Posted on 12/05/2022 9:11:44 PM PST by SeekAndFind
If you missed this story last week, the summary is that there are some real estate experts who believe the pandemic may have created a new normal, one that has major implications for our cities. I can summarize this in three steps.
First, when the pandemic hit, there were lots of white collar workers who decided to leave the city and ride out the storm in their 2nd homes in the Hamptons or Vermont or wherever they could go that was away from lots of other people. On top of this, you had the lockdowns which forced many corporations to be extremely flexible with remote work and Zoom meetings in order to survive. And it turns out many employees preferred working from home, at least a few days a week. Now that the Zoom genie is out of the bottle some employees don’t want to go back to 5 days a week in the office. In fact, some employees have left the city behind and taken advantage of much better home prices in the suburbs just because they aren’t expected to be there everyday.
Work from home turns out to benefit big companies too because it allows them to economize on real estate, potentially saving them a lot of money every year. We likely haven’t seen the full impact of this yet because commercial real estate leases often run for multiple years, meaning many companies are still locked in to their old agreements for now.
Second, removing all of those workers from downtown has an impact on other businesses which were dependent on them, i.e. restaurants, shops, etc. that catered to officer workers. Many of those shops and restaurants are struggling to survive or have already closed which also means there is not as much to draw people from the suburbs into the cities at night or on the weekends. In many places there were hopes that after the pandemic ended people would return to downtown but it’s not happening in many cities, at least not quickly.
Finally, the third part of the doom loop comes from the impact that less economic activity downtown has on the cities themselves. Much of their revenue comes from these areas so if they aren’t being utilized the city’s tax base is shrinking and that means fewer resources to deal with problems (homelessness, crime) that are also plaguing cities. So hopefully you can see how all of this creates a loop that feeds back on itself. The less money cities have, the less appealing downtown areas are. The less appealing those areas are, the less chance of luring customers and businesses back to downtown.
Over the weekend, David sent me this story which seems to fit right in with the whole “urban doom loop” scenario. This one is about Minneapolis-St. Paul:
Owners of some of the most expensive office towers in the Twin Cities are choosing to walk away from their properties instead of continuing to make loan payments.
Nearby Fifth Street Towers is facing the same fate and may also go back to its lender this month, according to Axios’ sources who were not authorized to discuss the matter.
Real estate experts predict more distressed office properties will follow suit, in Minneapolis, St. Paul and the suburbs.
And the outcome of all these distressed properties is likely to be lower rents to combat vacancy and therefore a shrinking tax base. Looking around, there are lots of stories like this. This story is about Washington DC:
Foot traffic in D.C.’s downtown and Golden Triangle areas is better than it was in 2020 but it’s still far below pre-pandemic levels. City officials are now looking for ways to bring customers back to struggling retail businesses that depended heavily on office workers.
About one fifth of offices in the Central Business District in D.C. are vacant at the moment. That’s nearly double the 2019 level according to the nonprofit, Federal City Council…
The group sent a letter to the city’s Chief Financial Officer, Glen Lee, last week. In part, it read: “The pandemic and work from home have further eroded fundamentals and all indicators of the health of the District’s office market point increased systemic risk and distress.”
Here’s one about Salesforce, the largest private employer in San Francisco:
The city’s largest private employer could continue to downsize its office footprint, executives said in a recent earnings call.
Salesforce CEO Marc Benioff said there will continue to be flexibility for employees who want to work from home, while Chief Financial Officer Amy Weaver said the software company is continuing to evaluate its real estate holdings. Salesforce did not respond to a request for comment as of publication.
“Over the past two years, we have continued to re-imagine our real estate strategy,” Weaver said on the call. “That is not only to optimize for scale but also continue hybrid work environment and how people are working and how they’re using their space. And this has included reducing our footprint fairly significant right now.”
Finally, in New York there has been some improvement lately but high interest rates are still expected to lead to distressed real estate sales in the next few months.
The world’s largest office market has of late endured the departure of big-spending Chinese investors, the rise of Covid-era remote working and the economic fallout from the Ukraine war. Now there is mounting concern that the dramatic rise in interest rates will be too much for many owners to sustain and that a long-awaited reckoning is drawing near.
“There’s a consensus feeling that capitulation is coming,” said Harmon, who likened rising rates to petrol igniting an office firestorm. “Everywhere I go, anywhere around the world now, anyone who owns office says: ‘I’d like to lighten my load.’”
The industry is rife with talk of partnerships breaking up under duress, office buildings being converted for other uses and speculation about which developers may not make it to the other side. Meanwhile, opportunists are preparing for what they believe will be a bevy of distressed sales at knockdown prices, perhaps in the first quarter of the next year.
“We’re going to see distress,” said Adelaide Polsinelli, a veteran broker at Compass. “We’re seeing it already.”
If you’re looking for a more optimistic take on all of this, JP Morgan Chase put out a Commercial Real Estate Outlook assessment last week. It’s upbeat if a bit vague.
