Where do you live? Depends.

What do you do? Where do you live?

Each question is only four words but rarely is the answer just as succinct.

Where you live is typically a function of what you do for work. It is self evident that wealthier individuals live in more desirable locations. A ‘desirable location’ possess a host of traits that an individual values. Proximity to the city, large suburban yard, access to the ocean, proximity to work, a quality school zone, proximity to friends and family, etc.

Covid-19 has captured a significant amount of the collective mindspace, so much so that we are beginning to question how this disease will effect our physical spaces, and ultimately real estate values. Polarizing debates now surround the future demand for commercial office space and the desirability of certain residential real estate. The core thesis rests on the idea that the combination of social distancing requirements and the success of the working from home experiment will deteriorate demand for commercial office space and will lead to the decline of urbanization as individuals now flee for the suburbs. The question at hand is whether or not we are now sowing the seeds of a material shift in the minds of individuals for what they consider ‘desirable’.

If we paint history with a broad brush it becomes clear that technological revolutions do in fact redefine the relative values of real estate. Consider the following a gross oversimplification of how the eastern coast of the United States developed. Each phase ends as the introduction of new technology alters the heat map of where people and businesses want to and need to be located.

Phase A

Settlers enter a foreign land and struggle to be self reliant. The lifeline of the economy is the port as the first settlers rely on exporting the local goods and importing the products they can not make on their own. Population density is low and farm land is given for free to those willing to settle in undeveloped territories.

Phase B

Railroads and factories emerge, providing locals with new trading partners, new products, and new economic opportunities. While the port remains critical, it is now just a part of a more vibrant and diversified economy. Businesses begin to position themselves alongside railroad routes, factories are built alongside rivers and canals, and farmland is pushed further away from the city center as economic prosperity spurs population growth. As the population grows the city become denser prompting a bifurcation of space between the haves and the have nots.

Phase C

Populations continue to grow both organically and through immigration. The port has been rendered to just one of the many features of a city and to most of the population it is a moot point. Society is now experimenting with exciting new technologies like electricity, the radio, the telephone, the automobile, the elevator, and airplanes. Electricity allows factories to relocate away from rural rivers and into the heart of the city. The combination of electricity and elevators ushers in a new age of urban density where skyscrapers redefine just how much value you can extract from a plot of land. The increased value of the city is recognized by government through investment in public transit systems, creating new arteries to the heart of the city.

Phase D

The culmination of Phases A, B, & C, has led to widespread prosperity and further population growth. Population density is at it’s highest point, and citizens must now make a conscious decision of where to live; close to the city or in the suburbs. Industrial farming and strong trade imports have transformed what was once farmland into housing and commercial space. Urban sprawl is now part of the lexicon. The Interstate Highway System was almost too successful in expanding access to the city as these arteries to the heart of the city are routinely clogged, plaguing commuters with notable deleterious effects. The widespread adoption of the automobile introduces the concept that one can live where they choose and work where they choose as long they are willing to deal with the commute.

The proposed Revolution

Here we are in the middle of 2020 and the cheers from the Work From Home crowd keeps growing louder. After only three months of remote work some are trying to claim the office is dead. Some are claiming that workers are now actually more productive. The CEO of Redfin is citing data that remote workers are now seeking to flee the very cities that employ them. While entertaining the storylines are a bit hyperbolic. Remote work is not the trigger for a mass exodus from cities as the features that make a city a city will remain constant. It is also a fantasy that white collar employees hold the negotiating power to transform work from home to work from anywhere. The vast majority don’t, and should think twice before wishing to elongate their remote work arrangements . If employers and employees no longer require proximity to one another then the pool of potential replacements just experienced exponential growth. There is a direct correlation between how smooth the WFH transition was to how quickly the employer can begin to expand their applicant pool.

It’s a shame the office is dead…

Before we get carried away, I do think the WFH movement is real and is actually igniting the start of a new era that will redefine the relative value of real estate. While the stock market is forward looking in nature, the same statement has historically been less true for real estate. It’s not that real estate development and investment isn’t anticipatory, it’s just prone to lag behind material changes in trends. A material change in a company’s outlook can be adequately reflected in minutes, real estate values simply do not react with such speed. This background is noteworthy in context to the latest sentiment shift regarding remote work.

Compared to prior paradigm shifts in real estate values today’s pool of real estate investors & homeowners are significantly more educated and possess resources to act on events as they transpire. So, if there is indeed a paradigm shift, participants will act quickly and in unison. Assuming today’s pool of real estate investors & homeowners are even more forward looking than prior generations then one must assume that investment theses are factoring in more than just Covid-19 and remote work. Autonomous vehicles, drone delivery, and the continuation of digitization are the other technological advances that any forward looking investor must consider. These technologies and their derivatives are the ingredients of the new revolution in real estate values.

What exactly does this upcoming shift in life and society look like? To a lot of people it may not look any different. Current residents of the city or the suburbs may not even notice the shift. The areas most effected are those who market themselves based on how accessible they are to the city. Transit orientated development is set to have its top selling point evaporate. These developments target those willing to pay a premium just to shave a few minutes off their commute. If the residents in these zones no longer need to deal with a commute they can easily take their dollars elsewhere. Since today’s purchasers of real estate are the most informed cohort in history they will look to settle down in the suburbs. Not just any suburbs, but the areas of the map that still have virgin land. Today a suburb may be classified as a community 10-20 miles away from the city but the suburbs 25-35 miles away from the city should see the largest gain in relative value.

Zones of desirability

The above depicts what is considered a ‘desirable’ area. The shape of the heat map is illustrative of the shift at hand. Yes, the city is still relevant and a desirable area to live but no longer will people be desperate to just live near the city. The revolution at hand devalues proximity to the city as society collectively redefines just how they can optimize their lives.

Even the McMansion is set for a makeover. If remote work is the catalyst for moving further away from the city then it only makes sense for a new home to feature two home offices (his & hers). If employers openly reduce costs through a reduction in office space it presents an opportunity for a new employee perk. Employers can subsidize the costs of home offices by contracting someone like California Closets or even buying employees a custom pod. Remote schooling and home gyms may even need to be considered by developers. Despite gaining newfound utility the added costs of building larger homes will largely be offset by cheaper land, this is especially true for the first adopters of the new revolution.

Next time someone asks where you live take a second to think about why you live where you do. If one believes their home is an investment then it’s critical to consider that we may be in inning #1 of a new real estate revolution. How did the work from home revolution happen? Gradually, then suddenly. It should be expected that the combination of drone deliveries, the continuation of digitization, AR/ VR, and autonomous cars produces its own shift in sentiment. Real estate values have already begun to brace for the impact of autonomous cars as some foresee the destruction of The Roadside Premium and up to $1 Trillion dollars’ worth of real estate shifting in value.

Less than 40% of millennials currently own a home. Employers are pushing for more remote work. Technological disruptions loom. These catalysts combine to outline the base case for the most geographically interesting real estate of the coming decade; the outer band of the suburbs which still holds virgin land. Conversely, areas whose value is derived from accessibility to transit are the least interesting and these are the very areas that should experience a mass exodus, not the city. The hollowing out of the middle is the most likely outcome of the latest real estate revolution.