An interesting strong signal today is about a second order of consequences of Covid-19. If we still don't know how hard the pandemic will hit us back this winter, it seems that remote work is now a key societal change. Employers fighting at the same time for productivity gains and against employees' scarcity have relinquished the idea of a full 9-to-5 at the office. And the impacts are now not only propagating to other sectors but are also very visible.

A recent research paper from NYT Stern and Colombia Business Schools documents the second order of consequences for real estate (emphasis mine):

We study the impact of remote work on the commercial office sector. We document large shifts in lease revenues, office occupancy, lease renewal rates, lease durations, and market rents as firms shifted to remote work in the wake of the Covid-19 pandemic. We show that the pandemic has had large effects on both current and expected future cash flows for office buildings. Remote work also changes the risk premium on office real estate. 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. Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability.

At the beginning of the self-driving cars craze, it was already forecasted that the most significant impact would be on real estate (parking spaces obsolete and all). Just imagine how full-on remote working would further accelerate this trend and reshape our cities.

Then again, residential prices have skyrocketed in some economically attractive countries during these last two years.

Average house price in Netherlands, existing owner-occupied homes - Source GPG, 2022

What to make of all this?

Despite most economists' love for simple two-dimensional explanations, the law of offer and demand is rarely straightforward. In most countries, real estate is the top monthly expenditure for families, making it a global $4 trillion industry. Whatever happens next, industry is hit by a perfect storm of forces pulling it down and pushing it up simultaneously. How things will balance out is unpredictable. But the ripple effects will be deep and vast, both on consumer spending and business performance.

No matter your hustle, you should follow this strong signal very closely.

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