As the lockdown has lasted longer than anyone thought, the third of the three coronavirus-related ATOM disruptions has continued to strengthen. As indicated in the June 2020 ATOM AotM, the pandemic has made workers adapt to remote working, which dramatically reduces demand for office real estate, particularly in premium locations. This effect comes on top of the already underway glut of retail real estate that is discussed here often.
The market cap of Zoom has risen 5x to about $150 Billion since May. This is an indicator of the expected volume of usage (whether this is the company that wins in the long run or not). This has immense implications for urban real estate. The exodus is already evident in rapidly rising vacancies and falling rents in the most expensive locations. If Pinterest, a company with only $1 Billion in revenue, decided to pay $90M (one year's rent) to terminate a 5-year lease, think of how many expiring leases are simply not being renewed (i.e. there is no cost to end them).
The most immediate effect is the sudden halt in many current construction projects, even if the costs are already sunk. Even if you just count skyscrapers taller than 150m in height, there were 625 under construction worldwide before coronavirus. These were mostly in China, but 75 of them were in the US, including 41 in NYC alone. Many are now on hold, but any buildings more than 20% complete have to be finished eventually. This is in addition to the huge volume of new skyscrapers completed in recent years (see image). To see charts of completion over time, this website has a lot of data (change city as needed).
It will take time for the capital to churn and repricing to manifest and stabilize, but the construction and permitting nexus is certain to do the worst possible thing, and halt all future construction in an attempt to constrict supply as well as obstruct the conversion of former office space into apartments. This will merely make the exodus more durable and irreversible.
The next question is one of how cityscapes adjust over the longer term. People often cannot think beyond binaries. Inane articles present just two choices, between the old fashioned structure of everyone commuting to an office every weekday and a system where 500 employees each work out of 500 homes at all times. Once the quarantine ends, the shift will be gradual. Five days a week in the office will become two or three. People can live twice as far away from home, which quadruples the amount of land area they can choose to live in, which, in turn, presents low-cost choices in most cases. The structural migration takes some time, as only renters are that fluid, but it nonetheless advances.
Residential real estate prices nearer to former job cores will fall, while those further away will stay the same. But the demand to convert excess office supply into residential supply will pressure prices further. This is ATOM deflation, but a problem for existing mortgageholders who are in a leveraged situation relative to their home equity. The Federal Reserve, of course, will print more money to keep up, but it will flow in directions the Federal Reserve did not predict. Hence, the cycle continues. As collaboration over videoconferencing becomes more normal, the distances that one can live from the main office rise. Eventually, some workers will be able to cross state lines and establish residency in low-tax states. The three places where workers are under the most onerous yoke of living costs and taxes are Los Angeles, New York City, and worst of all, the San Francisco Bay Area.
The state of Pennsylvania has just a 3% state income tax, and parts of PA are just 75 miles from Manhattan. A commute from there to NYC was not viable under the 5-days-a-week model, but is under a 1-2 day model. The greater tri-state area never had to worry about the PA state line until now, but this corridor of capital exodus has begun, and portions of Eastern PA near Route 80 and other major highways connected to the tri-state area might just experience a fortuitous wave of incoming wealth.
But the tougher nut to crack is CA, particularly since the wealth creation in CA only began much more recently, and the state borders have thus become problematic far after they were drawn. While no two bordering states have a higher differential in income tax rates than CA and NV, CA never had to worry about this since the high-income people were all over 200 miles from the Nevada border, where the climate is far less pleasant. But as CA has increased its top income tax bracket from 9.3% in 2011 to what might become 16.3% soon, this rising delta combined with the Zoom revolution has begun to generate cracks in the dam. California's taxation greed has not taken into account how the ATOM adapts around such obstacles given that they want to levy a tax hike even as Zoom has decimated San Francisco's office rental market. As more Silicon Valley professionals cross into Nevada, the network effect manifests, and they help others settle there. There are already such resettlement cooperative groups in Reno, Incline Village, and the Las Vegas area.
Rents in San Francisco fall as much as 31%.
Hence, it is quite appropriate to compare the Bay Area's high costs and taxes with OPEC's assumption that it could keep oil prices at $110 or higher forever. We know how that ended, and the same process could easily manifest over here, especially since it involves many of the people who are directly producing all the essential technological components of the ATOM. Expensive urban real estate, whether office, retail, or even residential, is a commodity. If it is made expensive due to artificial scarcity, then it falls under the might of the ATOM all the same.
Related ATOM Chapters :
4 : The Overlooked Economics of Technology