This has an impact not just in rents for office buildings but the entire ecosystem of support businesses that sell to workers who come into city centre to work.
One example. Small organic food shop, that sold mostly to office workers and has seen a 70% drop in foot traffic. The same thing hits bars, cafes, restaurants, theatres and other venues. Those very things that make living near or in a city interesting for many people.
In my case, precovid I thought a city centre apartment could be kinda nice, no commute, nice vibe and lots of access to amenities. But now much of that vibrant ecosystem is gone. Why would someone want to live in a converted office in such a setting? And if you house people who only have no other options - aren’t you just creating a type of ghetto?
I have always found that office-heavy areas of a city were pretty lame in comparison to denser residential. It does not seem like a big loss to me. Office centers tend to have some sandwich/salad lunch places that close at 4pm, some stuffy overly corporate happy hour bars, some dry cleaning places, some convenience stores and fast food spots.
Dense residential area tend to have the full range of services, more interesting restaurants and bars, more fun, more interesting. If people are spending more of their day there, I would expect a flourishing of these kinds of business. At the end of the day, some storefront owners will need to move to other areas to take advantage of changes in demand.
Cities are very dynamic things. They are constantly changing and renewing themselves. Neighborhoods come up and go down. There is no stopping it.
The big issue is how few cities reach sufficient residential density with enough occupancy over a wide enough area to begin creating that vibrant community. A few overpriced apartments towers near the CBD won’t get you there. I’d say the city I live in Perth, Western Australia has completely failed to cross that threshold and the current real estate environment is basically actively pushing back to prevent the urban core from ever getting there.
These vibrant ecosystems flourished where people spent most of their day. It could be a huge win if they finally migrate to residential neighborhoods, where people will now be more present.
Residential neighborhoods don’t have the same peak density. In central business districts every street has shops, in residential ones it wouldn’t be sustainable.
The place I work had diverse companies in a 'tech park' - Amazon, Google, and many others inside a gated office space, the total population of which could easily surpass 10K.
We used to have a common and very vibrant food court, even though each company used to give free cafeteria food, employees used to walk to the common food court for variety - of both people and food.
Also, since there was so much traffic of well paid, propensity to spend people, office park operation office used to arrange for paid fun stuff during lunch hours, which used to lend lot of colors to dreary office days.
During Covid the food court vanished along with all fun activities (consequently all those people who used to run those). The company cafeteria obviously closed as well and even when it has started now, they are pale shadow of earlier operations (less staff, owners of food counters working as staff).
We need to rethink the concept of city. If we don't do that we'll end up with ghettos. But if we do and implement the transformation then we'll develop something more desirable than conglomerate of various businesses. A center of a town can very well be vibrant and inspiring without most businesses if the resulting free real estate is repurposed by galleries, theaters, restaurants, parks etc.
But we won't in the near term. This will just start to happen after all other options have crumbled and one option will still be to just hold empty housing and real estate for the purpose of mere speculation. I'm pessimistic.
Must be some US thing with its more mobile and dynamic population, but I dont see any real change pre-covid vs post-covid in the city centre we live in (Geneva, Switzerland) or any other bigger cities we saw in past half year.
Few moved out, few moved in, maybe rents adjusted a bit but I didnt check that. Same shops, bars restaurants opened, same entertainment going on.
Yes, it is an american thing of how cities were built and social factors. Cities here tend to have commercial districts where nobody lives and residential districts or suburbs and you have to drive between the two.
The more European model where first floor is commercial and residential in top, it's a different story to have everyone working from home, no overnight ghost town in commercial districts.
I know a few areas that were gentrified in earlier times and ended up with things more suited for residents of a certain class than commuters. I also know of other downtown locations that became terrible to live in because a grocery store was uneconomical use of space.
I'd generally say that if they can fill it to a good density it can have a good local market compared to suburbs with poor density.
Is this true? Won’t the businesses go where the people are? So more organic shops and cafes in the suburbs? Or if the office building is turned into housing, all the people would be back again, and not just from 9-5, so the businesses would follow, right?
> Those very things that make living near or in a city interesting for many people
Most of the time, the types of bars and restaurants that rely on office workers as customers are not going to be the type of bars and restaurants you'd go in your free time when going out with friends.
