It’s not so unusual. The 1980s oil crash nearly destroyed Houston, but also laid the groundwork to cement its dominance as the capital of the energy industry. Today, it’s almost inconceivable that entertainment executives would create a TV series about a wealthy oil family and call it Dallas, as they did in 1978. They would call it Houston.
Michiel N. Daams and several colleagues demonstrated how the 2008 financial crash led to a “flight to quality” that caused subsequent growth to be skewed toward elite city downtowns. In their 2024 paper Capital shocks and the great urban divide, they noted that “the global financial crisis triggered enormous capital shocks whose impacts were asymmetric between cities, with large and already prosperous places benefiting greatly in terms of the increased volume and lower pricing of capital inflows, while economically weaker and smaller places faced declining capital inflows.” Specifically, these elite central city districts played a key role by acting “as a safe haven for investment capital.” The net result was that “the regional economic growth patterns of the USA suddenly switched from decades of spatial convergence to interregional divergence, with many large and coastal cities in particular pulling away from smaller cities in the heartland.”
Similar dynamics are starting to play out in America’s downtowns in the post-COVID-19 recovery.
COVID-19 seemed at first to act in a manner opposite to a financial crash. The earliest city to get hit hard by COVID-19 was New York. Its white-collar office businesses largely shut down as America shifted hard toward remote work. As many as half a million people left the city. People started talking about a so-called “urban doom loop.”
But this phenomenon didn’t just hit New York and San Francisco, which drew many of the national headlines. It hit basically every American downtown. In-person office work essentially went on hiatus for between one and two years.
Now, as downtowns climb back from COVID-19, it is the elite urban centers like New York and San Francisco that are pulling away from the pack.
The media is starting to catch up to the fact that New York is recapturing its mojo. Not only is its tourist industry booming, but business as well. The Wall Street Journal reports that the city’s office market is “roaring back.” Companies leased 23.2 million square feet of New York City office space in the first nine months of the year, more space than most U.S. cities have altogether.
Part of this is driven by a corporate flight to quality, as firms seek out ultra-prime class A+ buildings that are new, and with modern amenities and energy efficiency. These are the kinds of buildings employees want to go to work in. New York has quite a number of them, with developments such as Hudson Yards and the huge new tower One Vanderbilt by Grand Central Terminal. And more is coming online, including JPMorganChase’s new giant Midtown headquarters building, which will have 10,000 employees working there five days per week, and a new supertall center for the hedge fund Citadel. But according to the New York Times, even Class B leasing activity is picking up.
Similarly, much-maligned San Francisco is looking up. The artificial intelligence boom is fueling new office leases, with 5.1 million square feet worth signed in the first half of the year. Vanderbilt University is also planning an urban campus there, which would bring jobs in addition to students.
Most other American downtowns appear to have all but given up on bringing back business. They have a few, newer mixed-use complexes that are drawing businesses to areas on the downtown fringe, but this is mostly a relocation of existing activities. Louisville’s signature Humana Building, an architectural gem designed by Michael Graves and rated as one of the best contemporary office towers in the country upon its opening in 1985, is empty. St. Louis has one of the tallest vacant buildings in the world. Portland, Ore.’s downtown office vacancy rate is 35 percent.
These cities are experiencing growth in tourism and residential development, but without a significant revival in their downtown core office markets. Cities that cannot regenerate white-collar office employment at the center will be struggling against a permanent diminution in their status, regardless of how many apartments are built there.
Some non-elite downtowns are seeing positive signs. Detroit of all places is doing well, with a major new office tower about to go up that’s almost entirely preleased. Goldman Sachs is building an 800,000-square-foot office building in central Dallas. Nevertheless, we are clearly entering a time of renewed divergence and downtown inequality, in which the traditional leaders like New York and San Francisco power forward while others lag.
This dynamic is in part an outcome of the COVID-19 crash that damaged weaker-market downtowns more than it did the stronger ones. At the metro-area level, there may still be a shift to smaller markets, especially in the Sun Belt, with heavy growth in exurban areas. But when it comes to downtown business, elite cities like New York and San Francisco are once again leading the way.
