Are Downtowns in Danger of Going Downhill Again?

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"Ambitious projects will be put on hold, but I don't think they'll throw away the blueprints," said Mark Zandi, chief economist at Moody's Economy.com (MCO). "A lot of inner cities are going through a bit of a renaissance for broader demographic reasons that will remain in place for a while. Aging baby boomers are becoming empty-nesters and they're thinking of moving back to the urban core."

But cities also face risks, especially when it comes to crime rates, which fell significantly in many major cities before the housing boom began almost a decade ago. Crime increased during the 1980s with the rise in the population of twentysomethings, Zandi said. As another wave of Americans enters their late teens and 20s, cities need to work hard to keep crime in check, he said.

Violent crime rates began to tick up in 2005 and 2006 after years of declines. But that trend reversed itself in 2007 when property and violent crime rates fell for the first time in three years, according to statistics released this month by the FBI. Murders fell 9.8% in cities of 1 million or more people, and violent crime rose slightly in distant suburbs and rural areas.

Urban Planners Adjust

Moody's Zandi said urban centers will continue to flourish in coming years despite the slumping economy and real estate market. "I don't think this is the beginning of a trend, an inflection point," he said. "It's a step back in a process that has had many steps forward."

Still, urban economic development planners are having to adjust to the changing economy. When Jim Cloar accepted the job to head St. Louis' downtown revitalization effort in 2001, the timing seemed right. As in Philadelphia, Cleveland, Denver, Los Angeles, and other struggling downtowns, there were now powerful political and economic interests backing revitalization. The real estate market was booming and many developers saw a chance to turn former commercial buildings into hip loft-like spaces, shops, and trendy hotels for young professionals not yet ready for the move to the suburbs.

Like many once-thriving downtowns, St. Louis' had gone into a steady decline following World War II. By the 1980s, many of its historic buildings had fallen into disrepair as jobs, retailers, and residences relocated to the more affluent suburbs. It was Cloar's job to help bring them back.

"We're experiencing the ricochet impact of the economy," says Cloar, CEO and president of the St. Louis Downtown Partnership.

Between 1999 and 2007, St. Louis saw more than $4 billion worth of investment pour into its downtown where more than 96 of its historic buildings were restored. "In 2006 and 2007 we added significantly more inventory than what we had been adding on a historical basis. In 2008 our occupancy rates are going to drop and it will take time to burn off the oversupply."

See the BusinessWeek.com slide show for downtowns that could see their revitalization hurt by the economic downturn.

Gopal writes about real estate for BusinessWeek.com in New York.