“We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 32% decline in office values in 2020 and 28% in the longer-run, the latter representing a $500 billion value destruction.”
Is that value “destroyed”? Is it not unlocked to flow elsewhere? I’m genuinely curious about the dynamics of this.
Whether value was 'destroyed' or not depends on how you look at it. $500 billion dollars worth of assets were lost by the owners of the real estate; that value is gone, and it didn't go to someone else. It just vanished. The value didn't disappear because it transferred to someone else, it went away because the asset itself become less desirable and valuable to other people. You can imagine it being like if a farmer had a bunch of grain stored in a silo and it somehow went bad. The value of the grain is gone, because no one wants rotten grain; it isn't like someone else now has that value. Sure, the other farmers will sell more of their crops, but they still have to grow that food in addition to the rotten food... there is no efficiency gained or extra production in the economy.
The money spent on that commercial real estate is gone. Those big fancy buildings will have been wasted resources and effort.
>You can imagine it being like if a farmer had a bunch of grain stored in a silo and it somehow went bad.
It's fundamentally different, practically the opposite.
Paper losses are like a farmer realizing that the grain in his silo is bad. Knowing this when you were oblivious before is a good thing, whereas the grain going bad is obviously not.
Once you start regarding bad news as a loss, very bad stuff happens. In some contexts, we'd all agree. "Shooting the messenger" is an age-old cliche for counterproductive use of power, right?
Just saying that $X billion dollars were "lost" by market price fluctuation is dangerous, because it suggests it can be weighed numerically against real things and real peoples' lives lost.
If you were a CEO or a politician or someone powerful, would you justify destroying one warehouse or home or hurting one person, in order to avoid, say, a trillion dollar "loss" of paper value in some assets?
I mean, don't you think people do this, directly or indirectly, and it's wrong?
Stock market declines are called "corrections" for a reason.
>The money spent on that commercial real estate is gone. Those big fancy buildings will have been wasted resources and effort.
Maybe, but nobody can say for certain what the world will look like in 5, 10, 20, 50 years anyhow.
there's more to it though. Real estate doesn't "expire" like grain. It can be repurposed, but it would require some capital investment.
As an analogy, the grains could be fermented and turned into spirits.
And as an addendum, the value lost in the commercial real estate could be potentially considered as transferred - let's say a business either gets a cheaper rent, or stops renting offices (after this is why these commercial real estate valuation is lowered), then those businesses saved money and thus that money saved is what got "transferred".
While I agree value has been destroyed, rents should fall as a result of lower property values, and tenant companies will have more money to deploy to their businesses as a result.
A net negative to the economy to be sure, but (literal) rent-seekers aren't the only ones in the equation.
> [the value] went away because the asset itself become less desirable and valuable to other people.
That view on "value" is inherently fickly. In case they never sold their buildings, you could also argue that no value had been lost. They still have the building after all. Their speculation has a different calculation behind it now, but that's normal - speculation RoI is not guaranteed.
I assume in your analogy the general population is still buying the same amount of grain, so losing a silo of grain to rot is a pure loss to the farmer, and in a way is a loss to grain buyers (prices have to go up slightly).
But in the office space scenario, less office space is being used overall. This means that yes, landlords are losing the value of their investment, but (former) tenants are gaining access to cash flow that would have been tied up in rent and maintenance. So value has not been destroyed in the same way it was in the silo example.
I don't know if this is a good or bad thing, just pointing out a material difference in the two things you're trying to analogize.
Lower rents or building values means businesses leasing/purchasing those buildings have more money to invest elsewhere. It could be argued that the capital will be used to drive a real ROI… something that rent does not provide.
That also depends upon the fact that how much of that $500 billion was the upfront investment made and how much was actually due to pure speculative pricing.
Isn't it more like wheat produced at a cost of $100 was selling at $500. But it can only sell at $150.
I don't think this analogy is a very good one. Grain that has gone bad has close to zero utility. But office space in a city has tons of utility. It could be converted to residential space, for example. A better analogy might be a sudden shift in tastes that caused the demand for grain to drop. The grain could still supply markets for animal feed. And the farms that planted grain this season can be converted to some other crop.
More comparably grains market priced dropped. Thus grain in silo isn't worth the same anymore. So we lost food value? Even if the same calories and same utility is there still?
