How “doomed” is New York City due to the prevalence of remote work and its impact on commercial real estate values? Experts discussed the city’s fiscal outlook during a recent panel discussion, “How Doomed is the Loop?,” hosted by the Center for New York City Law at New York Law School. The January 25th panel was moderated by Mark Willis, Senior Policy Fellow at the NYU Furman Center for Real Estate and Urban Policy and featured Arpit Gupta, Associate Professor of Finance at NYU Stern and Sean Campion, Director of Housing and Economic Development Studies at the Citizens Budget Commission.
The ‘Urban Doom Loop’, a term originally coined by Professors Arpit Gupta, Vrinda Mittal, and Stijn Van Nieuwerburgh in their June 2022 paper “Work from Home and the Office Real Estate Apocalypse”, refers to the fiscal cycle set off by an increase in remote work. Working from home was a popular solution for businesses during the COVID-19 pandemic, and has now become a common practice at many companies. As a result, there has been a significant decrease in office attendance by employees, office leasing by companies, and revenue generated by commercial buildings. That decrease in attendance not only impacts those who own commercial buildings but also local governments, like New York City, which rely heavily on property taxes to help fund city services. Additionally, central business districts see less commuting, including from outside the city, foot traffic, and business patronization, leading to further economic losses, only some of which may be made up for by increased activity in local communities near where people live and work from home.
The reduced business activity and office property tax revenues, can lead to a reduction of government services and a lower quality of life for city residents, a worsened business climate, and population loss. That outward migration then feeds into the decline in real estate value, a drop in revenue from property taxes, then the cutting of public services, thus continuing the ‘urban doom loop.’ As for the current state of New York City, Gupta commented that office leasing activity in the city, “post pandemic is the lowest leasing rates in history, even lower than most recent financial crises. Eighty million square feet of commercial real estate space is vacant.”
New York leaders have recognized the ‘urban doom loop’ as a real challenge that may have long-lasting effects. A December 15, 2023, report from by Governor Kathy Hochul and Mayor Eric Adams stated that a ‘New’ New York is needed to combat the looming cycle and rethink central business districts, especially Midtown Manhattan. The report details an initiative to revamp libraries around the city to promote remote work hubs outside of the home as well as leverage city agency office space to anchor commercial hubs. Office attendance is only at 50 percent of pre-pandemic levels; while weekday subway usage and foot traffic have increased since the shutdown in 2020, neither have returned to pre-pandemic levels. It has been estimated that the increase in only one more work from home day per week can result in a loss of $1.6 billion in ‘daytime spending’, such as going out to lunch, and $0.7 billion in reduction in transportation spending.
The challenges posed in Professor Gupta et al.’s paper are also reflected in the December 2023, Comptroller Brad Lander’s report on the Annual State of the City’s Economy and Finances. The report acknowledged how the local economy outpeformed expectations, but also highlighted major declines in the commercial real estate sector. The report recognized that there may be permanently lower demand for office spaces in New York City, and that it is plausible property tax collections could decline as much as $1.1 billion over the next three years.
At the panel, Gupta discussed the Comptroller’s report and the impact of the decline of property taxes collected on the City. He noted that although the initial decline of property tax collection may not seem like a huge loss, that the loss will grow over time and become an insurmountable reduction. By 2027, he projected that the property tax decline will be around $10 billion. Gupta likened the realities of the ‘urban doom loop’ and the decline of commercial real estate value with commercial malls. The rise of e-commerce and obsoletion of commercial malls lead to a decline in commercial real estate value much like the increase in work from home policies leads to the decline in value of commercial real estate.
Since most commercial real estate leases are long term, Gupta noted, the City has yet to feel the full effects of the shift to remote work. Over the next few years, more commercial leases will come up for renewal or end, and more companies will make the decision about office space. “What does this mean for NYC … trophy buildings are holding up alright, but ‘b’ and ‘c’ buildings are becoming obsolete,” Gupta said, referring to the quality and age of certain classes of commercial real estate. Ultimately, the commercial buildings that are most likely to feel the effects of the ‘urban doom loop’ are the so called ‘b and c buildings’ as they lack outstanding factors that would motivate people to come back into the office such as greenspace and other amenities.
