The Rental to Mortage Flip

In this extraordinarily difficult time for our planet and country the winds of change that blow for the near future are as potentially revolutionary as they are unpredictable. In my last post on some of the consequences that have fallen as a result of sudden quarantine induced shift of many knowledge workers to working from home, I explained how the necessity of dedicated work from home practices by many companies will reveal two things, first, companies will realize that they get a lot more work out of their workers. I stated this based on much earlier analysis that I conducted as part of my invention of the action oriented workflow paradigm nearly 20 years ago. Second, the office will be seen for  the excessive cost center that it is, it will see continued shifting to open plan and generalized usage with the end of cubicle farms and the available space will be drastically reduced as rental of floors in down town city centers is absurdly expensive. Offices will remain for executive face time and to facilitate employees interactions with IT. Sure enough the data is now coming in to confirm the validity of my previous hypothesis.

Since the time of the last articles publishing in April, major consulting companies like Cognizant have published their own findings on working from home and conclude similarly. However, one of the inevitable consequences of hyper efficient remote working technologies would be the decoupling of work engagement from work location for a bulk of the knowledge workforce, I also reasoned in 2015 that as more workers transitioned from physical to knowledge work as a result of the inexorable automation of our society that this pressure to move work to arbitrary locations that were NOT necessarily offices would grow and this would drive a re-purposing of a great deal of existing office space to residential property.

Now over a decade since the first articles predicting the shift in a 10 year time frame, the perfect storm condition to make these prognostications more and more facts  has occurred in the form of a pandemic event unseen since the great flu pandemic of 1918.

Like that event, this one has and will throw a monkey wrench of chaos into the operation of all human systems...but the purpose of this post is to explore a bit the cascading effects of this current situation. In particular, I will posit the changes that will emerge in a few tangential sectors of society as a result of this pandemic ...two that seem at first decoupled but upon coverage will reveal themselves as indirectly coupled to the current new reality of a work from home workforce being a major driver of our economy going forward.

Before I begin it's important to note the essential nature of the physical labor markets which are the engine and motor of our economy in many ways. These are also connected to this change and I may extrapolate on ways that they will change beyond the obvious decimation of near term jobs due to the inability for many physical labor jobs to actually be engaged due to the requirements of state and city governments to lock down or enforce strict social distancing rules until an effective treatment for the virus outbreak has been developed and distributed.

That said, the two industries that I will touch on are real estate, in particular the city born rental markets and the non city residential markets. The second industry which acts to a degree as an enabler for the changes that will come to real estate is transport generally and consumer transport specifically.

Comfortable in a hegemony of fear and uncertainty

In my earlier series of writings I looked at what happens when offices are abandoned as companies that otherwise would rent the space out no longer see the value of paying for expensive space that is only used partially. Seeing how that empty space would have to be re purposed or eliminated seemed rather obvious to me...what wasn't obvious was how things might move in the opposite direction.

In particular, the pandemic response has created a situation in the United States where many knowledge workers who are now working from home have been forced to think deeply about their reasons for being in the city.

For many people these are complex but generally include one or all of 3 major reasons::

1. To be proximal to an office where they are required at least partially to commute to work.
2. To be proximal to family.
3. To be proximal to the particular amenities that cities have in concentration that are lacking in small towns.

Of these three the one most germane to this analysis is 1. In the past this one was taken for granted as prior to the automation of the working task for knowledge workers to include home as an option there was no other choice. You had to go into the office to work...but in 2020, most offices have been radically redesigned to operate more like collective shared working spaces than actual cubicle farms, more over these working spaces allow dynamic flexibility *within the office* in terms of where workers can generally work. The problem had been that companies presented  working from home as an option ...which indirectly was seen as a source of potential abuse.

This perception, I posit; didn't come from any gathered metrics on the matter as prior to working form home no data on how people work from home could be gathered for comparison. To the money people, the upper executives who track productivity at the corporate level, there was a data desert with regards to what the real possible efficiency was should work forces be allowed to work remotely more freely.  In addition, there was another factor at play, human psychology. Middle managers which have historically been seen as a cost center to be decimated periodically by upper management are often reliant on the physical and social proximity of their teams, many find relevance in their jobs by this interaction and fear losing it would reflect poorly on their usefulness to the business. I posit this reason is likely a stronger reason for the tepid embrace of working from home despite the availability of the basic necessary technologies to get it done efficiently being available for over 20 years now. Mobile work devices secured to employee access, VPN encrypted pipes for communicating data  through to the company network and of course sufficient penetration of high speed data links between homes and the internet through to corporate networks.

Given this combination of 2 factors vectoring in opposition to more working from home policy shifts there could only remain one means of dislodging the hegemony of fear on the part of managers of losing control and the data desert that upper level executives experienced with regards the true potential of a more fulsome embrace of work from home policy.

