Backgrounder: The Downtown ‘Doom Loop’

September 8, 2023

By Jason Arp and Craig Ladwig

A friend, a longtime political observer here, quipped that if Fort Wayne city councilmen were going to pretend to be investment bankers, we should elect smarter city councilmen. That has proved woefully prescient as workers and businesses nationwide are abandoning downtown offices for more flexible, safer and more efficient remote work. Fort Wayne’s downtown real estate is particularly at risk of collapse just at a time when the political class is blindly investing in it.

Over the last decade, Fort Wayne government has subsidized nearly a million square feet of new commercial space at a cost approaching a billion dollars in local, state and federal subsidies in various forms. Those include tax abatement, tax credits, tax increment financing (TIF) bonds and direct cash payments. A detailed distribution is available in “Eco-Devo Promises; Let’s Unwrap Them” in the winter 2019 Indiana Policy Review.

And yet, we are within weeks of a mayoral election and neither candidate has mentioned any of that, what is the most serious fiscal challenge to our city since the Depression. Surprisingly, they haven’t even bothered to blame that all-purpose bugaboo COVID, which was only the last blow in a series of events that overcame the crass political ambition that has guided downtown development to this point.

Some background: Commercial real estate pays a heap of taxes. If its market collapses, there will be a sure drop in city revenue. That means either more taxes from other sources (you) or reduced services — police, streets, schools. 

A study earlier this year from the Graduate School of Business at Columbia University says this could result in municipal fiscal crises when federal COVID aid shrinks: “At that point, some municipalities may find themselves entering in the doom loop scenario. The magnitude depends on the elasticity of migration to local tax rates and public-good spending (streets, public safety, etc.)”

What is a “doom loop”? Last week, Indiana  citizens had to depend on the faraway Washington Post to tell them that a national tech firm just cut a quarter of its office space in the tallest office building in their state. 

“All across the country, downtowns, office spaces and shopping centers are at risk of becoming ground zero for a new economic hazard: the urban doom loop,” the newspaper reported. “The fear is that a commercial real estate apocalypse could spiral out and slow commerce, wrecking local tax revenue in the process.”

The Post’s Rachel Siegel says economists are most worried about midsize cities such as Fort Wayne that have fewer ways to offset the blow “when a company slashes office space, the sale price of a building craters or a downtown turns into a ghost town.” She goes on to describe the steps in an urban “doom loop”:

  1. With more people working from home, companies rethink their leases or pull out of them altogether. 
  2. That drives vacancy rates up and makes it harder for landlords to attract new tenants or sell buildings for a healthy price. 
  3. Then property owners struggle to pay off their mortgages or clear other debt.
  4. Business districts dry up, stifling tax revenue from commercial properties or employee wages. 
  5. Shoppers and tourists have fewer reasons to venture downtown to eat or shop, choking off spending and forcing layoffs at restaurants and retail stores. 

We think a doom loop has already begun here. In 2005, an eight-story office tower in downtown Fort Wayne with 140,000 square feet of space sold for $28 million. It now sits on the tax roles assessed at $8.5 million. That is less than $58 a square foot (compared to $70 a square foot for an average residential home here). The long story short is that when these rebar-and-concrete investments go south, they don’t recover.

Also, we believe the experts who say that 30 percent or more of office space in our city already is likely vacant. Worse, city councilmen here knew or should have known this when they were directly and indirectly funding that million square feet of new commercial space. But that was done without independent market tests. The heavily subsidized projects were pushed through by a rent-seeking industry of lawyers, contractors, engineers, architects and suppliers of concrete and rebar, many of whom were contributors to city political campaigns.

Rather, we were told that the tax breaks and tax-insured bonds necessary to build the new office space were sound investments. The risk was justified, they said, by future demand, the evidence for which turned out to be fabricated and misleading especially in regard to downtown commercial properties.

To summarize, both mayoral candidates, one on council and the other in the mayor’s office, remain tight-lipped — and understandably so. Both were enthusiastic supporters of these boondoggles, and it will soon be apparent that their bad judgment has cost Fort Wayne property owners and taxpayers dearly.

But what is done is done. The challenge now is to identify the policy errors in order to restore Fort Wayne’s economic health. It will be a big job requiring honest leadership, that and the advice of real, not political, investment bankers.  

Jason Arp, for nine years a trader in mortgaged-backed securities for Bank of America, has represented the 4th District on the Fort Wayne City Council for the last eight years. Craig Ladwig is editor of The Indiana Policy Review, a quarterly journal established in 1989 to focus on state and municipal policy.


Leave a Reply