Friday, November 6, 2020

Business Is Moving to the Suburbs

Zero Hedge is on the story. Not so much the story of the election drama-- and very high drama it certainly is-- but the story of real estate in America’s great cosmopolitan metropolises. It's a good way to take a look at the future.

Yesterday, it considered a question that we have also been reporting, Namely, that commercial real estate in Manhattan has largely emptied out. Fewer and fewer people are coming to work in office towers. The buildings are now mostly unoccupied. This also damages the local businesses, beginning with restaurants, that relied on foot traffic.

We are so quick to blame the pandemic that we ought to consider the possibility that the coronavirus was merely a pretext. Perhaps people were simply tired of Manhattan life. Perhaps the command of politicians like Bill de Blasio and Alexandria Ocasio-Cortez was a flashing red light.

Keep in mind, within months of AOC's election Amazon picked up and left Queens. The company had already announced its intention to build a major hub in Queens. But then, it took a look at AOC and changed its mind. Obviously, the company is not a right wing redoubt. Then again, it did not become as successful as it has become by buying into stupid.

Naturally, no one makes the connection, so the fashion world celebrates the idiot bartendress as a great political leader and a fashion plate.

We note that the exodus from office towers has been accompanied by a concomitant decline in residential real estate prices. Obviously, the market will lower prices, for purchases and for rentals, for both commercial and residential real estate. Yet, these properties have most likely been mortgaged-- and who is going to be left holding the bag for delinquent mortgages. At what point do the prospective rents fail to cover monthly mortgage payments.

Zero Hedge reports:

People and companies are leaving American cities in droves. An urban exodus could persist for a couple of years as the virus pandemic and resulting socio-economic implosion has exacerbated quality of life problems - violent crime, homelessness, rising taxes, and high cost of living - those were some of the reasons, even before the pandemic, forcing city dwellers to rural communities.

We've presented enough evidence (see: here & here & here) of city dwellers fleeing for the exits, some of which was due to the virus pandemic unleashing a technological wave of remote working, allowing these folks to work anywhere with an internet connection. 

So what about firms? Are they also running for the exits?

A salient question. We have ourselves remarked that if sufficient numbers of workers move to suburb X, why would a company not set up hubs in suburb X. After all, these places are chock-a-block with near-empty malls-- why not transform them into commercial offices.

Zero Hedge continues:

Over the summer, firms in New York's financial district mulled over the idea of an exit. At least one real estate company has confirmed that big and small companies are shifting to suburbia, reported Bloomberg

IWG Plc, which operates Regus-branded offices in metro areas worldwide, said in a post-pandemic era, "a strong pick-up in demand" for suburban office space versus major cities has been observed. They said deals for downtown New York office spaces have fallen by 30% since the pandemic's beginning, citing a 40% surge in southern Connecticut activity. 

On the anecdotal side, I would note that the Regus office rental space in my neighborhood-- roughly like a Wework-- has recently shut down completely. So, the company seems to know whereof it speaks.

It points out that firms are now moving to suburbia:

IWG notes big and small firms are moving to suburbia. They said, "sales of small offices accommodating one to two people have jumped 19% amid growing demand for working closer to home."

Numerous times this summer (see: here & here & here), we've highlighted how the once-bustling New York City has transformed into a "ghost town." And it's not just New York City. Major metros across the country are experiencing similar outflow trends of people and businesses. This is also happening in Europe as people and companies shift out of densely populated areas. 

Something similar is happening in Western Europe:

U.K. housebuilder Crest Nicholson Holdings Plc said housing developments in southern England outside of London are experiencing rising demand as a "structural change to the balance of office and home working" is underway. 

"This shows the current trend of buyers wanting more space -- inside and outside of the house," Bloomberg's Iwona Hovenko said while referencing the latest Crest Nicholson report. "But it will be interesting if the trend lasts once the pandemic passes. I am a strong believer in London long-term."

Escape from cities, no matter if its people or firms, is happening across the Western world. This is terrible news for metro home prices and will also result in slower economic recoveries for cities. 

At least now, baby boomers in America who own McMansions and rural corporate real estate have a new wave of buyers to sell to. 

The result will be slower economic recovery. A point well worth considering.


Sam L. said...

Grammatical misfires:

"Fewer and people are coming to work in office towers." Somethings missing here...I think you need another "fewer" in there.

Also, "We note that the exodus from office towers has been accompanied by a concomitant decline in residential real estate prices. Obviously, the market will lower prices, for purchases and for rentals, for both commercial and residential real estate. Yet, these properties have most likely been mortgaged-- and who is going to be left hold the bag for delinquent mortgages." "Holding", not "hold".

Did you stay up too late watching the election returns?

Galway Boy said...

The evidence of the exodus is becoming more apparent here in New England. The New England states are all seeing significant numbers of New Yorkers moving permanently into their vacation homes on Cape Cod and in both Maine and New Hampshire. We are seeing Bostonians doing the same. New home construction in the smaller towns is definitely on the rise.

As employers come to understand the value of having their employees work from home and technology reduces the friction of the process, companies will start to question the need to have 10 floors of office space at a premier address in the city. I don't get to NYC much but I have seen a dramatic drop in the daily activities of the downtown Boston area. Driving through empty city streets once jam packed with vehicles and pedestrians is an unsettling experience. I have to remind myself it's a weekday and not Sunday morning. The upside is that my commuting time has been reduced by almost 50%.