Avoiding the Doom Loop

A recent article by The Financial Times (“What if San Francisco never pulls out of its ‘doom loop’?”) highlights the risk of places for which challenges triggered by the pandemic become too great to overcome. It can look something like this: remote workers never return to business districts, driving down the value of commercial real estate and leading to the closure of additional businesses; the local government responds too slowly and too inadequately to address problems, including crime prevention; the city tax base recedes impacting the services offered to and quality of life of its residents. With this backdrop, the value proposition to current and prospective residents and businesses decreases and gets caught up in a “doom loop.”

Detroit's "doom loop" led to thousands of abandoned homes (Photo by Liam Rearick on Unsplash)  

This scenario may seem pessimistic, but it is a legitimate concern for a number of downtown US cities. This is also not an entirely new scenario: in the 1960s, there was a flight to the suburbs that impacted dozens of downtowns, particularly in the Rust Belt and East Coast. While a number of downtowns have revitalized since then – up until the pandemic and advent of remote work – there are notable cities, such as Baltimore, Cleveland, and Detroit, that have yet to reach their prior peak. Detroit, for example, struggles with tens of thousands of abandoned homes and industrial spaces.

The Doom Loop Is Not Just a Concern for Downtowns

States and countries are also subject to doom loops. States can find themselves in poor financial condition because of crumbling infrastructure needs and underfunded financial commitments, such as for government pensions and insufficient annual revenues. A weak financial position may force a state to raise revenue, such as through tax increases, cutting services, or deferring important capital expenditures. Such changes may make it less attractive for current residents, triggering a desire to move as well as decreasing its appeal to outsiders. This is the state version of the doom loop, with Illinois ranking as the worst state financially, with projected insufficient funds to cover short-term obligations and substantial unfunded pension liabilities.  Connecticut, Kentucky, Massachusetts, and New Jersey are also weak in this measure.

A baby bust combined with low rates of immigration may lead to challenges for countries around the world (Source: The Economist)

Countries can face the same challenges. However, as illustrated in a recent Economist article (“The Old and the Zestless”), countries with low immigration coupled with low birth rates are subject to a significant contraction in population in the coming decades. In fact, outside of Africa, nearly all the world is having babies below the replacement rate of 2.1 babies per woman. South Korea is the lowest, with a fertility rate of just 0.8, and is expected to halve its population by 2100. By these measures, the U.S. is one of the few developed countries expected to grow this century.

Shrinking countries pose a challenge to government leaders and residents. Earlier this year, Kishida Fumio, Japan’s prime minister, warned that the country is “on the brink of being unable to maintain social functions” because of its baby bust.

Why The Doom Loop Matters to You

Doom Loops are not just something for economists and public policymakers to fret about. Citizens – young and old – are at risk. Funding for critical services, such as schooling, health care, and public safety, may get cut. A pullback in economic growth can impact asset values, too. Homeowners may see the value of their homes fall and may also face difficulty in selling their property promptly.

Doom loops have secondary effects, too. Moves disrupts existing social networks. For those who move, it takes effort to create local friendships. For those who remain, local friendships are lost and effort is required to remake friendship circles. Anecdotally, I have a number of friends who have relocated from California, a state that has experienced negative net migration in recent years, and I have witnessed the disruption caused from these relocations.

Doom loops can be faced within various dimensions of place (Source: Right Place, Right Time)

Avoiding the Doom Loop

There are several key steps necessary to avoid the doom loop. The first step is to be a student of your place. In my recent conversation with Avivah Wittenberg-Cox of the 4-Quarter Lives podcast, we talked about the concept of “PQ”, having place-based intelligence akin to IQ or EQ. It is important to understand the fiscal health of your place and be sure to think of place as a composite of your block, neighborhood, metropolitan area, state, country, etc. Understand the key trends and what risks it may pose to you. Note, if your job is linked to your current place and/or you are a homeowner, the risks posed by a doom loop may be particularly acute.

Particularly if there is concern that your place may be at risk of a doom loop, another key step is to create a contingency plan. What other places could be viable options for you?

Lastly, and perhaps most importantly, you need to have the courage to make a change. Making a change can be expensive, emotionally difficult, and logistically complex, but, depending on the situation, absolutely necessary.

Talk of San Francisco at risk of a doom loop may be hyperbole, but the underlying risks the city faces, just like other select downtowns in the U.S., are real. Don’t forget the nature of doom loops: conditions increasingly worsen, eroding quality of life and making it more difficult to sell a home quickly and at an attractive price. If you find yourself in such a place where a doom loop seems likely, it is always better to make a change sooner rather than later.