The attacks of September 11, 2001, and more recently the Madrid and London downtown train bombings, have raised concerns over both the safety of downtowns and the continuous efforts by terrorists to attack areas of such high density and significance. This article employs building-level data on vacancy rates to investigate the impact of an increased perception of terrorist risk after 9/11 on the office real estate market in downtown Chicago. Chicago provides the perfect laboratory to investigate the effects of an increase in the perceived level of terrorist risk in a major financial district. Unlike in New York, the 9/11 attacks did not restrict directly the available office space in downtown Chicago. 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 US (the Sears Tower) and other landmark buildings which are potential targets of large-scale terrorist attacks. We show that, following the 9/11 attacks, vacancy rates experienced a much more pronounced increase in the three most distinctive Chicago landmark buildings (the Sears Tower, the Aon Center and the Hancock Center) and their vicinities than in other areas of the city of Chicago. Our results suggest that economic activity in Central Business Districts can be greatly affected by changes in the perceived level of terrorism.
In the wake of the 9/11 attacks, economists are devoting much
effort to evaluating the impact of terrorism on economic outcomes
and understanding the channels through which the enhanced
risk of large-scale terrorism induced by the 9/11 attacks may affect
economic activity. A partial list of scholarly works in this
rapidly growing literature is Abadie and Gardeazabal (2003, 2008),
Becker and Murphy (2001), Becker and Rubinstein (2004), Berrebi
and Klor (2006), Chen and Siems (2004), Enders and Sandler
(1991, 1996), Enders et al. (1992), Frey (2004), Frey et al. (2007),
Glaeser and Shapiro (2002), Pshisva and Suarez (2004), and Zussman
et al. (2008).
The increase in the perceived level of terrorist risk induced by
the 9/11 attacks has placed particularly large pressures on major
Central Business Districts, such as New York, London, and Chicago,
which are considered to be preferred targets of terrorist attacks because
of their high population density, economic significance, and because they contain symbolic targets such as landmark buildings
or government facilities. The susceptibility of Central Business Districts
to large-scale terrorist attacks (as well as their vulnerability,
as demonstrated by recent events) is particularly unsettling given
the crucial role that Central Business Districts play in economic
activity. Quite surprisingly, however, there is very little work available
on the effects of terrorism on Central Business Districts. This
article aims to fill that void. For this purpose, we use building-level
data from downtown Chicago, one of the most significant Central
Business Districts in the US, to investigate the economic impact of
an increase in the perception of risk after 9/11.
There are two main channels through which terrorism affects
economic outcomes. First, terrorist attacks have a direct effect on
the economy because they destroy productive capital (physical and
human). Because the destruction caused by terrorist attacks represents
only a small fraction of the total stock of productive capital,
Becker and Murphy (2001) have argued that the relative importance
of this effect is small in practice. Second, terrorism increases
the level of fear and uncertainty, which may have large effects
on the behavior of economic agents (see Abadie and Gardeazabal,
2008, and especially Becker and Rubinstein, 2004).
The Central Business District (CBD) of Chicago provides the perfect
laboratory to investigate the effects of an increase in the perceived
risk of terrorism on a major financial center. 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 US (Sears Tower) and
other landmark buildings. The case of Chicago is, therefore, of particular
interest, because it allows us to separate the direct impact
of terrorist attacks on available office space (absent in Chicago following
the 9/11 events) from the impact caused by an increased
perception of terrorism threat in Central Business Districts after
9/11.
A distinctive characteristic of this study is that it uses data disaggregated
at the building level on a quarterly basis for a panel of
Class A and Class B office buildings (as defined by CoStar Group,
see below) in the downtown area of Chicago. To our knowledge,
data analysis of the impact of terrorism on real estate markets has
never been done at this breadth and scale.