Some utility was lost, more value was lost. But in reality economy only lost some paper valuation, something entirely imaginary...
If my stock portfolio was worth $1000 yesterday and is only $800 we don’t say the $200 was destroyed. I have the same number of stock. It may go down further, but it can also go up to say $1100 tomorrow. Is this a new being value created, or only capricious market pricing things differently?
Until I sell, there is no real gain or loss. And for the farmer, if the grain goes bad it’s not temporarily, it will never recover. This might have been a better analogy if the underlying real estate was destroyed (uninsured and fire, etc).
They are exaggerating it by not including the increases in value elsewhere, but there is "value" destroyed. The flow to other places is not as high as what was lost.
I think this is due to the perceived value of proximity not keeping up with technology. The "real" value of proximity fell as technology improved, and that was exposed during the pandemic. It's more of a correction than outright destruction, but it's not wrong that the overall asset class lost value.
It will be interesting to observe what this means for growth of cities. In the last 100 years, city sizes increased while staying within Marchetti's travel time budget [1] (1 hour for round trip) thanks to higher speeds available through motorized transport. Now that technology is redefining proximity once again, I wonder what factors will continue to encourage/discourage people to live in dense cities.
If we look at the most extreme case where everybody had an office or at least a desk and then everybody moves to homeoffice 100% then it massively decreases then demand for property in general. Everybody already has a home. Even if more people buy bigger homes then or rent a personal office, lots of former office space will be converted for other uses.
Pink cars are all the rage and sell for +20%
One day pink is viewed as bad and now blue is the color to have. So now blue cars sell for +20% and pink sell for +0%
The extrinsic value is arguably transferred, but if you are holding a pink car, you're down in value that was just lost due to a loss in extrinsic value.
A"transfer" is a bit tortured imo because the change in value was not 1:1. Some WFH areas gained a lot more comparatively than other locations lost, and vice versa
So far, I suspect every dollar lost on commercial real estate has been gained on residential.
In many cases, the uplift in residential value is directly attributable to WFH (e.g. where a home office or more rural property becomes more desirable.)
How does thus work? I still live in the same place as before. If anything, less people want to live here because proximity close to work is less important. Some places gained value for sure, I think Bend Oregon is a very notable example. I don't think it is 1:1 as not everyone up and left where their office became a ghost town.
Real estate people tend to borrow a lot of money. Minimum 70% LTV = 3x leverage = a 33% decline wipes out all their equity.
And especially in big cities the "high-quality" real estate is usually break-even and all profit is made on appreciation, so any drop in income might mean some of them can't hold the property.
If they have to sell their properties and take a huge loss, it doesn't really affect you or me - it just means a different group of rich people will become the new landlords. But the old landlords won't like it, and it probably qualifies as news.
One way of looking at the "destruction" of the value of the property is based on Net Present Value of future rent payments. Let's take one hypothetical building, its owner and its tenant.
The market value of this building (not its construction cost) is the Net Present Value of future rent payments to be made by a tenant to the owner. There is a scheduled, anticipated transfer of value from tenant to owner based upon the agreed market rental value of the building.
When the agreed market rental rate declines, the amount of value to be transferred from tenant to owner declines and consequently, the present value of those future payments is lower. This is the basis for journalists or commentators to say that value has been destroyed. But, the value hasn't been "destroyed"; it has been transferred to the tenant in the form of the net present value of his rent reduction.
I think the whole thing becomes more clear when you remember that price is an indication of how desirable things are relative to other things rather than an indicator of intrinsic value.
If you have an asset which used to be desirable but is no more, its market value is indeed just destroyed and not transferred. It doesn’t necessarily impact the price of other goods.
Perhaps one could say that the value was adjusted downwards. It wasn't an actual thing that was destroyed - rather, a dynamic equilibrium has changed. "Value was destroyed" has all the wrong connotations - it sounds like something somebody had a moral right to was maliciously, well, destroyed.
I was about to comment on the same passage. The value has moved into housing real estate that can serve as a remote working place *and* into the less quantifiable quality of life improvement. This is the same bias used in GDP calculation vs happiness, it's a huge topic, look it up for more information.
Yes value was destroyed by these deals/builds not properly accounting for risk of a shift to WFH. Basically all the companies involved lit money on fire to the tune of $500b. Other areas benefited but this was pure vaporization of money.
