Baen, J. (2004), "The implications of 11 September 2001, terrorism and global security on American property values, urban form, finance and functions", Journal of Property Investment & Finance, Vol. 22 No. 3. https://doi.org/10.1108/jpif.2004.11222caa.001Download as .RIS
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Copyright © 2004, Emerald Group Publishing Limited
The implications of 11 September 2001, terrorism and global security on American property values, urban form, finance and functions
Terrorism has been a fact of life in various international urban centres for the last 20 years. Northern Ireland, Spain, Palestine/Israel, Russia and many other countries have suffered, and in some cases continue to suffer, from the impact of political terrorism.
On 11 September 2001 (known as 9/11), the impact of global terrorism came to mainland USA for the first time and the event in New York City and Washington, DC will have lasting effects on future corporate and family real estate locational decision-making and property markets in the USA. The long-term decision-making and nature of American real estate as a fixed investment and as places for businesses to function may have changed since 9/11.
While the world watched two hijacked airplanes crash into the World Trade Centre in Manhattan, New York and another crash into the Pentagon in Washington, DC, America joined the rest of the world in fully realising terrorists’ attacks as a fact of life.
Webster’s Dictionary defines “terrorism” and “terrorist” as follows:
Terrorism, n. Act of terrorising, or state of being terrorised; specif., a mode of governing, or of opposing government, by intimidation.Terrorist, n. One who favours or practices terrorism; specif. [often cap.]: An agent or partisan of the revolutionary tribunal during the Reign of Terror in France.
The US economy and real estate market expanded at unprecedented historical rates from 1991 to 2001. The spectacular growth can be attributed to factors that were generally reversed by the 9/11 Terrorists’ events. This can be illustrated in the Table I.
Table I Real growth factors of the American economy 1991-2001 vs post 9/11/2001
A tendency to blame any and all present and future negative occurrences in business and the world economy on the 9/11 tragedy is unfortunately an oversimplification by the popular press and politicians. Prior to 11 September 2001, there was every indication that the USA was headed into a significant slowdown or recession. The terrorist attack accelerated that trend and added another dimension to Central Business Districts (CBD) property investment risk in the USA. Serious future value and net operating income (NOI) implications to institutional, investment-grade real estate in the form of higher operating costs and lower demand for office space are consequences of the 11 September attacks. Municipal budgets and financing may be at risk due to additional security costs and lower property and sales tax revenues.
There is a need to consider the long-term implications to various classes of real estate investments, and changes in urban form as a result of 9/11 beyond the natural real estate and business cycles that are always in motion. Because the USA has unfortunately joined the international community as a recent victim of urban terrorism, it is time that investors, business urban planners, and city governments consider policy changes and take a fresh look at the urban landscape and property investments of the future.
It is important that the general population and policy-makers do not over-react, become paranoid, or overstate the possibility or likelihood of the various types of terrorist threats that could affect other locations. These threats, however, are real and the next occurrence is more a question of where, when and what type or extent of damage may result.
There is an increasing possibility that isolated incidents of some of these terrorist threats will occur in the future. As real estate and urban infrastructures are long-term investments due to their fixity or investment permanence, new questions need to be asked. Will the market continue as usual in pre 9/11 investments, corporate locational and lease renewal decision making and urban policies? (The risk of terrorism is low and insignificant at any one location and even lower in suburban/rural areas.) Will companies consider decentralisation away from “high risk” areas? What will be the impact on the type of space that corporates occupy and how they secure that space?
Existing ownership and long-term lease commitments by companies will soften or delay property decisions of corporations and city governments that will not require them to consider these questions simultaneously in the near future. However, over time, urban growth and increased security measures with regard to design, structural requirements, emergency planning, and property management will add a great deal of cost to traditional high density urban development. Will cities, investors, insurance companies and users of space be able to afford the additional costs of future CBD development or redevelopment?
