Supply Chain and the Urban Doom Loop

In the supply chain, forecasting at multiple levels is critical, not only in terms of meeting demands this week, but over the long term to invest in the supply chain network that will deliver adequate supply at a competitive cost years from now.

And certainly many companies have been considering or building out distribution centers in urban markets, following Amazon's lead in driving next day and even next day deliveries.

For example, Amazon itself is rolling out many "same-day sites," which are smaller fulfillment nodes located closer to large metro areas where the company picks and ships customer orders in one process, rather than for example sending orders from a fulfillment center to a Delivery Station, where drivers pick up the goods for delivery.

But here's an interesting twist - what if there's not much left in terms of consumers, businesses and demand in urban areas in the not too distant future?

I recently ran across an article in the Washington Post on a concept called the "urban doom loop." It appears to have been around for some time, but the Post piece sums it up nicely.

It goes like this, starting with some data points:

In Indianapolis, CRM software company Salesforce is abandoning about 25% of its office space in the tallest building in Indiana, where it has been a key tenant for the past six years. In Atlanta, private equity firm Starwood Capital defaulted on a $212 million mortgage on a 29-story office tower. A landmark building in Baltimore recently sold for just $24 million, $42 million less than it fetched in 2015.

Not good signs for commercial real estate in what is a decent if not great economy.

"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 Post writes.

The potential nightmare scenario would have be led by a commercial real estate apocalypse that spirals rapidly downward.

That in turn would deliver a big hit to local economic activity. That decline would then hammer local tax revenue, in a very unvirtuous cycle.

The Post says that "with more people working from home, companies from Milwaukee to Memphis are rethinking their leases or pulling out of them altogether. That drives vacancy rates up and makes it harder for landlords to attract new tenants or sell buildings for a healthy price."

If this happens, many property owners would struggle to pay off their mortgages or clear other debt. Once busy business districts would dry up, cutting significant tax revenue from commercial properties or employee wages. Shoppers and tourists would have fewer reasons to venture downtown to eat or shop, choking off spending and forcing layoffs at restaurants and retail stores.

You get the idea.

The risk is there even for very large cities such as New York and San Francisco. However, some economists are even more worried about mid-size cities that don't have as many ways to offset the blow when a major company slashes office space.

At the worst: the downtowns of many cities become "ghost towns."

Maybe the risk of such a turn is greater for mid-size cities, but from what I am reading, large cities are in some peril as well.

This is all "a train wreck in slow motion," Stijn Van Nieuwerburgh, professor of real estate and finance at Columbia University's Graduate School of Business and one of the authors of a paper that coined the "urban doom loop," tells the Post.

The good news: this kind of train wreck is not guaranteed, and the spiral at this level has not kicked into gear anywhere yet.

I will also note the attempts by some companies such as Amazon and a number of Wall Street firms, among others, to force their workers back to the office. Will it work?

But on the pessimistic side, apparently there are a large number office properties coming up for new lease renewals - or not - in the next 2-3 years. Ditto for real estate loans.

And this trend is visible with the economy in decent shape, as noted above - a switch to recession could move many urban areas to doom loop status, as more companies let employees work from home to save money on real estate.

"There is less and less appetite for office space, with little sign the trend will turn around," the Post notes.

There is a lot more, but you get the idea.

And for all you supply chain and network strategists out there - I would be be looking at focusing on agility, so you can zig or zag depending on how things go.

Any reaction to the chance of urban doom loops? Let us know your thought at the Feedback section below.