The crashing office market will deepen the economic 'doom loop' for America's cities, economist says

• Some of America's largest cities risk falling into an economic "doom loop." 
• Cratering demand for office space will exacerbate problems for US cities, one Columbia economist says.
• Midsized cities could see higher tax rates and plunging property values as office demand falls.

Some of America's largest cities could be on the verge of an economic "doom loop" thanks to the crashing office real estate market, according to one Columbia economist.

Stijn Van Nieuwerburgh, a real estate and finance professor at the Columbia School of Business, has sounded the alarm for months on large to mid-sized US cities. That's thanks to work-for-home trends, which have battered the commercial real estate market in hubs like Atlanta, Chicago, and Denver.

Those cities are now seeing some of the highest office vacancy rates in the US, Nieuwerburgh said in a recent report, and office vacancies across the US have hit an all-time-high this year, according to an estimate from the National Association of Realtors. 

The economic repercussions of that development could be dire, Nieuwerburgh said, since property taxes are a major source of income across of the US. Property taxes for as much as 40% of total tax revenue in some states. Office taxes alone could account for as much as 10% of total tax revenue, he estimated. 

"If those offices lose about half of their value, tax revenues fall, and that creates a huge hole in the budget," Nieuwerburg warned in an interview with CNBC last week. "The problem that smaller cities have is that, often, there's not a whole lot of other things that cities have to offer in their downtown areas besides the commercial office district. So when that office district starts to falter, it sort of affects the entire city," he later added.

That could result in higher tax rates and property value declines in affected cities, with office building prices potentially plunging 35%, according to some estimates. Banks with high exposure to office debt could also run into trouble, as there's around $600 billion in office building debt that's "potentially in trouble," Nieuwerburg estimated.

Experts have warned for months of trouble in the overarching commercial real estate sector, which has struggled to bounce back from the pandemic. That's being exacerbated by the crunch in credit conditions, with banks already starting to pull back on lending and reportedly looking to dump their commercial real estate debt.