Percent loss in value of residential real estate oligopolies due to hybrid work

[LearningMachine]

Twitter, Microsoft, Facebook, and Google have all announced some form of hybrid work post-covid, where they will let their employees work from home 100% of the time or at least more of the time than pre-covid, permanently.

 

Some folks at some of these and other tech companies had already started to move, e.g. to be closer to their family in another city, or buy a bigger estate farther away from work.  Now, they are thinking of making these moves permanent.  Overall the # of options folks can pick from for their living situation has gone up more than 10 times in some cases.

 

Beyond the cost of the building itself, I think of real estate as deriving its value from having small local oligopolies.  For example, if someone needed to be able to get to work within 10-30 minutes for five days of week, they had a limited number of available multifamily landlords to rent from.  Now that they don't have to go to office at all or go only 2-3 out of 7 days, for folks to keep the same total commute time per week, they could have more than 10X the number of multifamily landlords they could rent from.  Same goes for the number of options of houses they would look at before and what they can look at now.  I understand things are not that simple as some people will still want to be in a certain area because of family or school district, but prices are determined by marginal supply/vacancy.  In Detroit, 20% vacancy had a huge impact on house prices.  For prices to be impacted, all it would take is a small percentage of folks exercising their options to pick from suddenly increased # of options.

 

In the public markets, if we suddenly had a company's oligopoly position destroyed such that we had 10X the number of companies available to buy the same product, that company's profitability and value would fall drastically. 

 

What do folks think would be the % degradation of real estate values where the oligopoly position has gone down to the level of suddenly 10X the number of options being available to buyers.  Could it approach to becoming a free market where cost of housing comes down to cost of actual building itself in some cases as is already the case with rural homes, where some folks are moving?

[SharperDingaan]

The Toronto downtown vacancy rate (Grade A space) has gone from a little over 1% in January, to 4.7% as at September 30 - increasing at 2%/quarter. Of course, some segments are doing far worse, and Covid will remain with us for at least another 3 quarters. At only 10% vacancy by June 30, 2021, there aren't going to be any dislocations within the institutional ownership. 

 

Toronto condo vacancies are materially higher, but it is primarily the owners problem - not the builders. Many are also off-shore investments, and liquidations at a loss will not adversely affect the local economy. There will just be more condos available, for cheaper, and fewer AirBB's. Minimal incremental tourism impact as everything is already in lock down, and no dislocations amongst the builders.

 

Point? Opportunities will be market specific, and more likely in the US vs Canada - the best probably being anything 'Trump' related.

The US election is Nov-03, most polls have Trump 10% behind and worsening, and the current stays on prosecutions lift if Trump loses the presidency. Do you really think that post election - it's going to be 'business as usual' at the empire?

 

To some this is 'political', the reality is that it's just trying to make a buck -as opportunity presents.

As even Trump might say ... it's just business!

 

SD

 

 

 

 

[spartan]

If you're (1) young (2) no family (3) can permanently WFH, your range of potential dwellings is all housing that falls within the same time zone +/- 2 hours. This is much more than 10x.

 

I have friends in London that are planning on moving to other European cities (cheaper). Some of my family members in Toronto are considering moving out of the country to cut their living expenses in half (at least).

 

As for Toronto condos, what happens is anyone's guess. Sellers are in denial and refuse to lower prices. It will be interesting to see where all of that money will go. Assuming these people sell their units within the next year or so, is that just hidden pent up demand for housing in the burbs? Or are they "investors" that got burned from real estate, don't want that feeling again, and would rather put money in the stock market where they see their 12 year old nephew making more money than them? Less headaches, more liquidity, etc.

[SharperDingaan]

If you want detached, pay up. Toronto's 'burb prices are rising because there is no supply, and everyone wants one. But if you're a builder - greenfield developments are multiple residences as there's more money in it. Hence the CAD IM+ detached house in many surrounding Toronto burbs, at 45 minutes main-line train travel, every 1/2 hour, to/from downtown Toronto.

 

Much of the offshore investment is 'safety' money, in case owners ever have to run.

