Sometimes economics can be boring. That happens when you know for sure that something is coming and nothing can stop it. And yet mainstream opinion is utterly in denial, continually shocked by the unfolding of the inevitable.
That’s when it gets frustrating. After all, economic forces have been widely understood for at least 500 years. There are forces of cause and effect in operation that become in economics as inevitable as the rise and fall of the sun. How come so many keep getting it wrong?
An obvious case has been the relationship between money printing and inflation. In March 2020 and following, the Federal Reserve magically caused more than $5 trillion in new dollars to appear out of thin air. That money was dumped in three successive rounds on U.S. businesses and citizens. That this would cause massive price increases was a complete and obvious no-brainer.
Some people were tricked because this didn’t happen after the quantitative easing of 2008. But that was because the new money was kept in bank vaults through a little trick: The Fed paid higher interest rates to banks than they could otherwise get by lending out the money. That locked the price level in place, even as it massively distorted industrial structures.
Another case in point is what is happening right now to commercial real estate in cities, with office space especially hit. The lockdowns of 2020 and following forced a reshuffling of work habits and reoriented daily routines to be achieved through remote work. That meant a year or more of not having to fight traffic in commutes and otherwise navigate the perilous ground of office politics. People loved it and would not go back.
Let’s say you have leased 10,000 square feet of space but most of your workers now prefer a hybrid work model as a condition of employment such that they are in the office part-time. They have also learned to carry their work on laptops rather than stuff desks full of things. That means that they can move around from desk to desk. Your demand for office space falls to half. There is no sense in leasing more space than you need, so when the lease comes up, you commit only to half the old space.
Many of these leases are coming up for renewal this year. The inevitable is happening. Demand for office space is crashing. That means much lower revenue for the indebted owner of the space and reduced and late payments to the bank, all the way toward threatening default. Before that happens, the entire building goes on the market and sells for nearly half its purchase price from 20 years ago, meaning that the bank itself marks down the value of its assets, threatening the banks too.
This domino effect is unstoppable. And it is, of course, happening exactly as many of us predicted a year or two ago. There was never any chance of going back to boom times.
“The financial upheaval in the office market is pressuring U.S. banks, insurance companies and other lenders. Commercial real estate losses in the fourth quarter at New York Community Bancorp sent shock waves down Wall Street evoking memories of bank failures last year. Regional banks in recent weeks have been reporting high net charge-offs due to commercial-property exposure. At PNC Financial Services, for example, they were more than $50 million in the first quarter, slightly less than $54 million in the fourth quarter of last year but much higher than about $10 million one year earlier.”
Part of the issue is that businesses are demanding big upgrades to office space in order to attract workers back and keep them there. That means many more private spaces where people can get on video calls without interruption. This is the new normal post-lockdown. Most offices before had attempted this preposterous fashion of creating big fish bowls for collaboration that never happens.
What workers today far prefer are real offices with doors that close, more like what you see in “Mad Men” from the 1960s. After decades of rationalistic redesigns, it turns out that most people are happiest with real offices just like in the old days. But the conversion is expensive, and with declining rents and financial squeezes, the resources might not be there, which puts added pressure on the owners.
At any rate, in the big picture, we are seeing the meltdown of most of what we used to consider the essence of city life with high-rise buildings surrounded by merchants and streets filled with bustling workers everywhere. These days are ending. The change in cities has happened at a time of such trauma and upheaval that one barely notices the difference.
I was on Capitol Hill a few weeks back and was astonished to discover what struck me as essentially a ghost town compared with what it used to be when I lived there a few decades ago. All the restaurants I frequented are gone. The one I found open had no customers. The streets were empty but for a few stragglers here and there. It is nothing like what it was.
New York and Chicago have their own well-known problems that include crime and bankruptcy and city managers not even slightly interested in fixing problems. San Francisco is toast, and major parts of Los Angeles are going dark.
“Living in greater harmony with nature will require changes in human behavior as well as other radical changes that may take decades to achieve,” it reads.
Those changes include “rebuilding the infrastructures of human existence, from cities to homes to workplaces, to water and sewer systems, to recreational and gatherings venues.”
The entire piece is a tremendous attack on cities themselves as the source of infectious disease. It was written during lockdowns as a way of signaling that they were not just temporary. They were a demonstration project to deploy the new reality.
These are crazy people, and they have taken control. Look around at what’s become of our once-great cities and you see their handiwork. We are seeing the meltdown happen in real time. Every bit of it was predictable and very likely intended from the outset. That anyone should be surprised by this is strange. It’s what happens when you fundamentally disrupt the social and economic evolution of centuries and attempt to replace it with a vision of some utopia that becomes dystopia in practice.
