Percent loss in value of residential real estate oligopolies due to hybrid work

[LearningMachine]

Twitter, Microsoft, Facebook, and Google have all announced some form of hybrid work post-covid, where they will let their employees work from home 100% of the time or at least more of the time than pre-covid, permanently.

Some folks at some of these and other tech companies had already started to move, e.g. to be closer to their family in another city, or buy a bigger estate farther away from work.  Now, they are thinking of making these moves permanent.  Overall the # of options folks can pick from for their living situation has gone up more than 10 times in some cases.

Beyond the cost of the building itself, I think of real estate as deriving its value from having small local oligopolies.  For example, if someone needed to be able to get to work within 10-30 minutes for five days of week, they had a limited number of available multifamily landlords to rent from.  Now that they don't have to go to office at all or go only 2-3 out of 7 days, for folks to keep the same total commute time per week, they could have more than 10X the number of multifamily landlords they could rent from.  Same goes for the number of options of houses they would look at before and what they can look at now.  I understand things are not that simple as some people will still want to be in a certain area because of family or school district, but prices are determined by marginal supply/vacancy.  In Detroit, 20% vacancy had a huge impact on house prices.   For prices to be impacted, all it would take is a small percentage of folks exercising their options to pick from suddenly increased # of options.

In the public markets, if we suddenly had a company's oligopoly position destroyed such that we had 10X the number of companies available to buy the same product, that company's profitability and value would fall drastically. 

What do folks think would be the % degradation of real estate values where the oligopoly position has gone down to the level of suddenly 10X the number of options being available to buyers.   Could it approach to becoming a free market where cost of housing comes down to cost of actual building itself in some cases as is already the case with rural homes, where some folks are moving?

[SharperDingaan]

The Toronto downtown vacancy rate (Grade A space) has gone from a little over 1% in January, to 4.7% as at September 30 - increasing at 2%/quarter. Of course, some segments are doing far worse, and Covid will remain with us for at least another 3 quarters. At only 10% vacancy by June 30, 2021, there aren't going to be any dislocations within the institutional ownership. 

Toronto condo vacancies are materially higher, but it is primarily the owners problem - not the builders. Many are also off-shore investments, and liquidations at a loss will not adversely affect the local economy. There will just be more condos available, for cheaper, and fewer AirBB's. Minimal incremental tourism impact as everything is already in lock down, and no dislocations amongst the builders.

Point? Opportunities will be market specific, and more likely in the US vs Canada - the best probably being anything 'Trump' related.
The US election is Nov-03, most polls have Trump 10% behind and worsening, and the current stays on prosecutions lift if Trump loses the presidency. Do you really think that post election - it's going to be 'business as usual' at the empire?

To some this is 'political', the reality is that it's just trying to make a buck -as opportunity presents.
As even Trump might say ... it's just business!

SD

 

[spartan]

If you're (1) young (2) no family (3) can permanently WFH, your range of potential dwellings is all housing that falls within the same time zone +/- 2 hours. This is much more than 10x.

I have friends in London that are planning on moving to other European cities (cheaper). Some of my family members in Toronto are considering moving out of the country to cut their living expenses in half (at least).

As for Toronto condos, what happens is anyone's guess. Sellers are in denial and refuse to lower prices. It will be interesting to see where all of that money will go. Assuming these people sell their units within the next year or so, is that just hidden pent up demand for housing in the burbs? Or are they "investors" that got burned from real estate, don't want that feeling again, and would rather put money in the stock market where they see their 12 year old nephew making more money than them? Less headaches, more liquidity, etc.

[SharperDingaan]

If you want detached, pay up. Toronto's 'burb prices are rising because there is no supply, and everyone wants one. But if you're a builder - greenfield developments are multiple residences as there's money money in it. Hence the CAD IM+ detached house in many surrounding Toronto burbs, at 45 minutes main-line train travel, every 1/2 hour, to/from downtown Toronto.

Much of the offshore investment is 'safety' money, in case owners ever have to run.
There is no appetite for a visible sale, so much of it will either sell 'underground', or just rent for whatever it can get - with the owner covering the shortfall. IE: It's not going on the market, and further lowering prices.

SD

[spartan]

Interesting. Well if there's one thing Toronto doesn't need more of, it's real estate developers. So many sleezeballs have turned into real estate geniuses (developers, sales agents, brokers raising equity for developers but calling themselves private equity professionals, "investors"). Lots of filth in industry. After covid hit, I thought we'd have a welcome moment of sanity and mean reversion...

As for the original question, every piece of real estate is different. It would be hard to make blanket statements regarding a % loss in value of urban residential real estate. Depends on the city, the employers and their future plans for WFH, and hundreds of other variables.

[BG2008]

Interesting. Well if there's one thing Toronto doesn't need more of, it's real estate developers. So many sleezeballs have turned into real estate geniuses (developers, sales agents, brokers raising equity for developers but calling themselves private equity professionals, "investors"). Lots of filth in industry. After covid hit, I thought we'd have a welcome moment of sanity and mean reversion...

As for the original question, every piece of real estate is different. It would be hard to make blanket statements regarding a % loss in value of urban residential real estate. Depends on the city, the employers and their future plans for WFH, and hundreds of other variables.

Sounds like the US during the housing bubble days

[LearningMachine]

Interesting. Well if there's one thing Toronto doesn't need more of, it's real estate developers.

This is counterintuitive, but if you actually allow more real estate developers, fewer zoning restrictions and let them build lot more, that would increase the supply so that price can come down to construction cost of buildings.

Anyway, Covid should help now by effectively increasing supply by decreasing demand for needing to take the train to downtown everyday, so that folks can move further out or to other towns. 

[thepupil]

I’ll throw out my guess.

“Expensive” SFH close to cities: 0%.

[LC]

Interesting. Well if there's one thing Toronto doesn't need more of, it's real estate developers.

This is counterintuitive, but if you actually allow more real estate developers, fewer zoning restrictions and let them build lot more, that would increase the supply so that price can come down to construction cost of buildings.

Anyway, Covid should help now by effectively increasing supply by decreasing demand for needing to take the train to downtown everyday, so that folks can move further out or to other towns.

This is true in theory but not necessarily in practice, particularly in cities. Many of the building costs are one-time fixed costs, for example laying foundation, walkways, utility hookups, HVAC units, permitting, etc.

Why this matters is that it encourages over-building, as the incremental cost to laying a new floor is minimal.

[LearningMachine]

I’ll throw out my guess.

“Expensive” SFH close to cities: 0%.

Pupil, would it be possible to elaborate what you meant here so that we can get the benefit of your wisdom here?