There is no appetite for a visible sale, so much of it will either sell 'underground', or just rent for whatever it can get - with the owner covering the shortfall. IE: It's not going on the market, and further lowering prices.

 

SD

 

[spartan]

Interesting. Well if there's one thing Toronto doesn't need more of, it's real estate developers. So many sleezeballs have turned into real estate geniuses (developers, sales agents, brokers raising equity for developers but calling themselves private equity professionals, "investors"). Lots of filth in industry. After covid hit, I thought we'd have a welcome moment of sanity and mean reversion...

 

As for the original question, every piece of real estate is different. It would be hard to make blanket statements regarding a % loss in value of urban residential real estate. Depends on the city, the employers and their future plans for WFH, and hundreds of other variables.

[BG2008]

Interesting. Well if there's one thing Toronto doesn't need more of, it's real estate developers. So many sleezeballs have turned into real estate geniuses (developers, sales agents, brokers raising equity for developers but calling themselves private equity professionals, "investors"). Lots of filth in industry. After covid hit, I thought we'd have a welcome moment of sanity and mean reversion...

 

As for the original question, every piece of real estate is different. It would be hard to make blanket statements regarding a % loss in value of urban residential real estate. Depends on the city, the employers and their future plans for WFH, and hundreds of other variables.

 

Sounds like the US during the housing bubble days

 

[LearningMachine]

Interesting. Well if there's one thing Toronto doesn't need more of, it's real estate developers.

 

This is counterintuitive, but if you actually allow more real estate developers, fewer zoning restrictions and let them build lot more, that would increase the supply so that price can come down to construction cost of buildings.

 

Anyway, Covid should help now by effectively increasing supply by decreasing demand for needing to take the train to downtown everyday, so that folks can move further out or to other towns. 

[thepupil]

I’ll throw out my guess.

 

“Expensive” SFH close to cities: 0%.

 

 

 

 

 

 

[LC]

Interesting. Well if there's one thing Toronto doesn't need more of, it's real estate developers.

 

This is counterintuitive, but if you actually allow more real estate developers, fewer zoning restrictions and let them build lot more, that would increase the supply so that price can come down to construction cost of buildings.

 

Anyway, Covid should help now by effectively increasing supply by decreasing demand for needing to take the train to downtown everyday, so that folks can move further out or to other towns.

 

This is true in theory but not necessarily in practice, particularly in cities. Many of the building costs are one-time fixed costs, for example laying foundation, walkways, utility hookups, HVAC units, permitting, etc.

 

Why this matters is that it encourages over-building, as the incremental cost to laying a new floor is minimal.

[LearningMachine]

I’ll throw out my guess.

 

“Expensive” SFH close to cities: 0%.

 

Pupil, would it be possible to elaborate what you meant here so that we can get the benefit of your wisdom here?

[thepupil]

really not much wisdom to share. I don't think work from home will drastically affect well-located single family homes that derive some of their value from being close to cities.

 

maybe that's me just being delusional. I just think that for the most part rich people pay to be around other rich people: good schools/amenities/etc. and that proximity to major metropolitan areas has appeal beyond short commutes. we'll see. perhaps my straight up and to the right zestimate is making me feel overconfident.

 

it all varies by market. maybe some areas do very well, some see a correction. but in answer to the question of the thread title: my aggregate guesstimate for the overall market effect would be 0% for SFH.

 

just to use my own backyard as an example. Between 7-9% of DC/ Maryland, and Virginia households have $1mm or more of liquid assets; DC has more millionares/capita than any state and Maryland is number 2. Incomes are high. There are only so many homes and no buildable land. no more SFH being created. I estimated there were likely more millionaires than SFH's in the the desirable parts of DC/MD/VA*. a large percentage of transactions are cash buyers. the wealthy towns have median family incomes of $150K+ and houses can still be had for less than $1mm. Why should houses be cheap / prices fall?

 

because a few people are going to remote in from the mountains or the exurbs now so they can FIRE at 40?

 

I think multifamily is going to have a brutal time over the next few years but would be a buyer of super well capitalized REITs on the way down (per the thread).