To detect the impact of an increase in the perception of terrorist
risk in Chicago as a result of 9/11, we 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. We use panel data fixed-effects estimators to
control for the presence of unmeasured characteristics of each individual
building in our sample. Our dataset includes quarterly
data for Class A and Class B office buildings in downtown Chicago
during the period of 1996–2006.1 We selected the Sears Tower, the
Aon Center, and the Hancock Center as “anchor” buildings because
of their landmark stature, which makes them preferred targets of
terrorist attacks. We based our choice of a 0.3-mile radius for the
shadow areas on the spread of the massive debris in New York City
after the 9/11 attacks (Dermisi, 2006).
The vacancy rate is not the only real estate variable possibly affected
by the 9/11 attacks. In fact, in the absence of a mechanism
that induces downward rigidity in rents, vacancies created by a demand
downturn could be eliminated by adjustments in rents.2 Our
analysis of the effects of the 9/11 attacks on the office real estate
market in downtown Chicago focuses on vacancy rates, as opposed
to rents, for a variety of reasons. First, office real estate markets are
characterized by substantial inertia, which induces long vacancy
cycles in response to demand shocks (Wheaton and Torto, 1988;
Grenadier, 1995). During periods of slack demand, rents do not adjust
all the way to eliminate vacancies in excess of the structural
vacancy rate. This creates a situation in which real estate downturns
are characterized by prolonged periods of abnormally high
vacancy rates (Grenadier, 1995).3 Second, while vacancy rates in
office real estate markets are measured routinely in commercial
real estate databases, data on rents are scarce and typically include
only information on asking rents.4 Even if information on contrac-tual rents was available, office leases often include complicated
sets of undisclosed provisions (e.g., owner-paid improvements,
free-rents periods), which may substantially affect the effective
rents accrued to the property owner (see Wheaton and Torto, 1994,
Webb and Fisher, 1996). Moreover, Webb and Fisher (1996) provide
evidence that during real estate downturns effective rents are
adjusted through concessions to the tenants that often are not reflected
on contractual rents. Our final reason for analyzing vacancy
rates is that vacancies are directly informative about the degree of
spatial agglomeration.
Our results show that office vacancy rates increased in downtown
Chicago in the wake of the 9/11 attacks. 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. These results suggest that the higher perceived
level of terrorist risk in Chicago after 9/11 induced centrifugal
forces powerful enough to counteract the effects of agglomeration
economies. This is particularly disturbing given the crucial role of
Central Business Districts in exploiting agglomeration economies
and knowledge spillovers (Glaeser et al., 1992).5
We interpret our results as evidence that the 9/11 attacks influenced
the location decisions of office tenants in downtown
Chicago. Alternatively, our results could be explained by differences
in how the various office real estate market segments in Chicago
were affected by the recessionary events of 2001. Using a variety
of robustness checks, we show that this alternative explanation is
not supported by the data.
The rest of the article is organized as follows. Section 2 reviews
the literature on the impact of terrorism in cities. Section 3 describes
in detail our dataset and methodology. Section 4 presents
and discusses our empirical results. Section 5 concludes.
The results of this study suggest that the 9/11 attacks created
centrifugal forces that influenced the location decision of high-end
office tenants in downtown Chicago. We use the panel data structure
of our data set to eliminate the potential confounding effects
that unmeasured building characteristics and common shocks to
the Chicago office real estate market may have had in our analysis.
We show that vacancy rates increased in Class A and B office
buildings in Chicago after the 9/11 attacks. Moreover, we show that
these increases were more severe for office properties located in
or nearby landmark buildings that are considered preferred targets
for terrorist attacks. In addition, we demonstrate that our results
are remarkably robust to an extensive set of alternative specifications.
The results of this article are particularly unsettling, given the
critical role that the economic literature assigns to agglomeration
economies in cities as a motor of economic growth. On the
bright side, our analysis focuses on a period during which the perceived
threat of terrorism in Central Business Districts has been
particularly elevated. The results in Davis and Weinstein (2002),
Glaeser and Shapiro (2002), Brakman et al. (2004) and Miguel and
Roland (2006) suggest 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.