You'd need to have already been equally* in residential and commercial, which are well siloed throughout all sorts of property-related industries, in order to break even and serve as a conduit for the transfer of value.
An individual investor would need to have that balance to not lose value, sure.
But a society as a whole, is the $500B "destroyed"? Or is there a transfer from the property owners to the businesses that no longer rent the space? The NPV of those decreased rent costs may just happen to be about $500 billion, right?
Not to mention the value gained by all the no-longer-commuting workers.
I take from the downvotes that people thought this was serious. Its absurdity was intended to show how misleading the use of the word "destruction" is when talking about economic costs derived from things that are no longer needed. Being more healthy, or more efficient, is unequivocally good!
I'm curious to see how this plays out in the long term since data they're using is from 2020. In late 2020 I remember reading tons of articles about how people were fleeing the city causing apartment rental prices to plummet. Now, two years later, most of my friends who rent are paying as much as, if not more than they were paying pre-covid and the apartment buildings I can see into look as full as they ever were (anecdotal evidence, I know).
Personally, I don't see a way for commercial prices to come back if WFH is here to stay, but a lot of people are incentivized to think of a solution and I've been surprised before. I think we should get another year or twos worth of data before we start calling it an apocalypse.
Here’s your data; Covid definitely slowed rent growth during 2020 but throughout 2021 and 22 it looks like it’s back in full-swing, with >15% YOY in 2021 and similar growth predicted for 2022.
Rent is way up in Brooklyn as of late 2021. I decided to leave nyc because renewing my lease came with a significant rent hike to the “pandemic deal” I got.
Commercial-wise, I can’t see it recovering to pre-pandemic levels. I’m not seeking an office out and I know many friends / former coworkers that are happy not in an office
I’m a believer in reversion to the mean, and I think that’s what we will see with the office market and work from home. The technology to work from home existed before the pandemic. Why didn’t it take off before the pandemic if it works so well? We didn’t suddenly discover a new technology here. The use of that technology was precipitated by a transient force, and when that force is removed completely, things will return to the previous equilibrium. It will take years for the mentality to revert, however.
That’s my take. Smart investors will acquire office properties during this time.
> Why didn’t it take off before the pandemic if it works so well? We didn’t suddenly discover a new technology here. The use of that technology was precipitated by a transient force, and when that force is removed completely, things will return to the previous equilibrium.
Not necessarily. It's entirely possible that working from home has always been better but that there was enough friction preventing a move in that direction that it didn't happen until covid forced it to. If that's the case, then we don't expect a reversion because the friction preventing the initial adoption is gone.
Well some of that is also regional, as the "forced" was a region by region, and job by job type of impact.
For me, my employer only had about 3 mo's collectively from 2019 to 2022 where full time work from home was even an option, and zero months where it was required and the offices where shut down.
I think there is a perception that all employers, everywhere were required to go full time work from home, that simply is not the reality
A lot of companies/managers couldn't conceive of how to run a business remotely before the pandemic. There were a few that were doing it, but lots of people had beliefs that caused them to not be able to see how it was possible. Due to the pandemic everyone had to experience how to do it, so the business world got a management crash-course in it. That dropped a whole lot of mental barriers.
I am not entirely convinced WFH will stay the norm either. Certainly more normal, but I think the HN crowd might be uniquely positioned to exploit the situation. Your average office worker doesn't usually have the agency to push back on office policies at the best of times, and you already see plenty of pull back into the office.
The other part of the equation is the more common hybrid arrangement. If you still have to come into the office twice a week you get a similar dynamic to traditional in-office work.
I think we are currently underestimating the desire to get back to the status quo and overestimating our leverage long term. Right now is a very unique time, sure to have lasting impacts, but I don't think it will stay like this.
IMO the hybrid arrangement is because office leases tend to be long term commitments. Since it is already a sunk cost in a sense the hybrid model has value right now.
I just can't see that the hybrid model is the long term equilibrium. The office either has a competitive advantage or it is a liability that can be trimmed in cost cutting measures. Long term, firms will either push the edge of the competitive advantage of the office back to everyone going to the office full time or cut the cost completely. Maybe it even depends on the department within the firm or across firms but the hybrid model is just nonsense to me. A cascade of punting a decision down the road so leadership doesn't have to really decide right now while we are all stuck in these pre-2020 commercial leases anyway.