 

it's not clear to me that 5 or 10 year out urban residential values will be lower than they were in February 2020. EQR trades for $377K / unit. Are nice urban apartments going to be available for $300/$250K?$200K? I mean that just seems absurd to me and self-correcting, can you imagine being able to buy an apartment in SF/NYC/DC/LA on a first year analyst/programmer/whatever salary. a first year analyst shouldn't be able to buy an apartment in NYC with his bonus as a down payment. that would be kind of awesome, but i don't think it will happen.

 

the competition for cool fun space to live and global real estate as a place to store value is too fierce for that.

 

just my delusional view.

 

*~300K households, 30,000 detached single family homes, some of which aren't in areas where people would buy expensive homes. 9% of households have >$1mm in investable assets, 20% make >$160K, the immediate wealth suburbs are wealthier and higher income because they don't have the poor parts of DC messing with the stats, so it kind of makes sense why when you're buying a "expensive" house there are 10 other qualified buyers bidding against you.

 

 

 

 

 

[KJP]

Demographics appear to be another SFH tailwind:  https://www.calculatedriskblog.com/2020/10/demographics-renting-vs-owning.html

 

 

[LearningMachine]

really not much wisdom to share. I don't think work from home will drastically affect well-located single family homes that derive some of their value from being close to cities.

 

maybe that's me just being delusional. I just think that for the most part rich people pay to be around other rich people: good schools/amenities/etc. and that proximity to major metropolitan areas has appeal beyond short commutes. we'll see. perhaps my straight up and to the right zestimate is making me feel overconfident.

 

it all varies by market. maybe some areas do very well, some see a correction. but in answer to the question of the thread title: my aggregate guesstimate for the overall market effect would be 0% for SFH.

 

just to use my own backyard as an example. Between 7-9% of DC/ Maryland, and Virginia households have $1mm or more of liquid assets; DC has more millionares/capita than any state and Maryland is number 2. Incomes are high. There are only so many homes and no buildable land. no more SFH being created. I estimated there were likely more millionaires than SFH's in the the desirable parts of DC/MD/VA*. a large percentage of transactions are cash buyers. the wealthy towns have median family incomes of $150K+ and houses can still be had for less than $1mm. Why should houses be cheap / prices fall?

 

because a few people are going to remote in from the mountains or the exurbs now so they can FIRE at 40?

 

I think multifamily is going to have a brutal time over the next few years but would be a buyer of super well capitalized REITs on the way down (per the thread).

 

it's not clear to me that 5 or 10 year out urban residential values will be lower than they were in February 2020. EQR trades for $377K / unit. Are nice urban apartments going to be available for $300/$250K?$200K? I mean that just seems absurd to me and self-correcting, can you imagine being able to buy an apartment in SF/NYC/DC/LA on a first year analyst/programmer/whatever salary. a first year analyst shouldn't be able to buy an apartment in NYC with his bonus as a down payment. that would be kind of awesome, but i don't think it will happen.

 

the competition for cool fun space to live and global real estate as a place to store value is too fierce for that.

 

just my delusional view.

 

*~300K households, 30,000 detached single family homes, some of which aren't in areas where people would buy expensive homes. 9% of households have >$1mm in investable assets, 20% make >$160K, the immediate wealth suburbs are wealthier and higher income because they don't have the poor parts of DC messing with the stats, so it kind of makes sense why when you're buying a "expensive" house there are 10 other qualified buyers bidding against you.

 

Thanks Pupil for sharing your words of wisdom.

 

Shelter vs. farm products: A rich analyst doesn't pay a big percentage of annual income for products from farms either because there is no oligopoly-type ownership concentration so far with farms.  If they had the option to buy farm products from only a few non-competing farm owners, those few options could have easily extracted a big percentage of their annual income, but fortunately that is not the case so far.  Both shelter and farm products come from real estate but former has been taking much more income because of need for close proximity to work so far, which has created oligopoly type structure by reducing options.