As replacement space is rarely “ready” and requires space planning and finish-out, business continuance requires innovation and temporary “flex-space”. Various supply and demand factors in the office market, as well as immediate availability of alternative space, may have played a part in these relocations. These relocations will have a long-term impact on investor and city revenues.
The booming economy and growth of the dot.com businesses of the 1990s were both cooling prior to 9/11, developers continued to create excess vacant new space during the time of increasing vacancies and leased office space having rents being paid, but available for sublease. Office space was predicted to be in less demand with falling rents for the following business efficiency reasons (Baen, 2001). Further reduced demand due to 9/11 will be accelerated particularly in the high-rise CBD “trophy” office buildings that could be possible targets in “any city”, USA or the world.
The unprecedented American booming economy of the 1990s was based on four primary factors:
the growth of technology and its associated increased productivity gains,
a liberal policy and growth in immigration,
a period of peace and lack of terrorism, and
affordable oil and gas, gasoline, and electricity.
There were obvious signs of a business cycle recession and general slowdown in the economy prior to 9/11. However, the 9/11 event and other terrorist attacks (anthrax, etc.) have the potential over an extended period of time to wipe out all positive gains due to technology efficiency gains over the last ten years.
Modern technology in the form of air travel, microbiology, manufactured nuclear materials, and the creation of chemical warfare agents, have become tools of destruction and fear for modern twenty-first century cities. The fact that three jet airliners, or letters containing small amounts of anthrax dust, or low-tech nuclear dust truck bombs or shipping containers could render entire buildings and large areas of CBDs destroyed, unusable and worthless for years is a serious threat to the civilized world, their economies, and even governments.
While many American companies are locked into medium to long-term ownership or lease positions for their corporate real estate needs, what will the future strategic planning and cost benefit analysis corporate locational decisions conclude after 9/11? Will they stay at the same CBD location, move to suburban locations or campuses perceived to have less risk, or decentralise to multiple regional, national or international locations?
Globalisation of industry, free trade and the free flow of information, technology and people (immigration) have allowed the standards of living and quality of life to increase worldwide. The sphere of business influence of the USA on the world economies is not unlike the powerful Roman Empire and civilization of the Western World (275BC-476AD). The fall of Rome was brought about by relatively “low-tech” Germanic “terrorist” or barbarian’ attacks, which disrupted free trade and commerce. Perhaps twenty-first century “low-tech” terrorists are succeeding in utilising “high-tech” with “low-tech” delivery systems to attack modern cities and economies.
It is possible that the 9/11 attacks will result in the acceleration of the following trends in terms of the twenty-first century urban frontiers:
A rapid increase in the rate of suburbanisation and decentralisation of businesses and urban dwellers.
A painful change in forms of city government financing services offered and regulations.
Increased businesses and property operating costs in the form of additional security, insurance costs, and employee benefits that will offer no productive return on the expenses.
The perception of a “safe work place” and community has changed, which is a drag on productivity for the entire world economy.
The concept that real estate is a long-term investment with a sense of permanence and safety has been altered. It should be noted from ancient history that cities build again after being destroyed by disasters and war, although more often than not, not in one generation, and quite often not by the same people or government.
NoteExcept for the bombing of the Federal Building in Oklahoma City in 1995 and the first bombing of the World Trade Centre in 1993, Americans had the misconception that terrorism would not and could not occur to the extent of the New York human losses, property losses, business disruption and national economic shock.
Editor’s noteThis editorial is based on a full paper presented at the American Real Estate Society (ARES) Meeting, 3-5 April 2003, Monterey, California. Full copies can be obtained from the author by e-mail at firstname.lastname@example.org or by post from John Baen, Professor of Real Estate, FIREL Department, University of North Texas, PO Box 310410, Denton, TX 76203-0410, USA.
John BaenUniversity of North Texas, Denton, Texas, USA
Baen, J. (2001), “Advanced public property management and new perspectives/challengers – THINK TANK – GSA Corporate Services”, presented at Texas A & M University Centre for Executive Development, 3 August, Book No. 4