The Zoom Shock on Real Estate

A year ago, I wrote that the US would be 70%-80% back to normal in a year. So far so good: energy consumption, capacity utilization, industrial production, consumer spending, housing starts and capital goods shipments have all recovered by at least that much. But there’s something that may not normalize that quickly; the number of people working from home (WFH) compared to pre-COVID levels. University of Chicago researchers surveyed employee WFH preferences last December. Granted these surveys took place before vaccinations began, but I still think they’re indicative of employee preferences. Employee preferences may turn out to be important in the later stages of this cycle; we expect unemployment rates of 4.5% at year end, and small businesses are reporting the highest degree of hard-to-fill jobs since the data began in the 1970's.

As shown in the first chart, employees prefer a substantial number of WFH days; the average works out to around 2.5 days per week in the office. As shown on the right, that’s higher than the 1 day per week that employers would like to see.

If the WFH compromise ends up someplace in between, office owners may be in for a “zoom shock”. This term, coined by the UK researchers cited below, refers to the employment flow impact of people shifting their work domicile to their place of residence. People aren’t assumed to switch jobs; they still spend the same amount of money; almost everything about their lives stays the same, they just work from home instead. The map below shows greater London “MSOA” geographical areas. The intensity of the employment inflow or outflow is based on estimates of WFH potential by job developed by Jonathan Dingel at the University of Chicago.

WFH has begun to impact residential and commercial property values. The first chart is from Nicholas Bloom at Stanford and shows the remarkably close correlation between how many jobs can be done from home by zip code vs residential property price changes from 2019 to 2020. In other words, cities where a lot of jobs can be done from home saw the smallest gains since more WFH families opted to leave the city. Bloom also found that price declines for commercial real estate were larger for denser cities (chart, right); and that denser cities have higher shares of WFH jobs, making them more vulnerable to zoom shocks.

Cities with less public transit usage are important bellwethers for tracking WFH activity.  In other words, when people can reduce COVID risks by commuting without public transport, how many are going back to work? The next chart below shows the answer: not that many, at least so far. Texas cities have the lowest public transit usage of cities we analyzed, and their office utilization rates are still just 35%-40%. We’ll take another look in a few months, since lower COVID mortality and more vaccinations may change worker sentiment.  But as investors, we need to consider longer-term zoom shock impacts on residential property prices, office markets (rents, valuations, sublet volumes), public transit systems (ridership, solvency), municipalities (bond risks, tax base, tax rates) and a range of businesses tied to urban office utilization.

Michael Cembalest, JP Morgan Asset Management