 

I had done a survey of a group I am part of on what percentage of people would consider moving if WFH became permanent.  I got about half the people.  Redfin did the same survey and found about 50% people ready to move in some cities: https://www.redfin.com/news/wfh-leaving-new-york-san-francisco/

 

This is what I am starting to see in practice as well.  The folks I'm seeing do this are not into FIRE.  Rich working single folks are moving for multiple reasons, e.g. to be close to their family and buying a house in another city, etc.  Rich working folks with families are buying bigger properties farther away from work.  I hear you on rich folks like to be together.  Here, I'm seeing working rich folks in the tech who are getting the flexibility to move and starting to leverage that flexibility together.  This is similar to how we saw white flight in the 60s, where those who could afford a car, started moving to suburbs.  This time also, the reason for many is not FIRE but a bigger property, newer homes, etc.  Savings are just icing on the cake.

 

All it would take is about 10-20% move to make a big impact on pricing as 20% vacancy did in Detroit. 

[Jurgis]

Personally, I am with mostly with thepupil although I would not try to predict RE pricing based on my thoughts.

 

We are in somewhat-close suburbs of Boston.

We talked about moving to exurbs for bigger-or-nicer house/more land/more forest or water/etc.

The problem is that infra does not move. So we'd lose (or be forced to drive way longer to):

 

- Tai Chi studio we go to, meditation place we go to

- PCP and medical specialists we go to

- restaurants

- other Boston culture, shopping, etc.

- friends

 

Ultimately, I don't think losing all of these are worth what we'd gain.

 

OT: why do American builders continue to build the 1930s/1950s esthetics SFHs? Unlike Europe there are no look restrictions and yet everything except multi-million custom houses look like they were plopped from a 1960s sitcom.  ::) Lithuanians build nicer looking new houses than Americans...  :-\

[SharperDingaan]

The major catches to all this is availability of high-speed internet with adequate band width, zoning restrictions within the surrounding small towns, and integration. There is often a very real drop-off in connectivity as soon as you go rural, limiting where you can go. That 60's style SFH in a small town is typically demolished and replaced with a new-build monster home - with every other new (& rich) arrival on the street doing the same thing. Yes it reflects highest and best use of the serviced lot - but it really pisses the old-timers off. Small towns are sleepy - because they like it way. A few rich folk is one thing, too many is gentrification. 

 

SD

 

[LearningMachine]

Personally, I am with mostly with thepupil although I would not try to predict RE pricing based on my thoughts.

 

We are in somewhat-close suburbs of Boston.

We talked about moving to exurbs for bigger-or-nicer house/more land/more forest or water/etc.

The problem is that infra does not move. So we'd lose (or be forced to drive way longer to):

 

- Tai Chi studio we go to, meditation place we go to

- PCP and medical specialists we go to

- restaurants

- other Boston culture, shopping, etc.

- friends

 

Ultimately, I don't think losing all of these are worth what we'd gain.

 

OT: why do American builders continue to build the 1930s/1950s esthetics SFHs? Unlike Europe there are no look restrictions and yet everything except multi-million custom houses look like they were plopped from a 1960s sitcom.  ::) Lithuanians build nicer looking new houses than Americans...  :-\

 

Agreed, you wouldn't want to lose these.  That said, assuming you were close to your work before, would you now willing to be 30 minutes away from some of these needs if you could get an estate now for the same price, e.g. say with a farm, view, horses, heliport, airport, or something else you like?  Maybe you have to go too far in your area, but do you think some small percentage of people might be willing to consider that option for their next house?

 

For each extra mile you're willing to add now, the options grow quadratically with new options being available in area of size pi * (new_distance ^2 - old_distance^2).  So, if you were willing to be only 5 miles away from these options before, you could cover only pi^25 square miles.  Now, if you can go 20 miles, your options for living go up to pi^400 square miles.  If you are willing to go 30 miles, your options for living have expanded to pi^900 square miles.

 

I feel the oligopoly power of the living options within pi^25 square miles has certainly diminished by the availability of living options in p^900 square miles, while keeping access to things that are important.

 

All it takes is a small percentage of people to start exercising this option of leveraging increased effective supply as 20% incremental supply can lead to moves in prices as 20% vacancy in Detroit showed us.  Here, the effective supply has increased quadratically by many multiples not just 20%.

