5 ms·

This has happened every few years in corporate real estate for the past half century (Sam Zell's biography is a good take). Every. Single. Time. Valuations too

This has happened every few years in corporate real estate for the past half century (Sam Zell's biography is a good take). Every. Single. Time. Valuations too high. Debt too high. Equity too low. I am pretty cynical because I have read a bit too much history and seen this so many times working in investment management but...so what? Some rich people lose a ton of money...okay? Capitalism has losers. You lose. Also, in the last crisis, a ton of people (particularly Blackstone) made a ton of money buying huge deals at the very top of the market. None of this excess came out of the market. Lots of people who borrowed tons of money were just able to take their paper to the Fed, and keep playing.

sebmellen 6y ago
Point taken, but I don't think you're taking into account the monumental impact of COVID-19. We've never had such a large, immediate, and impactful shift to work culture. Working remote was still a niche idea at the beginning of 2020, now it's ubiquitous. That has never happened before.
- hogFeast 6y ago
  Agreed. Very hard to estimate that effect. With corporate real estate, it is inherently local (you cannot export an office) so the question is about the swings in vacancies. Have some markets seen ~15% vacancies before? Yes, corporate real estate is very cyclical, no-one builds for years, and then the market adds 40-50% in a few years. But when it gets to 30-40% then you are probably looking for examples outside the US...and SF will be the worst-hit market, others should be less. But...the world will move on, write down the value of property, assign losses, pay off remaining creditors, the world moves on...I don't think anyone could say a fault of the last ten years has been that shareholders/creditors were forced to swallow too many losses. The strength of a capitalist economy is that losses can be assigned quickly, and everyone moves on...in theory.
  - sebmellen 6y ago
    You're right, things will move on, and I am not (personally) all that worried. Nor are the creditors who can afford to eat a loss. My concern is more about the ripple effects. Many low-skilled workers rely on service work, and servicing corporate real estate is a real industry (janitorial services, managerial duties, parking lot attendants, plumbers, even construction). They are already having a pretty hard time of it, and if this industry vanishes, "moving on" may mean going out on the streets. San Francisco, Los Angeles, New York, and San Diego have enough homeless already.
    - AdamJacobMuller 6y ago
      The same effects which will drop commercial office real estate prices will drop commercial residential prices and thus their rents. And, if it doesn't, in the absence of work they always have the option of moving somewhere with a more attractive income to cost of living ratio. Much harder for a company to up and move than an individual or a family.
      - generalpf 6y ago
        Someone who is just getting by doesn’t have the option of simply moving their family.
  - lumost 6y ago
    There are a lot of companies that require office space e.g. pharma, hospitals etc. I wouldn't be surprised to see established companies expand on cheap real estate and start offering closed offices to employees.
    - greenyoda 6y ago
      > I wouldn't be surprised to see established companies expand on cheap real estate and start offering closed offices to employees. As much as I like closed offices, I think that companies that want to save money still won't offer them. The cost of closed offices isn't just more square footage; they also incur construction costs that open office space don't: walls, doors, their own heating/cooling/ventilation ducts, their own lighting and electrical wiring, etc. And an office layout with closed offices is more expensive to modify.
    - hogFeast 6y ago
      Warehouses is another one (in addition to coworking). I am not sure how easy it would be to rezone (some places have an industrial category that is separate from office/residential) but being able to fulfill orders out of city-centres is obviously attractive (but debt and equity would go to zero then, you could probably maintain prices with coworking but warehouse space is going to be a 90%+ loss).
- sidlls 6y ago
  I think the shift to remote work is temporary. There will almost certainly be a relatively large crash in commercial real estate, but it will recover, probably within a year or maybe two.
  - Daishiman 6y ago
    A permanent shift of even 5-10% of the workforce to permanent remote (which _will_ happen; far too many people with negotiating power have realized that this is an option now) will drastically alter commercial real estate.
  - lostlogin 6y ago
    > but it will recover, probably within a year or maybe two. Doesn’t this require the pandemic to be gone? I hope it is, but that’s one hell of a condition.
    - kelnos 6y ago
      If the pandemic isn't under control within a year or two, I think a commercial real estate collapse will be just one thing in a long list of problems.
  - staticassertion 6y ago
    It doesn't seem that way. Technology is making it more and more possible, companies like Dropbox, which have never supported remote work, are even shifting over.
    - sidlls 6y ago
      I'd bet within a year or maybe two tops that the vast majority of "permanent" remote companies will have reverted to be mostly or entirely on-premise again. One or two might last, but most won't.
      - staticassertion 6y ago
        Maybe. If the property values completely collapse and they can get cheaper leases, I could see it, but that's sort of an after the fact issue.
- threeqhan 6y ago
  The cause is always different, the effect is usually the same. SF experiences boom and bust cycles, this is just the catalyst of the next bust.
- kelnos 6y ago
  Remote work is ubiquitous among jobs that can be done remotely. In reality, something like 30% of the US workforce has been remote due to COVID-19. That's not a small amount, to be sure, but that's hardly ubiquity.
DevX101 6y ago
This time it really might be different. COVID seems to be leading to structural changes in the demand for commercial real estate.

