Post-9/11 cities

The decentralization of jobs from city centers is a very old story. New NBER research (abstract below) offers evidence that the post-9/11 threat of terrorist attacks add to these tendencies. Findings like this probably apply only to the few downtowns in the U.S. such as Chicago, the site of the case study. More studies are probably on the way.

Chris Redfearn has investigated residential markets near Los Angeles' LAX (published in a book with which I am associated) and reports that there had been no notable post-9/11 effects. These findings also require corroboration before firm conclusions can be drawn.

But if both results hold, jobs will spread further into residential areas -- perhaps even providing the mixed land uses that urban planners now seek. But this was not planned.

The Impact of Terrorism on the Office Real Estate
Market

Alberto Abadie and Sofia Dermisi

"After 9/11 office properties in the three main Chicago
landmark buildings and the surrounding areas experienced more severe increases
in vacancy rates than office properties not located in the vicinities of
landmark buildings."

The 9/11 attacks drastically increased the perceived risk of
large-scale terrorist attacks in Central Business Districts and placed
particularly large pressures on major financial centers, like New York, London,
and Chicago. From the point of view of an economist, the increased threat of
large-scale terrorist attacks in Central Business Districts has profound
potential implications, given the crucial role of Central Business Districts in
economic activity.

In "Is Terrorism Eroding Agglomeration Economies in Central
Business Districts? Lessons from the Office Real Estate Market in Downtown
Chicago" (NBER Working Paper No. 12678), economist Alberto Abadie and real estate
analyst Sofia Dermisi investigate the economic impact of an increase in the
perception of terrorist risk induced by the 9/11 attacks on the office real
estate market, using data from do! wntown Chicago. The Central Business District
of Chicago - the authors explain - "provides the perfect laboratory to
investigate the effects of an increase in the perceived risk of terrorism on a
major financial center." The attacks of 9/11 reduced drastically the available
office space in New York's financial district. Unlike New York City, the city of
"Chicago was not directly affected by the destruction of the 9/11 attacks.
However, the 9/11 attacks induced a large increase in the perception of
terrorist risk in the Chicago Central Business District, which includes the
tallest building in the U.S. (Sears Tower) and other landmark buildings."
Therefore, the case of Chicago allows the authors to separate the impact of an
increased perception of terrorism threat in Central Business Districts after
9/11 from the direct impact of the destruction caused by terrorist attacks on
available office space.

To investigate the effect of an increase in the perception of
terrorist risk in Chicago after 9/11, Abadie and Dermisi compare "the evolution
of vacancy rates at the three main landmark buildings of Chicago (the Sears
Tower, the Aon Center, and the Hancock Center) and other nearby office buildings
within a "shadow" area of 0.3-mile around each landmark building to the
evolution of vacancy rates of office buildings located outside the shadow areas
of the three landmark buildings." The authors select the Sears Tower, the Aon
Center, and the Hancock Center as "anchor" buildings because their landmark
stature makes them preferred targets of terrorism. The authors' choice of a
0.3-mile radius for the shadow areas is motivated by the spread of the massive
debris fields created by the collapse of the World Trade Center on 9/11.

The study employs quarterly data on vacancy rates and other
building characteristics for a sample of high-end office buildings in the
downtown Chicago area ! during the period 1996-2006.

The results of the article show that before 9/11 vacancy rates
in the three main Chicago landmark buildings and the surrounding areas had
evolved similarly to vacancy rates for buildings not located in the vicinities
of the three main Chicago landmark buildings. The data show also that in the
wake of the 9/11 attacks office vacancy rates increased in downtown Chicago.
Most importantly, office properties in the three main Chicago landmark buildings
and the surrounding areas experienced more severe increases in vacancy rates
than office properties not located in the vicinities of landmark buildings.
Then, Abadie and Dermisi repeat the analysis using alternative measures of the
susceptibility of each particular office building to terrorism attacks, finding
identical results: in the post-9/11 era vacancy rates increased more for
buildings with a high perceived vulnerability to large-scale terrorist attacks
than for buildings that are not perceived as preferred targets for terrorist
attacks.

Moreover, Abadie and Dermisi argue that the larger increases
in vacancy rates in the shadow areas of trophy buildings after 9/11 cannot be
explained by an increase in the supply of office space there. In fact, after
9/11 the increase in total rentable office area in the vicinities of trophy
buildings was smaller than away from those buildings. Given those facts, Abadie
and Dermisi interpret the results of their investigation as evidence that "the
9/11 attacks created centrifugal forces that influenced the location decision of
high-end office tenants in downtown Chicago."

Abadie and Dermisi call their conclusion "particularly
unsettling," given the critical role that most analysts assign to cities as
engines of economic growth. On the other hand, the authors explain that their
analysis focuses on a period during which the perceived threat of terrorism in
Central Business Districts was particularly elevated. They conjecture that "if
the perception of terrorist risk in cities were to return to the pre-9/11
levels, the long-run growth of cities would not be affected by the 9/11
attacks."

-- Matt Nesvisky
http://papers.nber.org/papers/W12678