[thepupil]

WhT exactly are you referring to with respect to Detroit? During/after GFC or like the general decline of the 20th century?

 

You’re probably my right.

 

Covid and WFH  has destroyed my stock portfolio, now it can go after my house

[Spekulatius]

The Covid-19 turbocharged WFH trend provides an option for people, who want well paying jobs who formerly were only available in a city, to move elsewhere and do the same job.

 

Some pole will like this and take this option and some don’t because they prefer to live in a City anyways. How these net movements work out is any wine guess, but it seem certain that there is a net migration out of large expensive cities.

 

The places these people move to (suburbs) will see stronger home appreciation and large apartment buildings in large cities will probably be less desirable.

[LearningMachine]

WhT exactly are you referring to with respect to Detroit? During/after GFC or like the general decline of the 20th century?

 

I meant during and after GFC, Detroit residential vacancy hit above 20%, causing banks to give away houses for $1 in some cases to avoid liability for property taxes and vandalism.

 

I am not saying it will get that bad in every city.  What I am saying is 20% vacancy can cause more than 50% drop in prices. 

 

I'm also not saying prices will fall 50% in cities with certainty.  What I am saying is the effective supply of options is going up way more than 20% for that well-paid analyst or software engineer, and that in history, we have examples of even just a 20% effective supply increase causing a big drop in prices.  So, I think probability is high that there will be some drop in prices for residential real estate in expensive cities.  Many factors will determine the amount of that drop, e.g. how fast the trend materializes, how much existing housing is already available in desirable locations [desirable defined in the new era where they don't have to be within 5 miles from work], how fast can developers build new houses on the outskirts in good school districts that these folks would want to move to, the magnitude of new supply from developers vs. the demand, how much regulations and zoning slow down these developers, etc.

 

 

[bizaro86]

How steep the demand curve is matters as well. There are absolutely people who currently either don't live in expensive cities or take long commutes solely because they can't afford to live closer. Small drops in price have the potential to increase demand from people who are priced out of the market.

 

Of course, gateway cities are probably also seeing condo inventory formerly dedicated to airbnb convert to residential usage...

[LearningMachine]

How steep the demand curve is matters as well. There are absolutely people who currently either don't live in expensive cities or take long commutes solely because they can't afford to live closer. Small drops in price have the potential to increase demand from people who are priced out of the market.

 

The demand to relocate out of expensive cities seems to be high according a survey by Blind, which verifies employees by asking them to provide their company email address.

 

Roughly third are willing to relocate even with a pay cut.  In addition, 40-45% will relocate without a paycut, depending on city/company.

 

Here are results broken down by company and by city:

https://www.teamblind.com/blog/index.php/2020/09/14/44-of-professionals-are-happy-to-take-a-pay-cut/

https://usblog.teamblind.com/wp-content/uploads/2020/05/PayCut.pdf

https://docs.google.com/spreadsheets/d/1zF_jxowBZYkiJIeatZAm3soelVBpoFf1TbjEZVwxBpA/edit#gid=171959972

 

[KJP]

How steep the demand curve is matters as well. There are absolutely people who currently either don't live in expensive cities or take long commutes solely because they can't afford to live closer. Small drops in price have the potential to increase demand from people who are priced out of the market.

 

The demand to relocate out of expensive cities seems to be high according a survey by Blind, which verifies employees by asking them to provide their company email address.

 

Roughly third are willing to relocate even with a pay cut.  In addition, 40-45% will relocate without a paycut, depending on city/company.

 

Here are results broken down by company and by city:

https://www.teamblind.com/blog/index.php/2020/09/14/44-of-professionals-are-happy-to-take-a-pay-cut/

https://usblog.teamblind.com/wp-content/uploads/2020/05/PayCut.pdf

https://docs.google.com/spreadsheets/d/1zF_jxowBZYkiJIeatZAm3soelVBpoFf1TbjEZVwxBpA/edit#gid=171959972

 

I don't think that's the demand curve Bizaro was referring to.  You appear to be trying to identify the number of people currently living in cities who would move elsewhere if they believed they could.  I believe he's asking about the demand from people who would like to live in cities (or different cities) but currently do not because it is not practical for them (cost, location) to do so.