sebmellen 6y ago

Point taken, but I don't think you're taking into account the monumental impact of COVID-19. We've never had such a large, immediate, and impactful shift to work culture. Working remote was still a niche idea at the beginning of 2020, now it's ubiquitous. That has never happened before.

hogFeast 6y ago
Agreed. Very hard to estimate that effect. With corporate real estate, it is inherently local (you cannot export an office) so the question is about the swings in vacancies. Have some markets seen ~15% vacancies before? Yes, corporate real estate is very cyclical, no-one builds for years, and then the market adds 40-50% in a few years. But when it gets to 30-40% then you are probably looking for examples outside the US...and SF will be the worst-hit market, others should be less. But...the world will move on, write down the value of property, assign losses, pay off remaining creditors, the world moves on...I don't think anyone could say a fault of the last ten years has been that shareholders/creditors were forced to swallow too many losses. The strength of a capitalist economy is that losses can be assigned quickly, and everyone moves on...in theory.
- sebmellen 6y ago
  You're right, things will move on, and I am not (personally) all that worried. Nor are the creditors who can afford to eat a loss. My concern is more about the ripple effects. Many low-skilled workers rely on service work, and servicing corporate real estate is a real industry (janitorial services, managerial duties, parking lot attendants, plumbers, even construction). They are already having a pretty hard time of it, and if this industry vanishes, "moving on" may mean going out on the streets. San Francisco, Los Angeles, New York, and San Diego have enough homeless already.
  - AdamJacobMuller 6y ago
    The same effects which will drop commercial office real estate prices will drop commercial residential prices and thus their rents. And, if it doesn't, in the absence of work they always have the option of moving somewhere with a more attractive income to cost of living ratio. Much harder for a company to up and move than an individual or a family.
    - generalpf 6y ago
      Someone who is just getting by doesn’t have the option of simply moving their family.
- lumost 6y ago
  There are a lot of companies that require office space e.g. pharma, hospitals etc. I wouldn't be surprised to see established companies expand on cheap real estate and start offering closed offices to employees.
  - greenyoda 6y ago
    > I wouldn't be surprised to see established companies expand on cheap real estate and start offering closed offices to employees. As much as I like closed offices, I think that companies that want to save money still won't offer them. The cost of closed offices isn't just more square footage; they also incur construction costs that open office space don't: walls, doors, their own heating/cooling/ventilation ducts, their own lighting and electrical wiring, etc. And an office layout with closed offices is more expensive to modify.
  - hogFeast 6y ago
    Warehouses is another one (in addition to coworking). I am not sure how easy it would be to rezone (some places have an industrial category that is separate from office/residential) but being able to fulfill orders out of city-centres is obviously attractive (but debt and equity would go to zero then, you could probably maintain prices with coworking but warehouse space is going to be a 90%+ loss).
sidlls 6y ago
I think the shift to remote work is temporary. There will almost certainly be a relatively large crash in commercial real estate, but it will recover, probably within a year or maybe two.
- Daishiman 6y ago
  A permanent shift of even 5-10% of the workforce to permanent remote (which _will_ happen; far too many people with negotiating power have realized that this is an option now) will drastically alter commercial real estate.
- lostlogin 6y ago
  > but it will recover, probably within a year or maybe two. Doesn’t this require the pandemic to be gone? I hope it is, but that’s one hell of a condition.
  - kelnos 6y ago
    If the pandemic isn't under control within a year or two, I think a commercial real estate collapse will be just one thing in a long list of problems.
- staticassertion 6y ago
  It doesn't seem that way. Technology is making it more and more possible, companies like Dropbox, which have never supported remote work, are even shifting over.
  - sidlls 6y ago
    I'd bet within a year or maybe two tops that the vast majority of "permanent" remote companies will have reverted to be mostly or entirely on-premise again. One or two might last, but most won't.
    - staticassertion 6y ago
      Maybe. If the property values completely collapse and they can get cheaper leases, I could see it, but that's sort of an after the fact issue.
threeqhan 6y ago
The cause is always different, the effect is usually the same. SF experiences boom and bust cycles, this is just the catalyst of the next bust.
kelnos 6y ago
Remote work is ubiquitous among jobs that can be done remotely. In reality, something like 30% of the US workforce has been remote due to COVID-19. That's not a small amount, to be sure, but that's hardly ubiquity.

DevX101 6y ago

This time it really might be different. COVID seems to be leading to structural changes in the demand for commercial real estate.