Could Chicago Face A "Doom Loop"?

A recent article in Forbes by Dylan Sloan quoted a Columbia economics professor Stijn Van Nieuwerburgh, that a 1970’s style ‘doom loop’ could be heading for New York City.  The arguments for a downward spiral in New York apply equally well to Chicago.

Office buildings around the country have taken a beating from Covid.  Chicago is running a vacancy rate north of 20% and many office buildings are hemorrhaging money.  Crain’s seems to be reporting a new office building selling at huge discounts almost every week. The Forbes article cites studies that show about 30% of paid days are worked from home and that trends higher for more urban areas.

To attract workers to the office, many companies are downsizing and upgrading to the newest office buildings.  This is leaving the middle office market in serious trouble.  The problem also extends to banks.  Nieuwerburgh said that banks own about half of the $6 trillion in commercial real estate debt in the U.S.  Of that half, 70% is owned by small, regional banks.  Many of these banks are overexposed to commercial real estate and could take a beating.  

Further, Covid money from the Federal Government that has helped municipalities get by, is starting to run out.  If property values fall, cities cannot collect as much in tax revenue and distressed banks will need to cut back on lending.  This is all a recipe for less public spending on transportation, public safety, sanitation, and investments in small businesses.  It is harder for cities to attract companies and remote workers to downtown if the city is dirtier and less safe. This would further hurt property values and push up property taxes creating a negative spiral downwards.

This is a recipe for a New York style ‘doom loop’ reminiscent of the 1970s.  We have all seen how some of the weaker south suburbs of Chicago have crushing tax rates which stops virtually all development in its tracks and chases new development to lower tax suburbs.  Low tax states like Florida or Texas could start attracting lots of new businesses and wealthy retirees, as investment drains from the Chicago area.