“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.”
Is that value “destroyed”? Is it not unlocked to flow elsewhere? I’m genuinely curious about the dynamics of this.
The money spent on that commercial real estate is gone. Those big fancy buildings will have been wasted resources and effort.
It's fundamentally different, practically the opposite.
Paper losses are like a farmer realizing that the grain in his silo is bad. Knowing this when you were oblivious before is a good thing, whereas the grain going bad is obviously not.
Once you start regarding bad news as a loss, very bad stuff happens. In some contexts, we'd all agree. "Shooting the messenger" is an age-old cliche for counterproductive use of power, right?
Just saying that $X billion dollars were "lost" by market price fluctuation is dangerous, because it suggests it can be weighed numerically against real things and real peoples' lives lost.
If you were a CEO or a politician or someone powerful, would you justify destroying one warehouse or home or hurting one person, in order to avoid, say, a trillion dollar "loss" of paper value in some assets?
I mean, don't you think people do this, directly or indirectly, and it's wrong?
Stock market declines are called "corrections" for a reason.
>The money spent on that commercial real estate is gone. Those big fancy buildings will have been wasted resources and effort.
Maybe, but nobody can say for certain what the world will look like in 5, 10, 20, 50 years anyhow.
In some cases, building something that nobody will use is still a loss. It still cost money to build a building, and if the one paying for that building doesn't recoup the cost the it's a lost.
Beyond that, of course you're right. It's unrealized gains, not a loss.
I like this. It's insightful, and stated in a plain way.
And equally we can say, once we start regarding good news as a gain, very bad stuff happens.
The idea of "confidence" rather than measurable, tangible facts as an economic basis has been the road to many bad things. In some ways confidence and pessimism can be seen as the ability to ignore reality. We've been inventing ways to delude ourselves in western economies for decades. For example, film and record companies counting copyright infringement as if it were an actual loss, or Twitter over-counting its users as a kind of corporate egotism.
What might really help our societies on multiple levels is a return to fact-based economics, instead of what is essentially information warfare directed at pulling off ever more audacious confidence tricks.
Confidence is useful. It reduces volatility in the market.
As I am sure you know, a "confidence trick" is a way to defraud another by influencing their (psychological) confidence (or pessimism) against their better judgement and in spite of the objective facts.
Maybe total value still decreased, because people no longer pay such a large premium for the limited city center space.
As such, total money paid on rent is less.
So, in short, yes. We also got new value, but tons is being unnecessarily destroyed.
Perhaps material-neutral "value" is not a particular good measure of anything.
https://www.urbanthree.com/case-study/minneapolis-mn/
https://www.youtube.com/watch?v=7Nw6qyyrTeI https://www.urbanthree.com/case-study/minneapolis-mn/
This is a very debatable statement. Looking at my coworkers in the past two years, opinions seem to have been pretty evenly 50/50 split between people who had enough space/comfortable home to be able to work from home, and people who had no real good option to work from home (family situation, loud kids, living in a single bedroom apartment with no desk, etc). I know A LOT of people who specifically rented apartments that were only serving the purpose of "a place to sleep, close to the office", because these people's lives revolved around doing 90% of their stuff outside of their house (eat at the office, go out during weekends, travel, etc). These people got gutted when the pandemic hit and we were forced to work from home. I always wanted a large apartment (far from the office, so less expensive) at the exchange of a longer commute. I always wanted my own work/office area. And now that we're started returning to the office I applied for (and was granted) fully remote work. However I know that if this is going to become the norm for a lot of other people, apartment layout and demand is going to change.
My wife is also working from home, and we're expecting a baby. We're likely going to buy a new house and one of our specific requirements is going to be two separate offices for both me and her, plus a room for our baby. This kind of stuff wouldn't have likely happened before.
https://www.theguardian.com/society/2021/jun/20/rural-house-...
Also the money didn’t disappear, it went to people smarter or luckier than them who used to own the place before. Money doesn’t disappear.