Campion’s presentation switched the focus from the mechanics of the ‘urban doom loop’ to its financial impact. Overall, for New York City, he said, “the fiscal outlook is fragile” and pointed to the fact that commercial real estate buildings provide the City with billions in annual property tax revenue. The City’s Preliminary Budget Financial Plan estimates that expenditures for Fiscal Year 2026 in New York City will be $114.4 billion while the revenue will only amount to $109.2 billion, but that estimate is based on whether property tax revenue makes up approximately 20 percent of the City’s overall revenue. A projected budget gap of $5.2 billion combined with the reality that revenue from real property tax will decrease with the devaluation of commercial real estate will cause issues, said Campion.
In addition to budget concerns, Campion discussed the impact of potential responses a decrease in commercial building value could have on New York City’s millionaire population. “No matter your feelings on millionaires, high income earners pay most of the personal income tax,” Campion explained. If the city’s solution to the revenue lost due to the ‘urban doom loop’ is to raise taxes, it may cause an outward migration of millionaires. Outward migration is starting to slow but it is still above pre-pandemic levels and involves the top 40 percent of income makers. For every two people to leave, one person moves in, and this is a concern when thinking about keeping New York City’s economy growing,” said Campion.
Gupta and Campion, guided by moderator Willis, engaged in a question-and-answer session at the end of the panel. Willis provided further contextualization to the ‘urban doom loop.’ “There are a lot of reasons to be concerned, and obviously we need to be concerned about the future of the city, but I wonder if it’s a little bit early, still, to be judging that,” Willis said, and asked Gupta and Campion when they think there might be more certainty around a stabilized level of office demand. Gupta said there may not be “any definite answer” about such demand, the needs may continue to “evolve over time.”
One member of the audience asked if the city is losing population, why is rent going up? According to Gupta, if more people are working from home, more people spend time in their apartments, which can result in renters wanting more space or to live alone. As remote workers spread out, demand for apartments increases, and thus rent increases.
Another audience member asked, if the ‘urban doom loop’ is causing widespread issues for New York City, how can we end it? Gupta suggests a conversion of abandoned commercial buildings into multi-family homes; however, he points out that only five percent of commercial buildings are viable for such conversion. A comprehensive solution that addresses all damages from the ‘urban doom loop’ may not be so straightforward.
As for the future of New York City, Gupta reassured that “cities have found ways to reinvent themselves and compete in new dimensions. Right here [Tribeca] used to be a hub of manufacturing and now it is populated by government agencies.” One challenge with reinvention now is that remote work has allowed people to work white-collar jobs “without being tied to a city,” Gupta added. Campion noted that even, “stock market prices reflect that they are valuing commercial real estate a lot lower than previously. While cities have recovered from the immediate shock of the pandemic there are still concerns for outward migration, crime, transportation, and the fiscal future.”
To assess the extent of the ‘urban doom loop’ in New York and elsewhere will include watching whether office use can climb back to pre-pandemic heights. “Employment levels in office-using professions are for the majority down in New York City. Overall, there is a mixed employment outlook,” said Campion. If employment in office-using industries grows, commercial real estate could be in further demand. But Campion pointed out that while New York City currently has higher than national growth in finance and tech jobs, it is below the national average in other sectors such as professional services, medical offices, life sciences, and insurance among others.
Campion and Gupta both pointed out that the future of employment is prone to shift as technology advances and this may have a substantial impact on the demand for office space. “We may not even know all the players in the game, such as AI,” said Gupta referring to the growing use of artificial intelligence.
While his presentation offered several warnings about the outlook for New York City, Gupta offered a call to action, saying that the future of the city “may or may not be doomed but not much room for complacency.”
By: Meg Beauregard (Meg is the CityLaw intern, and a New York Law School student, Class of 2024).