In a recent conversation with a real estate investor friend, we discussed that remote work has caused some office buildings spaces to become empty, resulting in defaults and foreclosures. Some office space currently sells at 20 cents on the dollar. Is this a buying opportunity, or is the remote shift of the office employee permanent? More broadly, the question is whether there is or will be a buying opportunity for real estate as the economy slumps.
Recessions and Real Estate
To understand any potential opportunity, it’s essential first to understand why a recession causes a decrease in demand and an increase in supply, resulting in a decline in asset values.
While we may not be in a recession yet, we are almost certainly in an economic slump. Generally, a recession is defined by decreased gross domestic product (GDP) and employment — officially, a recession is two consecutive quarters of negative economic growth. During slower economic times, demand for goods and services decreases because consumers and businesses are less willing to spend money.
It’s About Supply and Demand
A decrease in demand leads to an increase in the supply of goods and services, as companies are left with unsold inventory and decreased production, leading to a decline in the prices of goods and services. This also applies to the value of real estate.
Recessions have many causes; the current slump, however, has been engineered by the Federal Reserve (and Central Banks across the world) to get inflation under control. By raising interest rates, Central Banks have made it more expensive for consumers and businesses to borrow money resulting in a decrease in credit availability. Thus consumption and investment are more costly and riskier – inevitably, economic activity slows. External economic shocks, such as the Ukraine war, have also played a part.
Inflation and a Recession
In an inflationary environment like the one we have been experiencing since the pandemic, there is too much demand for limited assets and goods, causing prices to increase. A slowing economy, where demand for goods and services restricts, is what the Fed wants to achieve to get inflation under control.
Is the Slump in Office Permanent?
The question about office space is whether the depressed prices are a result of a permanent shift away from the office or a temporary trend caused by the pandemic and prolonged by the economic slump. While no one can predict the future, the past can serve as an indicator. People have always separated where they live from where they work. Even when technology enables remote work, companies such as Goldman Sachs, JP Morgan Chase, Microsoft, Twitter, and many others, have asked their employees to return to the office. These companies argue that working in person with a team is more productive and beneficial for their business.
Data-Driven Companies Want Employees Back in the Office
These companies are data-driven and out to make money, so if remote work were more productive, they would all be closing their offices and making remote work permanent. They are not doing so because remote work lacks the important qualities that successful enterprises need to maintain their edge.
Office and Real Estate Will Come Back
It is clear to me that office space will have a resurgence. And all recessions pass, and as asset prices go down during the recession, they also rise post-recession. As Barron Rothschild purportedly said, “When there is blood in the street, buy real estate,” or to quote Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful.”
Make Sure to Buy Right
What is valid for office space is also true for real estate during a recession. The key to success in real estate is to focus on the numbers and buy right, and a recession offers many opportunities for that.
In summary, the current depressed prices of office space may seem like a buying opportunity, but it’s important to consider whether the trend is temporary or permanent. While remote work is possible and has been adopted by many companies, successful enterprises still need the qualities that can only be found in an in-person working environment. Therefore, office space and real estate, in general, will likely rebound after any recession or economic slump.
Disclaimer: This article is for informational and educational purposes only and reflects the author’s views. It is not intended to be investment advice. For investment advice, please seek the guidance of a professional financial advisor. The information provided in this article should not be used as the basis for making investment decisions and should not be considered a recommendation or endorsement of any particular security or investment strategy. The author and publisher are not responsible for any losses or damages resulting from the use of this information. Always conduct your own research and due diligence before making any investment decisions.