The issue isn't so much work from home, which is not the ideal working arrangement for all, it's the commute to a central location. What has happened is people have realised the essential stupidity of it.
The future will be much more mixed and more sensible. Some people will work from home and some people will work in offices, but those offices will be much closer to where people live and people who need to work together will tend to live close by, or at least have the opportunity to. Essentially we'll see a lot more smaller offices in the suburbs.
You couldn't design a worse system of everyone having to commute to a central location, with infrastructure that is always overloaded at rush hour and underused the rest of the time.
The key to that arrangement surviving has been that the impact is all on workers and the convenience payoff has been for employers. The pandemic opened people's eyes and they're not going back.
Covid is basically over and it is still like this. It will probably stay more like this than it will revert. Global paradigm shifts don't usually revert.
The less number of days workers go into the office, the less companies can justify renting the space and paying for the supplies. I think companies will begin to either go 100% remote except for on location workers that have to be there such as data center people, and others will try to go 100% back to office, and the latter will lose because the economic incentives are stacked against them. Increased cost, including a premium on talent willing to commute, make companies that do this less competitive. Unless you believe the water cooler has some property that boosts productivity significantly, in which case you're right. But I doubt it.
Wearing my Tinfoil Hat: I see a looming, hypnotically-self-induced recession, manufactured precisely so that workers (incl. those who tend to hang on HN) feel more insecure and thus feel less empowered to say "No" to back-to-the-office mandates, thereby rescuing the rent-seeking classes from a Covid hangover. The timing is just too convenient...
It is specifically a concept tied to repeated observations from a -random- process. That is, a process in which the values fluctuation over time (due to inherent randomness), but the -fundamentals- of the process (and its probability distribution) remain fixed -- along with its mean value.
What they're saying here is that WFH has caused a seismic shift -- and hence, a drastic change in the fundamentals of the process. Their whole point is that we're seeing different valuations in 2022 than in early 2020, it's not due random fluctuation -- its because the fundamentals of the process have changed -- along with its mean.
By definition, "reversion to the mean" only applies if ... the mean is fixed.
respectfully disagree. knowledge, just like innovation cannot be reverted. it hadn't taken off before the pandemic since we were living under a purposefully driven illusion of the necessity of office work.
just like food delivery, employers, just like workers now have the knowledge that wfh works. thus workers will always have the leverage of having competitive companies that know it does offering it.
The internet was always going to enable people to perform information work remotely. It was all a matter of the process and how long it was going to take. Covid accelerated it, but it was already happening. There was no equilibrium before, just a lot of resistance and legacy social structure keeping the inertia going. With covid, that resistance was shown to be mostly substanceless, and now the inertia is preventing going back. In the end, there will be a premium paid on any work that requires someone to be at a specific location, and jobs that don't require it to be able to do the job itself won't pay that premium.
That's my take. It's basically the opposite of yours. I would not invest in office properties.
I think the opposite. Currently there is very little remote work ecosystem, but there is a huge office ecosystem. With remote being now a very real option for so many people, businesses that facilitate remote work will spring up (helping people relocate, coworking, help with foreign workers, payments etc). Traveling hasn't even resumed, and as the pandemic is removed and the war ends, people will have more options to reconsinder where they want to live.
Remote is also naturally self-reinforcing because partial-remote degrades the value of offices.
> Why didn’t it take off before the pandemic if it works so well?
Because hopeless middle managers (toxin or cancer? [1]) like their empire to be outside their office doors in cubicles. Hopefully the past few years has started to root out these sociopaths and make their incapability clearer both up and down the management chain.
Section 3.4, "Identifying the Persistence of Work From Home", is weird. They are trying to calculate the persistence of work from home based on data about what rents on high-quality office space did during the pandemic:
"A key parameter in the calibration is p, which governs the persistence of remote work. 13
We identify this parameter as follows. We assume that the economy transitioned from the
no-WFH expansion state (the E state) in 2019 to the WFH state and a recession (the WFH-R
state) in 2020. We compute the model-implied return on the NYC A+ office market in this
transition (using the A+ calibration)."
Why this should be a valid predictor for post-pandemic / endemic periods is not clear at all.
