In the bustling metropolis of New York City, the commercial real estate sector is teetering on the brink of a crisis reminiscent of the 1970s. Professor Stijn Van Nieuwerburgh, a Columbia Business School expert famously dubbed the “prophet of urban doom” by The New York Times, has issued a stark warning: the city may be entering the dreaded “doom loop.” This term, rooted in economic theory, describes a self-perpetuating cycle of decline that could ensnare the city if no substantial changes occur.

Office Vacancies and Economic Impact

The rise of remote work, accelerated by the COVID-19 pandemic, has left a significant mark on urban office spaces. In New York City, office vacancies have soared to unprecedented levels, with nearly 20% of spaces sitting empty. This vacancy rate not only hemorrhages potential revenue but also shrinks the city’s tax base, a concern echoed in Colliers’ report.

Van Nieuwerburgh warns that the repercussions of these vacancies could extend far beyond real estate. The anticipated decline in tax revenue may force the government to cut spending on essential services such as transportation, education, and sanitation, making urban living less attractive and potentially driving residents to relocate to states with more favorable tax environments.

Changing Office Space Preferences

As companies adapt to new work paradigms, the demand for office spaces has shifted. Businesses are now seeking smaller, modern offices equipped with amenities to entice employees back to in-person work. This trend, as noted by Fred Cordova, CEO of real estate consultancy Corion Enterprises, is putting pressure on traditional office buildings, many of which face refinancing challenges due to expiring loans from the post-financial crisis era.

Banking Sector Vulnerabilities

The banking sector, particularly smaller regional banks, is heavily exposed to the commercial real estate market. According to Van Nieuwerburgh, these banks hold a significant portion of the $6 trillion in commercial real estate debt in the United States. With the potential for rising vacancies and declining property values, these financial institutions could face severe instability unless market conditions improve.

Potential Solutions and the Path Forward

To avoid the grim scenario outlined by Van Nieuwerburgh, substantial policy interventions are necessary. These could include strategic investments in public infrastructure and incentives to attract businesses back to urban centers. Without decisive action, the city risks entering a cycle of economic decline, echoing the fiscal challenges of the 1970s.

As New York City stands at this critical juncture, the insights from Fortune’s detailed analysis serve as a clarion call for city leaders and stakeholders to address these pressing challenges head-on.