“Urban doom loop.” “Office real estate apocalypse.” Today, anyone who reads business news has seen dire predictions for America’s downtown commercial towers, which emptied out when the coronavirus arrived and remain under-occupied three and a half years later. Most coverage centers on the most expensive big cities, such as New York.

But the focus on glittering superstar cities is misguided, because many more fragile downtowns—the likes of Dayton, Ohio; Birmingham, Alabama; and St. Louis—entered the pandemic with little margin for failure. Even Minneapolis, with a strong overall labor market, faced a high office-vacancy rate in 2019. Still more commercial space emptied out during the pandemic, and foot traffic downtown has waned. “It’s spooky,” one retail clerk told The Wall Street Journal.

To be sure, Manhattan office investors and their lenders certainly have plenty to lose, because participating in that market was so expensive to begin with. According to the 2023 outlook from the commercial-real-estate company Colliers International, asking rents for downtown Class A office space in Manhattan are $81 a square foot per year, down slightly from $85 the year before the pandemic. Current rents for comparable space in San Francisco ($79) and Boston ($72) also dwarf the rents typical in boomtowns such as Atlanta ($38), Denver ($39), and Dallas ($31). The rents in some of the priciest markets have started to come down—notably in San Francisco, where Class A rents, according to Colliers, hit $105 in 2019—but are still nowhere close to Sun Belt levels.

Dror Poleg: The next crisis will start with empty office buildings

Class A refers to a city’s most attractive buildings—typically recently constructed towers in desirable locations. If rents for such buildings in Manhattan must drop by half to return to normal occupancy, landlords will lose a lot of money. Some major real-estate investors in New York are halting debt payments for certain properties and giving up control to their lenders. The shift in the market could cost New York City 3 to 6 percent of its tax revenue, by some estimates. But the city will still be the world’s financial capital; a tech hub; the headquarters of a slew of major corporations; a home to major educational, medical, and cultural institutions—all of which generates demand for office space even in the remote-work era. New York, in other words, will be fine.

By contrast, if office rents in the Rust Belt or the Mississippi River Valley drop by anything close to half, downtowns in those regions face abandonment—not only by white-collar businesses and the shops and restaurants that once served their employees but also by the owners of entire buildings. In a city such as Dayton—which, according to Colliers, has downtown Class A rents of $18 a square foot per month and had a vacancy rate of more than 25 percent even before the pandemic—rents can’t fall far while still yielding enough money to pay taxes and operating costs. Class A rents are comparably low in Memphis, Tennessee ($20); St. Louis ($20); Albuquerque, New Mexico ($23); Cleveland and Akron, Ohio ($23); and Birmingham ($23). St. Louis and Albuquerque also had pre-pandemic vacancy rates hovering around 20 percent or higher. Many cities, including Dayton, are working—with some success—to repurpose their downtown with new condos and apartments, restaurants, and entertainment venues. But how quickly struggling central business districts can replace what used to be their core economic activity is an open question. In the meantime, a lender who seizes a commercial building in so weak a market may turn around and surrender the property to the city rather than run up bills while awaiting a buyer.

That is what an actual public-policy crisis looks like: Think of Detroit, Buffalo, or Flint, Michigan—places where, over the past several decades, owners simply stopped paying property taxes and let the government take over. Many abandoned buildings were demolished for surface parking or left vacant altogether, in some cases prompting major publicly funded demolition campaigns that continue today.

When downtown commercial rents are high, it’s partly because the downtowns themselves are desirable places to work—and partly because the supply of office space is limited. New York, Boston, San Francisco, and other cities that are notorious for limiting housing construction also constrain the supply of commercial real estate. The high cost of building in some cities also helps explain high rents, but only up to a point. Indeed the New York Building Congress found that office-construction costs are 15 to 50 percent higher in New York than in most other major U.S. cities. This might justify rents that are persistently 15 to 50 percent higher, but the artificial scarcity is the primary explanation for why, before the pandemic, Class A rents in Manhattan were 74 percent higher than in Chicago and 82 percent higher than in Los Angeles.

For all the hand-wringing about New York, a major rent drop could end up being good for business. Brad Hargreaves, a New York–based entrepreneur, told me on Twitter (now X) earlier this year that his education start-up, General Assembly, rented a “beautiful” space for $29 per square foot in 2010. “In 2018–19 they were charging upwards of $75psf,” he wrote. “We never would’ve started GA if we had faced those rents on Day 1.” Acknowledging this threat to the city’s competitiveness, Mayors Michael Bloomberg and Bill de Blasio broke from anti-growth norms by rezoning areas such as Hudson Yards and East Midtown to permit more office space. Bloomberg’s “upzoning” of Hudson Yards alone legalized 28 million square feet of potential office construction—more than all of the office space of Portland, Oregon.

Not least because of that easing of regulations, Manhattan still has more than 11 million square feet of downtown office supply under construction, Colliers reported earlier this year. That’s about four Empire State Buildings. It’s nearly as much downtown office space under construction as in the entire South—which includes Atlanta, Houston, Austin, Charlotte, Dallas, and a dozen other cities. Even if the pandemic had never brought about an exodus from white-collar workplaces, the addition of so much new commercial space in New York would have forced the owners of existing office buildings to hold down or even cut rents. The new space, combined with the remote- and hybrid-work shocks to office demand, may foretell a Houston-like abundance of office space—which means that Manhattan office rents might conceivably fall to a Houston-like $40 to $50 a square foot.

If you own a dilapidated, highly leveraged building in Manhattan, you may lose it to the bank. But then the bank will auction it to a new owner, who might cut the rent by double digits or convert the property to another use to fill it back up. Nobody should even start to worry about a Dayton-style abandonment of Manhattan until its office rents fall below Houston’s or Atlanta’s. No foreclosing lender will simply abandon a tower that can still collect Sun Belt Class A rents.

The expensive superstar cities enjoy an advantage accidentally created by bad, anti-growth choices before the pandemic. Like nature, markets abhor a vacuum—and if office rents eventually fall far enough below residential rents, developers in cities starved for housing will find a way to take advantage.

Skinny buildings with lots of windows can easily be turned into apartments, particularly if their current zoning accommodates multifamily residential. But few office towers fit those criteria. In harder cases, extensive and expensive renovations, which in some cases may involve cutting huge lighting and ventilation areas dozens of stories deep, can produce high-end residential units. Cities could also change their building and zoning codes to allow dormitories and rooming houses with shared dorm-style kitchens and bathrooms that wouldn’t require threading in new vertical plumbing stacks for every unit.

Tracy Hadden Loh: Downtown needs to change to survive

Were New York and San Francisco farsighted in creating housing shortages and a “safety buffer” of priced-out people waiting to move in? Certainly not. Nevertheless, they do today in fact have hundreds of thousands of people ready to move in if they loosen their land-use regulations. The waitlist is shorter than in 2019, but NYC alone is still at least 300,000 homes short of demand.

If office rents really plunge, one last option comes into play: Desperate landlords will start renting out gray-market “artist studios” and not checking too carefully to find out whether people are staying overnight. Are unrenovated Class C office-building interiors ideal places to live? Not really. But neither are the large-floorplate 19th-century factories that have long supplied New York’s famous artist lofts. Impractical floor plans and bad plumbing didn’t stop artists from seeking big, cheap, gray-market factory loft studios when Manhattan began deindustrializing in the 1960s. It wasn’t just the 1960s, either; New York regularly updates the Loft Law to catch up with ongoing illegal factory and office loft conversions in the outer boroughs (and last did so in 2019). Although 1970s office buildings aren’t as pretty as lofts in 1870s factories, they’re also safer to live in.

New York and a few other cities have the easy option of changing the rules—or just looking the other way—as underused office buildings turn into apartments. But this alternative isn’t available to cities with more reasonable housing costs and fewer desperate tenants. Not many New Yorkers will shed tears for the incumbent landlords of Manhattan, whose supply-side comeuppance is long deserved, and an “office apocalypse” that lowers rents for start-ups and opens up space for artists could even make the city more vibrant. Instead, national policy makers and urbanists should be worrying about the already-cheap downtowns of cities that cannot survive any more rent cuts.