Economic and Political Challenges of Stranded Suburban Commercial Real Estate Assets

This transition is going to be hard, much harder than the last big one.

As retail stocks get pummeled again today it feels like we’re one step closer to the majority of the country’s malls being functionally obsolete, with many of them on the way to becoming “stranded assets.”

We’ve been through this transition before.

The last time this happened, when we transitioned from walkable downtowns and Main Streets to booming suburbia, before sprawl was a dirty word, the politics were relatively easy. There was a lot more growth in the growing places than there was decay in the declining places. The Atlanta metro area is roughly 6 million people while the city of Atlanta’s population is around 450,000. If the city of Atlanta stagnated it didn’t matter politically, because the people in the much larger suburbs were pretty happy and had more votes. And the percentage of the nation’s infrastructure stock that was obsolete was becoming a smaller and smaller percentage of the nation’s total infrastructure stock.

Today there are fewer and fewer communities that are well-functioning and thriving, perhaps 15-25% of the country. With the way things are trending, wealthy suburbs and walkable town centers will be fine, and on the whole communities in the southeast and Pacific northwest have demographic tailwinds at their back. But more and more communities are going to be left behind, whether they be lower-income suburbia or regions with poor demographic trends like states in the northeast and midwest.

There’s also the challenge of how cities will fund themselves. Residential property taxes don’t get it done. Most communities rely heavily on sales taxes and commercial real estate property and income taxes for their budgets. What happens if more and more retail sales are powered by Amazon? How will that budget shortfall be made up if 60-80% of malls go dark?

The political choice society made last time was to ignore the plight of small towns and downtowns. Not enough votes to matter. Tough luck for Detroit and Memphis.

But there are too many votes in suburban Ohio and Pennsylvania to ignore. The social and economic future of the US might be e-commerce and Sun Belt/West Coast suburbia. But the political system will have to answer to the 70% of communities for whom market forces will be insufficient to solve their problems.