These guys have a data set of office rental data, and seem to be trying to infer way too much from it.
I'd love to see office spaces transformed into other useful spaces: Parks, cultural centers, entertainment, residential space, etc. Some office space could still be used as a coworking space for people who don't want to work from home.
The land didn't disappear. Only the need for a specific use has changed.
At some point that office space will get converted to housing and things will balance out again. Don’t feel too bad for those small organic food shops because there are not that many of them, most of the office workers were eating Subway or McDonald’s - if they could afford it. You get a lot better options when your working remotely. I know where all the farmers markets are now. My grill has never had so much action.
I'm hearing it already start to reverse in Sydney at least. So a bunch of people bought houses up the coast thinking they could work from home after covid pushing value of houses up and commercial down. But turns out people can't be trusted and and companies want people back in the office and they can't sell these coastal houses for same price they bought them for. Anecdotal of course. I have no data.
All of the non tech people I know in Australia are now back in the office. I think we might see a halt in new office construction, but existing offices do look like they will eventually fill up. And a lot of the big names like Apple and Tesla have signalled that in office work will resume.
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Dense residential area tend to have the full range of services, more interesting restaurants and bars, more fun, more interesting. If people are spending more of their day there, I would expect a flourishing of these kinds of business. At the end of the day, some storefront owners will need to move to other areas to take advantage of changes in demand.
Cities are very dynamic things. They are constantly changing and renewing themselves. Neighborhoods come up and go down. There is no stopping it.
The place I work had diverse companies in a 'tech park' - Amazon, Google, and many others inside a gated office space, the total population of which could easily surpass 10K.
We used to have a common and very vibrant food court, even though each company used to give free cafeteria food, employees used to walk to the common food court for variety - of both people and food.
Also, since there was so much traffic of well paid, propensity to spend people, office park operation office used to arrange for paid fun stuff during lunch hours, which used to lend lot of colors to dreary office days.
During Covid the food court vanished along with all fun activities (consequently all those people who used to run those). The company cafeteria obviously closed as well and even when it has started now, they are pale shadow of earlier operations (less staff, owners of food counters working as staff).
We need to rethink the concept of city. If we don't do that we'll end up with ghettos. But if we do and implement the transformation then we'll develop something more desirable than conglomerate of various businesses. A center of a town can very well be vibrant and inspiring without most businesses if the resulting free real estate is repurposed by galleries, theaters, restaurants, parks etc.
But we won't in the near term. This will just start to happen after all other options have crumbled and one option will still be to just hold empty housing and real estate for the purpose of mere speculation. I'm pessimistic.
Few moved out, few moved in, maybe rents adjusted a bit but I didnt check that. Same shops, bars restaurants opened, same entertainment going on.
The more European model where first floor is commercial and residential in top, it's a different story to have everyone working from home, no overnight ghost town in commercial districts.
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I'd generally say that if they can fill it to a good density it can have a good local market compared to suburbs with poor density.
Im glad to live in America, but the way cities are laid out elsewhere makes more sense.
Most of the time, the types of bars and restaurants that rely on office workers as customers are not going to be the type of bars and restaurants you'd go in your free time when going out with friends.
“We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 32% decline in office values in 2020 and 28% in the longer-run, the latter representing a $500 billion value destruction.”
Is that value “destroyed”? Is it not unlocked to flow elsewhere? I’m genuinely curious about the dynamics of this.
The money spent on that commercial real estate is gone. Those big fancy buildings will have been wasted resources and effort.
It's fundamentally different, practically the opposite.
Paper losses are like a farmer realizing that the grain in his silo is bad. Knowing this when you were oblivious before is a good thing, whereas the grain going bad is obviously not.
Once you start regarding bad news as a loss, very bad stuff happens. In some contexts, we'd all agree. "Shooting the messenger" is an age-old cliche for counterproductive use of power, right?
Just saying that $X billion dollars were "lost" by market price fluctuation is dangerous, because it suggests it can be weighed numerically against real things and real peoples' lives lost.
If you were a CEO or a politician or someone powerful, would you justify destroying one warehouse or home or hurting one person, in order to avoid, say, a trillion dollar "loss" of paper value in some assets?
I mean, don't you think people do this, directly or indirectly, and it's wrong?
Stock market declines are called "corrections" for a reason.