..And waltzing in comes the Black Swan


We are now living, dying and adjusting through the onslaught of the pandemic. As I write, the successful suppression of the spread of the virus in the first area significantly hit in the United States has New York and New Jersey seeing single digit infection rates as other states which did not engage the issue with the necessary level of severity and hobbled by an upside down national policy are now rapidly rising in both infections and deaths. Long before this moment, companies reading the writing on the wall smartly and quickly deployed company wide work from home policies for nearly all knowledge workers. Now with the virus taking its toll in states that weren't impacted during the first wave...many people who have been quarantined for weeks or months are now realizing the absurdity of some aspects of their lives.

Why are we here?

In the wake of the shutdowns and the announced forbearance programs to temporarily forgive payment for rent and mortgages, the subset of the workforce who can work from home and is still getting paid have must of asked the question of why are they in a given city. Since the companies are getting more productivity the only reasons for staying in a city are the proximity to amenities and culture that make them unique but one doesn't need to live there in a WFH world. There is no longer a need to pay $4,000 per month for a box in the middle of the city when one can move to Oregon and pay a mortgage of $1,000 for a generous home with land instead. This realization is particularly stark as so many of those amenities are now inaccessible from tourist traps to bars to restaurants to clubs, all shut down. These renters are steeped in the absurdity of their choice now that they no longer need to be in the city.  Those looking for city amenities can situate themselves proximal to a city center but not necessarily a suburb away. This epiphany will trigger a massive migration of these workers out of the city...and in fact this prediction also has evidence already extant.


Lots of home around to go.

So as the pandemic continues to worsen and the economy delays recovery and opening the pressure to move out will accelerate. This movement will be further accelerated by the perception and reality of increased crime in the city as those who can't just move out are put into increasing life stress that is the trigger of criminality. The efforts by the United States government in particular to redress this issue have been non existent as the totality of the assistance has been siphoned into businesses and only the part of the working class that had recent employment leaving an entire swath of the nation under survival and rental stress ....hence increasing crime rates. This will have people flee the city both as a matter of economics and safety and it will be done with alacrity as a result. Already the rental markets in large cities are cooling down as these exits ramp up....this would be good for those who live in the city and otherwise still can't leave but would like to upgrade to a lower priced but more upscale living arrangement but I posit those are a fraction of those in the cities...the bulk were living check to check and are now undergoing extreme rent and survival stress.

The mortgage bomb is primed and ready to blow.

Simultaneous to the exodus from high cost rentals in the cities will come a large implosion in the home mortgage space, the Mortgage backed securities that led to the epic 2008 crash have been replaced by rental backed securities ... retaining the same underlying risk as homes managed by banks or property management companies have rented them to tenants with precarious work situations....these renters are subject to forbearance but if they are also out of work and the extensions to unemployment which are about to run out do so ...those people will default on their contracts and will have to be evicted. Eventually the clearing of these homes will leave large amounts of housing in the hands of banks....banks don't want to be property managers and eventually these properties will be put on market at better and better pricing. The same will be true of home owners who took out mortgages that were a bit beyond their ability and when combined with the pandemic, will lead to mortgage default and foreclosure. So the implosion of the market will come from rentals and mortgages and must be followed by dramatic price reductions in both.

The only question is ....will there be balance in the number of former renters escaping big cities and the available or new homes put on markets ? I think that the percentage of the workforce who can leave a $4,000 per month rental to buy a house are likely in the top 5% of the earners and will have their pick of a decimated market in urban areas where as we discussed they can now live because there is no longer a need to be near any particular "office".

So it seems that there will be a grand reshuffling of renters and owners, those who rented high cost units in the cities will buy bargain priced homes and actually save money....former owners who lived close to their limit will foreclose and likely be forced to seek rental where ever they can....those reduced pricing would enable this for many many others will likely become homeless. How this homelessness is handled will be the big question....had the government bit the bullet and bailed out the workers and those who are not working instead of big business they would would prevented all of the misery to come but they did not. The future will reap the bitter fruit of this bad policy.

Transport takes center stage.

Once this process of reshuffling is complete, there will be many with reasonably affluent ability living in rural areas because they can....but the problem of desire for access to amenities will remain. It is here that transport shifts will happen to accommodate this new demand. As companies like Waymo and Uber and Tesla race to build autonomous vehicles the serendipity of this moment for their intended businesses becomes clear. A company like Tesla is in the cat birds seat, they are arguably the most advanced of the companies seeking autonomous vehicles...primarily due to the group training methods they are using to teach their entire fleet at once. Elon Musk has stated his desire to allow Tesla owners to contribute their cars to the Tesla RoboTaxi service. In a world where people of means move into rural areas as they see fit ....transport to city centers that is efficient and low cost would be answered by such services. True, the dirty old ICE engine vehicles could be used but I posit the costs for transport , particularly via an autonomous network of electric vehicles, will obliterate the market potential for all the traditional car makers to make a profit ...they will be choked out of existence. Though I am partial to thinking Tesla will win this race (full disclosure I do own their stock) I am pointing out a more general trend and reality that will continue to happen over the years. The decimation of many industries and the explosion of demand for STEM related expertise is expected to continue and those with the skills or learning them will be in the best position to take advantage of the aforementioned shifts.