A report in Bloomberg by Isis Almeida and Miranda Davis highlights another sign of the weakness in the office-property market in the U.S., the disappearance (or near disappearance) of cranes from many city centers. They report that in 2017, Rahm Emanuel, Chicago’s then-mayor, could point to 60 construction cranes on the skyline. Now it’s nine. Last year there was just one groundbreaking, this year the total may end up at zero.
Working from home is part of the problem, but another is the mispricing of office buildings during the years of ultralow interest rates. Almeida and Davis quote one developer who says that “office is toxic. . . . Lot of people had their projects based on low interest rates, and today that actually just doesn’t pencil.”
Mess with the market price of money at your peril.
What remains surprising is that so many developers and buyers seemed to have worked on the assumption that (on some calculations) interest rates had reached a 4,000-year low, a state of affairs that was unlikely to continue forever, and yet . . .
The article includes a chart showing that there were no groundbreakings of office buildings in Boston, Charlotte, New York City, Salt Lake City, San Francisco, or Washington, D.C., last year.
In a way, this is a cycle doing what it is meant to do. Demand falls, new supply falls, and, in time, assuming that the market is not now in permanent decline, a balance is found followed by a shortage of space. And things tick up again. Let’s see.
But the office market is not a sector that can be safely walled off.
Almeida and Davis:
The office downturn can filter through the economy. Fewer workers mean downtown businesses generate less sales tax revenue. Reduced commercial real estate assessments shift the property-tax burden to the city’s homeowners, threatening to reduce Chicago’s appeal to residents over the longer term. And empty streets aren’t conducive to safety. The city is already struggling with persistently high crime rates, with incidents up 55% since 2019.
Empty streets are certainly not conducive to safety, and neither (I suspect) is the way that anti-car moves (such as New York City’s upcoming congestion charge) risk discouraging visitors or workers from coming into the city at a time when downtowns need all the help they can get. And these restrictions could come with a subtler disadvantage too. Streets without the reassuring buzz of traffic may be less welcoming than planners would have people believe. In some parts of town, reducing (or even eliminating) the number of cars on the road may be fine, or even desirable, but in others the absence of autos (or a severe reduction in the numbers driving through, hunting for parking spaces and so on) might create a cityscape that may, to some, seem alarmingly empty, especially at night, and not somewhere they would want to walk.
Time will tell, I suppose.