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From the abstract, “We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects.

From the abstract, “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.

hunter2_ 4y ago
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. *Whatever optimal point.
- function_seven 4y ago
  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.
deleted 4y ago
[deleted]
cortesoft 4y ago
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.
- chii 4y ago
  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".
  - nopenopenopeno 4y ago
    If NYC office space in a high rise, it cannot just be repurposed for something else.
    - Taniwha 4y ago
      like WFH capable apartments ....
    - deleted 4y ago
      [deleted]
    - dylan604 4y ago
      Of course it can. What makes you think that it couldn't be remodeledd into living spaces? Buildings in a town flip all the time from residential=>commercial=>residential.
      - gms 4y ago
        New York’s zoning laws.
        dylan604 4y ago
        Any developer worth their salt can have that corrected. Everyone in NY walks around with someone else's hand in their pockets.
jmtulloss 4y ago
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.
- xkgt 4y ago
  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. 1 - http://www.cesaremarchetti.org/archive/scan/MARCHETTI-052.pdf http://www.cesaremarchetti.org/archive/scan/MARCHETTI-052.pd...
- koshnaranek 4y ago
  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.
MichaelBurge 4y ago
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.
faangiq 4y ago
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.
benjaminwootton 4y ago
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.)
- seadan83 4y ago
  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.
sbrother 4y ago
Living in a resort town in Utah, I’m fairly sure a large portion of that value was transferred to Mountain West residential real estate
- seadan83 4y ago
  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
richardw 4y ago
House prices in areas people would rather live have all gone up. Those houses also play the role of offices 3-5 times a week. 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.
nomilk 4y ago
And if everyone quit smoking it would cause the "destruction" of billions of value in the tobacco industry.
- richardfey 4y ago
  Exactly. Until someone starts to calculate the compound healthcare and welfare costs.
  - seadan83 4y ago
    Generally the tobacco industry does not pay those costs. Hence, relative to the tobacco industry, it would be a vaporization of value
- nomilk 4y ago
  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!
WastingMyTime89 4y ago
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.
richardfey 4y ago
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.
kolp 4y ago
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.
ahartmetz 4y ago
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.
Angostura 4y ago
The value of buggy-whip stocks was certainly destroyed with the advent of the motorcar.

hunter2_ 4y ago

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. *Whatever optimal point.

function_seven 4y ago
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.

deleted 4y ago

[deleted]

cortesoft 4y ago

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.

chii 4y ago
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".
- nopenopenopeno 4y ago
  If NYC office space in a high rise, it cannot just be repurposed for something else.
  - Taniwha 4y ago
    like WFH capable apartments ....
  - deleted 4y ago
    [deleted]
  - dylan604 4y ago
    Of course it can. What makes you think that it couldn't be remodeledd into living spaces? Buildings in a town flip all the time from residential=>commercial=>residential.
    - gms 4y ago
      New York’s zoning laws.
      - dylan604 4y ago
        Any developer worth their salt can have that corrected. Everyone in NY walks around with someone else's hand in their pockets.

jmtulloss 4y ago

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.

xkgt 4y ago
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. 1 - http://www.cesaremarchetti.org/archive/scan/MARCHETTI-052.pdf http://www.cesaremarchetti.org/archive/scan/MARCHETTI-052.pd...
koshnaranek 4y ago
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.

MichaelBurge 4y ago

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.

faangiq 4y ago

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.

benjaminwootton 4y ago

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.)

seadan83 4y ago
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.

sbrother 4y ago

Living in a resort town in Utah, I’m fairly sure a large portion of that value was transferred to Mountain West residential real estate

seadan83 4y ago
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

richardw 4y ago

House prices in areas people would rather live have all gone up. Those houses also play the role of offices 3-5 times a week. 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.

nomilk 4y ago

And if everyone quit smoking it would cause the "destruction" of billions of value in the tobacco industry.

richardfey 4y ago
Exactly. Until someone starts to calculate the compound healthcare and welfare costs.
- seadan83 4y ago
  Generally the tobacco industry does not pay those costs. Hence, relative to the tobacco industry, it would be a vaporization of value
nomilk 4y ago
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!

WastingMyTime89 4y ago

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.

richardfey 4y ago

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.

kolp 4y ago

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.

ahartmetz 4y ago

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.

Angostura 4y ago

The value of buggy-whip stocks was certainly destroyed with the advent of the motorcar.