The future of office buildings remains up in the air. It is, however, important to note that none of the regions across the U.S. have seen vacancy rates dip below their pre-pandemic Q4 2019 levels, according to Moody’s Analytics.
In some cases, the right location with the right amenities—think optimizing floorplans for collaboration, offering private outdoor space and adding onsite services such as childcare and catering—may bring employees back to the office.
“Looking ahead, we are not in the ‘office is dead’ camp, but we think cash flow growth will be challenged in the office sector,” said Anthony Paolone, Senior Analyst and Co-Head of U.S. Real Estate Stock Research at JPMorgan Chase.
So maybe the outcome won’t be doom but it will probably be rough in the short term, especially if interest rates keep rising and the country lands in a recession as many economists now believe it will.
‘Normal isn’t coming back. But Jesus is.’
The Office isn’t dead but it is dying. You simply do not need to go into the office for many white collar jobs. Companies are trying to lean on employees to at least accept a hybrid 2 days per week in the office arrangement. They know 5 days a week like before is out of the question. Experienced employees and those who have in-demand skills can and are refusing to accept anything less than 100% remote. Companies have had no choice but to accept.
Big, expensive (and invariably Leftist) cities are in big trouble. Why waste hours of your day not to mention the expense of commuting into a dirty, dangerous city when you don’t have to? Once you realize that is not necessary, the next step is why even live there at all? Many have already connected the dots and left. More will keep leaving. Their standards of living will rise significantly. Those cities will see their wealthy and power crash as this goes on.
Over time some of the more Left leaning voters who move out of the big cities may....just MAY...learn to do more for themselves and be more independent and less reliant on nanny government for everything.
Oh but think of how good it is for the environment to not have all those people burning that dirty oil to commute into the office every day. You DO want to help Earth Mother Gaia don’t you?????
Save da Erf!
LOL!
I work for the big banks. Even they are having to accept hybrid schedules for their employees and for experienced ones....100% remote.
I had one (HSBC) I was playing footsie with about 6 months ago. The project I was going to work on got cancelled and I moved on and got a project with another bank. Then HSBC had another project that was similar they wanted done and started contacting me again (more experienced folks in the areas I do are not plentiful). I mentioned I took a contract with another bank 100% remote. They were stunned....”and they accept that???” (me living several states away from where the other bank is located). I said “Sure! They have no problem with it. Nor does (another big bank I was negotiating with).”
Most of them have figured out by now they’re just going to have to accept remote work if they want people with some of the experience and skills they are looking for. Otherwise they simply won’t be able to compete in the market for those people.
I live here in Charlotte. The Banks are hybrid 2 days a week for most low level employees. They are 100% remote for more senior employees/contractors and those who have skills they really need which are in short supply.
Whether they like it or not, that’s the reality in the marketplace now.
They wanted to destroy the economy in an effort to drive Trump out of office. Now the bill has come due and blue cities are abandoned, dystopian ruins.
Diffusing power is a good thing. I am glad big, democrat run cities will suffer.
Sucks to be a Blue City Mayor and Council Member these days. Hope they enjoy the SUCK that THEY caused.
Definitely agree here. Good reading. Minneapolis used to be a shining-civilized city. The decline started when Somailains started moving there.... Must be 150,000 of them by now. Few are gainfully employed and if they are it is by government or a government funded NGO.
Wracked by Floyd riots for days. Even 4 years ago, my image of Minneapolis was favorable and safe.
I see that as well, for particular skill sets in high demand. Those workers can apparently decide for themselves if they want to work remotely or not.
The problem for cities is that they preyed on those workers and their employers for tax revenues (NYC has a CITY income tax); while NJ workers of NYC companies working remotely are for the time being considered NYC employees for tax purposes, I’m sure some have officially switched to small NJ offices of their companies (still working remotely) to escape that tax trap.
Doesn’t bother them at all.
This analysis seems plausible....time will tell.
The remote workers are far more skilled and experienced than the local workers. The biggest reason the local employees have fewer skills is that most of them are hired above their pay grade because the companies couldn't hire talent at those salaries and instead had to hire inexperienced staff.
Yep. I think its foolish for companies to fight this trend. They get access to a vastly bigger talent pool - the whole country instead of just their local area. They also get to drastically reduce office expenses over time. The employees are much happier this way.
This is a good trend for the country too. Not only will this harm Blue cities especially, this will also spread wealth around a lot more. Lower cost areas will be particularly attractive to a lot of White Collar workers looking to maximize their standard of living. They will bring money into communities and spread it around as they live in various places and buy goods and services there.
One long-term problem for remote workers is that their work can also be done from India, China, etc.
Bookmark
Any work that could have been outsourced overseas was already done starting decades ago.
The pandemic allowed the reality to surface.......... cities are obsolete. Proof is to be seen in what was Deeetroit and Baltimore.
That reality is dawning in Los Angeles, San Francisco and Portland heavily dawning in Portland and San Francisco where what once was in now missing. The empty shuttered buildings are evidence of what was
A gift from obama that keeps on giving.
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