>The money spent on that commercial real estate is gone. Those big fancy buildings will have been wasted resources and effort.
Maybe, but nobody can say for certain what the world will look like in 5, 10, 20, 50 years anyhow.
Also the money didn’t disappear, it went to people smarter or luckier than them who used to own the place before. Money doesn’t disappear.
As an analogy, the grains could be fermented and turned into spirits.
And as an addendum, the value lost in the commercial real estate could be potentially considered as transferred - let's say a business either gets a cheaper rent, or stops renting offices (after this is why these commercial real estate valuation is lowered), then those businesses saved money and thus that money saved is what got "transferred".
A net negative to the economy to be sure, but (literal) rent-seekers aren't the only ones in the equation.
That view on "value" is inherently fickly. In case they never sold their buildings, you could also argue that no value had been lost. They still have the building after all. Their speculation has a different calculation behind it now, but that's normal - speculation RoI is not guaranteed.
But in the office space scenario, less office space is being used overall. This means that yes, landlords are losing the value of their investment, but (former) tenants are gaining access to cash flow that would have been tied up in rent and maintenance. So value has not been destroyed in the same way it was in the silo example.
I don't know if this is a good or bad thing, just pointing out a material difference in the two things you're trying to analogize.
Isn't it more like wheat produced at a cost of $100 was selling at $500. But it can only sell at $150.
Some utility was lost, more value was lost. But in reality economy only lost some paper valuation, something entirely imaginary...
The workers think they're getting a good deal but they really traded gas money for snack money. /s
If my stock portfolio was worth $1000 yesterday and is only $800 we don’t say the $200 was destroyed. I have the same number of stock. It may go down further, but it can also go up to say $1100 tomorrow. Is this a new being value created, or only capricious market pricing things differently?
Until I sell, there is no real gain or loss. And for the farmer, if the grain goes bad it’s not temporarily, it will never recover. This might have been a better analogy if the underlying real estate was destroyed (uninsured and fire, etc).
I think this is due to the perceived value of proximity not keeping up with technology. The "real" value of proximity fell as technology improved, and that was exposed during the pandemic. It's more of a correction than outright destruction, but it's not wrong that the overall asset class lost value.
1 - http://www.cesaremarchetti.org/archive/scan/MARCHETTI-052.pd...
In many cases, the uplift in residential value is directly attributable to WFH (e.g. where a home office or more rural property becomes more desirable.)
And especially in big cities the "high-quality" real estate is usually break-even and all profit is made on appreciation, so any drop in income might mean some of them can't hold the property.
If they have to sell their properties and take a huge loss, it doesn't really affect you or me - it just means a different group of rich people will become the new landlords. But the old landlords won't like it, and it probably qualifies as news.
The market value of this building (not its construction cost) is the Net Present Value of future rent payments to be made by a tenant to the owner. There is a scheduled, anticipated transfer of value from tenant to owner based upon the agreed market rental value of the building.
When the agreed market rental rate declines, the amount of value to be transferred from tenant to owner declines and consequently, the present value of those future payments is lower. This is the basis for journalists or commentators to say that value has been destroyed. But, the value hasn't been "destroyed"; it has been transferred to the tenant in the form of the net present value of his rent reduction.
I’m not sure if it makes up for the loss in commercial real estate though, but I’d say some destruction of value and some transfer of value.
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If you have an asset which used to be desirable but is no more, its market value is indeed just destroyed and not transferred. It doesn’t necessarily impact the price of other goods.
*Whatever optimal point.
But a society as a whole, is the $500B "destroyed"? Or is there a transfer from the property owners to the businesses that no longer rent the space? The NPV of those decreased rent costs may just happen to be about $500 billion, right?
Not to mention the value gained by all the no-longer-commuting workers.
Personally, I don't see a way for commercial prices to come back if WFH is here to stay, but a lot of people are incentivized to think of a solution and I've been surprised before. I think we should get another year or twos worth of data before we start calling it an apocalypse.
https://www.apartmentlist.com/research/national-rent-data
Commercial-wise, I can’t see it recovering to pre-pandemic levels. I’m not seeking an office out and I know many friends / former coworkers that are happy not in an office
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That’s my take. Smart investors will acquire office properties during this time.
