Sunday, May 24, 2020

44. Casualties of the Crisis: Real Estate and College Campuses (Demographic Doom Podcast)

This is the script for my Demographic Doom podcast episode (#44) recorded on 24 May 2020 (released on 25 May 2020). It may differ slightly from the final broadcast. This episode is available on major podcast platforms, including PodbeanApple Podcasts and a video version on YouTube. See the description on the YouTube version for extensive annotations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is

I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations. I'm seeking to view the world from the widest possible angle, as aliens would see us from space.

In this episode, I'm continuing my discussion of the Covid epidemic and the worldwide financial collapse it has triggered, but today I'm looking at just a slice of it, one disaster of many. I'm interested in how the epidemic has already reorganized mankind's relationship with "place". All of a sudden, in a matter of months, real estate has lost a significant portion of its intrinsic value. Although the real estate crash of the 2020s hasn't really gotten started yet, I predict that in the near future, much of the world's real estate markets will be in free-fall and will never regain their previous highs.

It turns out that with modern computer technology, we just don't need places the way we used to. This includes places to work in knowledge-based industries and places to be educated, especially for young adults. We don't need those massive office buildings any more, or college campuses. The crisis is teaching us that higher education isn't a place anymore. It's an address on the internet. So what's going to happen to all of the places previously used for these functions? I'd like to try the predict their fate in this episode.

Spoiler alert: It's not good.

This is May 24, 2020. We're now about 2½ months into the lockdown phase of the coronavirus epidemic, and 4½ months since the first cases were publicly reported in China. During this time, stock markets took a dive but then recovered much of their losses on what can only be described as a temporary fever of false optimism. Real Estate markets, however, hardly seemed to have been touched. Homes, for example, are selling now for the about the same prices as four months ago.

America hasn't yet seen any serious price-cutting in real estate, but I attribute this to the fact that real estate is a very slow-moving market. No one makes decisions in a matter of minutes. Real estate decisions take months, and both buyers and sellers often have the option of putting things off. That's what I think is happening here. There isn't yet a glut of homes on the market because sellers have declined to offer them. They are waiting to see how the epidemic plays out. The sale of real estate is considered a non-essential business, so most agents in the U.S. are closed. This means there no opportunity for a market to be made in real estate right now. We'll have to wait for the economy reopens before the damage can be assessed.

I predict that the damage to real estate markets in the long run will be massive. That's not just because the rest of the economy is in free-fall, but because the virus has done more than any other event to turn our economy into a virtual one. Any job that primarily involves the processing of information doesn't have to be done in an office anymore. It can be done in the worker's home. To be sure, the change was a long time coming, starting with the internet revolution in the 1990s, but the pandemic has forced companies and organizations to make full use of the technology. Now that workers are successfully performing their duties from home, there's very little incentive to return to the old ways.

If most of its employees are working from home, a information-based company hardly even needs an office anymore. A place is only needed for certain physical transactions that still can't be done online.

Think of an insurance company, selling car, home and life insurance. That's maybe 90% an information processing business. I can think of two things that an insurance company needs a physical presence for: They need to inspect whatever physical object they are insuring, and they need to inspect any damage for which a claim has been filed. Virtually everything else, like the processing a claim, can theoretically be done by workers at home in their pajamas. The virus has forced companies to test those theories, and I suspect that those tests are working out pretty well. Organizations are figuring out how to manage employees and their work without physically lording over them in a office block.

An acquaintance of mine is an insurance claims adjuster. Until March, he was working in a high-rise office building in downtown Boston. Now he's working from his bedroom while nothing in the nature of his work has changed. He is still doing the same things he was doing in the office, mainly typing on a computer and talking to clients on the phone. As long as his workflow is being monitored, there's no reason at all that he needs to sit in someone else's office or make the long commute to get there.

There is talk in this guy's company about the office reopening, but the logical question is why? If things are working out and the employee is providing his own office space for free, the savings to the company in the long run are huge. It no longer has to pay rent on that expensive office space in Boston. There's no utilities or maintenance cost, and they don't have to physically protect their employees. Whenever a business invites someone onto their premises, there's a certain liability involved, and with the lingering coronavirus, that liability will be huge. What if my friend goes back to work in the high-rise and contracts Covid-19 there? In hyper-litigious America, he could sue the company for failing to provide a safe environment. The company incurs no such liability if the employee stays home.

The economic implications for commercial real estate are huge. When the leases on all those offices come up for renewal, maybe they won't be. That's going to result in a slow-moving collapse where more and more offices are vacant, driving down the rents on all the others. It's slow-moving crisis because leases are generally for a year or more. For businesses that fail in the next few months, the shock to landlords is going to be rapid. For businesses that remain solvent, the shock is going to be spread out over the next 1 or 2 years as companies that have switched to telecommuting fail to renew their leases.

Eventually, this means major job losses for all the workers who construct and maintain those office buildings. The first effect you can expect is that no one will construct a new office building in Boston anytime soon—if ever—which puts construction workers out of work. All those vacant offices don't need cleaning staff, so they're out of work, too. Even if an office building is only partly occupied, you still need maintenance staff for all the basic systems, but it's not out of the question that some offices will merely abandoned as the companies that run them go bankrupt. Now you don't even need the basic maintenance workers anymore.

Things are obviously going to be bad for commercial office space, and but retail space is also in deep trouble. Having been banned from stores during the lockdown, consumers are relying even more on online shopping. Every few days, you hear of the bankruptcy of another well-known retail chain, and as these businesses fail, shopping centers and other retail space is going to empty out, driving down rental rates. