Vacant office space in U.S. cities could create a “debt spiral,” Dr. Tyler Goodspeed said on Newsmax’s “Carl Higbie FRONTLINE.”
If more companies flee urban centers, those tax bases will come under pressure, Goodspeed said Wednesday.
‘Debt Spiral’
Even if those cities manage to create a “budget surplus, they could fall into a debt spiral because with higher interest rates, their debt load will be growing,” said Goodspeed, the former acting chairman of the White House Council of Economic Advisors under Trump.
While residential real estate caused the Great Recession of 2008, “the next economic crisis will be empty real estate space,” Higbie said. “Corporate real estate is the engine of every major city, sometimes 50% of a major city’s tax base. It contributes $1 trillion a year to GDP.”
Following the government’s mandated shutdown of the economy during COVID, many offices in downtown cities remain vacant to this day.
“The national commercial real estate vacancy rate is 17.5%,” Higbie said. “Nearly 20 of the top 25 markets have reported vacancies in the past year. Writedowns in commercial loans could spell big trouble for the financial system just as the 2024 election gets underway.”
‘Doom Loop’
As cities face budget constraints and cut back on major services, this could worsen urban exodus in every major U.S. city—creating a “doom loop,” Higbie said.
Cities could prevent this from happening with better policies, such as improving public safety, transportation and education, and discouraging their businesses from allowing remote work, suggested Goodspeed, a fellow at the Hoover Institution at Stanford University.
Nevertheless, Morgan Stanley analysts warn that remote work and high interest rates could cause commercial real estate to drop by 40% in value—at the same time $1.5 trillion in commercial real estate debt is due for repayment in 2025.
Bank failures and deposit withdrawals could complicate matters, since small and regional banks are major lenders to the $20 trillion office and retail property sector.
Higbie said the government should never have set off this domino effect.
By mandating COVID shutdowns nationwide, Higbie said, “the all-knowing government lit a match for the next crisis, which is almost inevitable.”