The Impact of Terrorism on the Office Real Estate Market

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 downtown 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