And finally, here's what Joe’s interested in this morning |
Here is a chart of Vornado, a major real estate trust with a lot of office property in New York City.
As you can see, not only is it massively down from pre-Covid levels. It's sill lower than it was when stocks crashed in March 2020.
Despite many employers pushing to get workers back to the office over the last couple of years, office vacancies haven't stopped climbing, at least through the end of last year.
On the new Odd Lots out today, Tracy Alloway and I spoke with NYU Stern Assistant Finance Professor Arpit Gupta, who co-authored a paper in 2022 pleasantly titled "WORK FROM HOME AND THE OFFICE REAL ESTATE APOCALYPSE." The paper basically attempted to quantify some of the spillover effects from rising office vacancies in key cities like NYC and SF. So far, at least one disaster scenario hasn't played out and that is the effect on banks. Yes, there’s been struggles in the banking sector, but by and large, the willingness for borrowers and lenders to come together to extend and amend loans has softened the blow.
Some knock-on effects are still unclear and may take time to play out. One factor is that there are still pre-Covid leases that have yet to expire. So we may not have hit the bottom yet in terms of cash flow. Also property-tax reassessments take time, so we may take awhile before we see the real hit to urban budgets, from the loss of this money. Thus we don't know the full extent that the effect that urban budget decisions -- whether they manifest in higher taxes or reduced services -- will have on the livability of the city. And of course, if taxes go up or services go down, that may spur more people to leave the city, which is how you have the “loop” effect.
Furthermore, population loss doesn't just affect budgets directly. It has an effect on local businesses, schools, crime and other things that aren't as easily measured in dollars and cents.
On the other hand cities -- including NYC famously -- have experienced doom loops before, and bounced back. One interesting thing that I've thought before is that, in theory, technology that may allow people to spread out — may also raise the value of urban living. Of course, mobile phones, the Internet and Zoom let you live and work from anywhere. But other applications, like food delivery and dating apps, may raise the value of living in dense areas, where these services can be used to full effect. So for now, the verdict seems to be that there's a slow moving, structural problem facing some major cities. But as of today, the effects are cloudy.
One crazy stat is that in SF, at the current pace of new lease signings — which is being helped by the AI boom — would only get the city back to old levels of occupancy in 37 years. So part of the question is the degree to which cities can reinvent their space, including possibly office-to-residential conversions, which Arpit has also done research on.
Anyway, it was a fascinating conversation. Find it on Apple, Spotify or elsewhere.
Joe Weisenthal is the co-host of Bloomberg’s Odd Lots podcast. Follow him on X @TheStalwart
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