If I buy something for $100, the market value increases to $150 and then drops to $50, I've still lost $100 from the peak on paper. It didn't go to someone else.
The way I see it this is not the case now. Real money was handed over to buy these properties (noted by how many homes were bought for all cash). Money that was redistributed, printed by the government during the pandemic but has now been in proper circulation (thus as real as it gets) and which was paid off to a bunch of property owners who now have this as actual cash (or SPY holdings).
As an analogy, the grains could be fermented and turned into spirits.
And as an addendum, the value lost in the commercial real estate could be potentially considered as transferred - let's say a business either gets a cheaper rent, or stops renting offices (after this is why these commercial real estate valuation is lowered), then those businesses saved money and thus that money saved is what got "transferred".
A net negative to the economy to be sure, but (literal) rent-seekers aren't the only ones in the equation.
That view on "value" is inherently fickly. In case they never sold their buildings, you could also argue that no value had been lost. They still have the building after all. Their speculation has a different calculation behind it now, but that's normal - speculation RoI is not guaranteed.
But in the office space scenario, less office space is being used overall. This means that yes, landlords are losing the value of their investment, but (former) tenants are gaining access to cash flow that would have been tied up in rent and maintenance. So value has not been destroyed in the same way it was in the silo example.
I don't know if this is a good or bad thing, just pointing out a material difference in the two things you're trying to analogize.
People see the extremely high valuations of some things like housing and business locations as a good thing. Instead I mostly see them as asset inflation, and the decrease in their values as a good thing for the actual products produced by an economy.
Isn't it more like wheat produced at a cost of $100 was selling at $500. But it can only sell at $150.
Some utility was lost, more value was lost. But in reality economy only lost some paper valuation, something entirely imaginary...
The workers think they're getting a good deal but they really traded gas money for snack money. /s
If my stock portfolio was worth $1000 yesterday and is only $800 we don’t say the $200 was destroyed. I have the same number of stock. It may go down further, but it can also go up to say $1100 tomorrow. Is this a new being value created, or only capricious market pricing things differently?
Until I sell, there is no real gain or loss. And for the farmer, if the grain goes bad it’s not temporarily, it will never recover. This might have been a better analogy if the underlying real estate was destroyed (uninsured and fire, etc).
I think this is due to the perceived value of proximity not keeping up with technology. The "real" value of proximity fell as technology improved, and that was exposed during the pandemic. It's more of a correction than outright destruction, but it's not wrong that the overall asset class lost value.
1 - http://www.cesaremarchetti.org/archive/scan/MARCHETTI-052.pd...
In many cases, the uplift in residential value is directly attributable to WFH (e.g. where a home office or more rural property becomes more desirable.)
And especially in big cities the "high-quality" real estate is usually break-even and all profit is made on appreciation, so any drop in income might mean some of them can't hold the property.
If they have to sell their properties and take a huge loss, it doesn't really affect you or me - it just means a different group of rich people will become the new landlords. But the old landlords won't like it, and it probably qualifies as news.
The market value of this building (not its construction cost) is the Net Present Value of future rent payments to be made by a tenant to the owner. There is a scheduled, anticipated transfer of value from tenant to owner based upon the agreed market rental value of the building.
When the agreed market rental rate declines, the amount of value to be transferred from tenant to owner declines and consequently, the present value of those future payments is lower. This is the basis for journalists or commentators to say that value has been destroyed. But, the value hasn't been "destroyed"; it has been transferred to the tenant in the form of the net present value of his rent reduction.
I’m not sure if it makes up for the loss in commercial real estate though, but I’d say some destruction of value and some transfer of value.
If you have an asset which used to be desirable but is no more, its market value is indeed just destroyed and not transferred. It doesn’t necessarily impact the price of other goods.
*Whatever optimal point.
But a society as a whole, is the $500B "destroyed"? Or is there a transfer from the property owners to the businesses that no longer rent the space? The NPV of those decreased rent costs may just happen to be about $500 billion, right?
Not to mention the value gained by all the no-longer-commuting workers.