Not necessarily. It's entirely possible that working from home has always been better but that there was enough friction preventing a move in that direction that it didn't happen until covid forced it to. If that's the case, then we don't expect a reversion because the friction preventing the initial adoption is gone.
For me, my employer only had about 3 mo's collectively from 2019 to 2022 where full time work from home was even an option, and zero months where it was required and the offices where shut down.
I think there is a perception that all employers, everywhere were required to go full time work from home, that simply is not the reality
The other part of the equation is the more common hybrid arrangement. If you still have to come into the office twice a week you get a similar dynamic to traditional in-office work.
I think we are currently underestimating the desire to get back to the status quo and overestimating our leverage long term. Right now is a very unique time, sure to have lasting impacts, but I don't think it will stay like this.
I just can't see that the hybrid model is the long term equilibrium. The office either has a competitive advantage or it is a liability that can be trimmed in cost cutting measures. Long term, firms will either push the edge of the competitive advantage of the office back to everyone going to the office full time or cut the cost completely. Maybe it even depends on the department within the firm or across firms but the hybrid model is just nonsense to me. A cascade of punting a decision down the road so leadership doesn't have to really decide right now while we are all stuck in these pre-2020 commercial leases anyway.
The future will be much more mixed and more sensible. Some people will work from home and some people will work in offices, but those offices will be much closer to where people live and people who need to work together will tend to live close by, or at least have the opportunity to. Essentially we'll see a lot more smaller offices in the suburbs.
You couldn't design a worse system of everyone having to commute to a central location, with infrastructure that is always overloaded at rush hour and underused the rest of the time.
The key to that arrangement surviving has been that the impact is all on workers and the convenience payoff has been for employers. The pandemic opened people's eyes and they're not going back.
The less number of days workers go into the office, the less companies can justify renting the space and paying for the supplies. I think companies will begin to either go 100% remote except for on location workers that have to be there such as data center people, and others will try to go 100% back to office, and the latter will lose because the economic incentives are stacked against them. Increased cost, including a premium on talent willing to commute, make companies that do this less competitive. Unless you believe the water cooler has some property that boosts productivity significantly, in which case you're right. But I doubt it.
(Only half joking...)
It is specifically a concept tied to repeated observations from a -random- process. That is, a process in which the values fluctuation over time (due to inherent randomness), but the -fundamentals- of the process (and its probability distribution) remain fixed -- along with its mean value.
What they're saying here is that WFH has caused a seismic shift -- and hence, a drastic change in the fundamentals of the process. Their whole point is that we're seeing different valuations in 2022 than in early 2020, it's not due random fluctuation -- its because the fundamentals of the process have changed -- along with its mean.
By definition, "reversion to the mean" only applies if ... the mean is fixed.
just like food delivery, employers, just like workers now have the knowledge that wfh works. thus workers will always have the leverage of having competitive companies that know it does offering it.
The internet was always going to enable people to perform information work remotely. It was all a matter of the process and how long it was going to take. Covid accelerated it, but it was already happening. There was no equilibrium before, just a lot of resistance and legacy social structure keeping the inertia going. With covid, that resistance was shown to be mostly substanceless, and now the inertia is preventing going back. In the end, there will be a premium paid on any work that requires someone to be at a specific location, and jobs that don't require it to be able to do the job itself won't pay that premium.
That's my take. It's basically the opposite of yours. I would not invest in office properties.
Remote is also naturally self-reinforcing because partial-remote degrades the value of offices.
Nothing fundamental changed between 2019 and today.
Because hopeless middle managers (toxin or cancer? [1]) like their empire to be outside their office doors in cubicles. Hopefully the past few years has started to root out these sociopaths and make their incapability clearer both up and down the management chain.
[1]: https://www.slideshare.net/bcantrill/surge2013/2-Software_En...
"A key parameter in the calibration is p, which governs the persistence of remote work. 13 We identify this parameter as follows. We assume that the economy transitioned from the no-WFH expansion state (the E state) in 2019 to the WFH state and a recession (the WFH-R state) in 2020. We compute the model-implied return on the NYC A+ office market in this transition (using the A+ calibration)."
Why this should be a valid predictor for post-pandemic / endemic periods is not clear at all.
These guys have a data set of office rental data, and seem to be trying to infer way too much from it.
The land didn't disappear. Only the need for a specific use has changed.