 

Is it possible that widespread WFH actually increases demand for certain cities, because people who historically had to work in say, Omaha, Des Moines, Little Rock or Tulsa can now live in NYC,  Boston or LA?  Likewise, is it possible that housing in Minneapolis becomes more in demand because WFH frees people from living in, for example, Duluth?

 

Put another way, your comments seem to assume that people are in cities because that's traditionally where good jobs have been.  But what if it's the other way around:  Goods jobs are traditionally in cities because that's where people want to be?  If it's primarily the latter -- and if the desire to live in cities going forward has not changed -- when how would widspread WFH affect demand for urban housing?

 

Applying this framework to the Detroit example, vacancies were high and housing prices low, not just because people left but also because other people did not want to move in. 

[LearningMachine]

Put another way, your comments seem to assume that people are in cities because that's traditionally where good jobs have been.  But what if it's the other way around:  Goods jobs are traditionally in cities because that's where people want to be?  If it's primarily the latter -- and if the desire to live in cities going forward has not changed -- when how would widspread WFH affect demand for urban housing?

 

Totally agree that high tech employers want to be able to attract top talent wherever they are.  This is why big tech companies are leasing new NYC office sqft even in the middle of the pandemic.  They want to be able to attract the top technical talent in the biggest metropolitan region of almost 20 million people.

 

My point is that the game has changed a little.  In order to attract and retain top talent, tech companies are now also competing over offering WFH and hybrid work benefits.  This means for that newly hired Facebook engineer, he no longer is required to get to office daily, and his/her desirability of being able to walk to work has gone down, and the living options for that engineer have gone up quadratically within the region. The desirability of being close to cities is still there, but his residence doesn't have to be walkable distance to work.  Now, that engineer might still want to be in the wider city region of slightly bigger radius for dating life and other reasons, e.g. expanding their desired region from within 1 mile of work (pi * 1 square mile) to within 10 miles from work (pi * 100 square miles).  However, for folks with families, dating infrastructure might not be as important a reason, and they can expand their radius for the area farther from within 1 mile of work (pi * 1 square mile) to within 20 miles of work (pi * 400 square miles).

 

The desirability of being close to cities is still there, but work doesn't have to be in immediate vicinity within the region anymore.

 

I am already starting to see that folks who used to want to live within 1 mile radius of work are now willing to look much farther out within the region, while still having access to all the city has to offer.

[LearningMachine]

Is it possible that widespread WFH actually increases demand for certain cities, because people who historically had to work in say, Omaha, Des Moines, Little Rock or Tulsa can now live in NYC,  Boston or LA?  Likewise, is it possible that housing in Minneapolis becomes more in demand because WFH frees people from living in, for example, Duluth?

 

What do we think is the buying power of each of these folks working for a company currently located in a city that is not very expensive compared to the buying power of the analyst or software engineer working for a company that had already picked to be located in a big city for talent?  Probably lower, right?

 

While WFH a lot more of the time will be standard, WFH 100% of the time will probably take some time to pick up.  Assuming it picks up for some percentage of these folks and that these folks are able to move, what is the radius of the area they will be targeting within their new region?  Will it be 1-mile radius (p* 1 square mile) like it was for some of those rich analysts and software engineers, or will it by 20-mile radius (p* 400 square miles)?  Probably latter, right?

[Gregmal]

There are two very distinct groups in the big urban based workforce. The younger folks, work to play. They want to be in the city. Not half an hour away. Then theres the older crowd. They work to support families and lifestyles. The latter is flexible. But the former? Dont think so. 25 year old tech/finance bros dont want to live anywhere but where the action is.

 

There was a piece recently posted somewhere(might have been here, I forget) about how the current 30-40 age group, the one that largely drove rental rates across the country through the ceiling the past 10 years, are shifting significantly towards home ownership. The most preferred areas are about 15-25 miles from urban centers.