After the horrific tragedy on Sept. 11 that killed thousands, some commentators exclaimed, “This changes everything!” Surely, those events and the subsequent anthrax threats have radically reduced our previously blissful feelings of domestic security. But not everything has changed — at least in the long run. In fact, we may find that the events of Sept. 11 will have primarily short-term effects.

Financing on pause

The aggravation of a general economic downturn is the biggest immediate impact on real estate. Although the economy has been slowing for more than a year, the Sept. 11 events pushed the economy into a recession and reduced demand for all types of space — particularly in the hotel, resort and travel industries. The terrorist attacks also have caused vacancies to rise and rents to fall in the office and R&D sectors, especially in high-tech markets.

All types of firms dependent upon air travel have suffered huge revenue losses, and several major airlines themselves balance on the brink of bankruptcy. Meanwhile, aversion to flying has skyrocketed. Even so, I believe the public's willingness to fly will return, as long as another fatal hijacking does not occur.

The Sept. 11 tragedy also has slowed activity on the financial side of commercial property markets. As Stan Ross, former vice chairman of Ernst & Young's real estate division, said at a recent Urban Land Institute meeting, “a great cloud of uncertainty” enveloped real estate financing right after Sept. 11. Many potential buyers, sellers, investors and lenders in prospective real estate deals have drawn back from big decisions.

Because of the recession and possible future terrorism, dealmakers are too uncertain about future occupancy and rents to make commitments right now. I believe this fog will gradually dissipate as events unfold over the next few months — certainly within the next year. Transactional volume will return to normal levels, in part because there are plenty of investors out there looking for places to put their money.

What's in store for skyscrapers?

We already are seeing an unwillingness of big businesses to concentrate large numbers of employees at single locations on the higher floors of super-tall buildings. Occupancy rates for all types of tenants above the 50th or 60th floors will decline, and rents for those floors will fall. Many large firms may decide to divide their key personnel into smaller groups dispersed around a region or in several regions. I believe this will prove to be more than a temporary change in strategy among large firms.

U.S. proposals to construct new buildings containing more than 60 stories are dead, especially on the site of the World Trade Center. In Asia, however, many developers continue to build super-high office structures. Shortages of usable land in cities such as Shanghai and Hong Kong force developers to build upward to meet space demands, and threats of terrorism seem less likely in those countries.

But those conditions do not prevail in the U.S. Some commentators predict a precipitous rental decline in big cities as firms flee to more secure rural sites where they can better control access with low-rise campus structures.

I do not believe any such major exodus will occur. True, the long-run decentralization of economic activity in the U.S. caused by rising real incomes, improved roads and vehicles, and better communications will continue as it has for more than 75 years, so most future growth will continue to occur in suburbs and smaller outlying places. But cities will not lose all the economies of face-to-face contacts and agglomeration that created them in the first place.

Overall, I do not believe Americans will make radical changes in current living and working styles that will notably affect real estate markets beyond these alterations. The basic forces that shaped our real estate markets for many decades will, to a great extent, remain in effect.

The one wild card is the potential spread of biological warfare. If that happens over a sustained period, a larger exodus of population from places most susceptible to germ attacks, such as our highest-density cities, may occur. Let us fervently hope that does not occur.




Anthony Downs is senior fellow at the Brookings Institution in Washington, D.C. The views are those of the author and not necessarily those of officers, trustees or other staff members of the Brookings Institution.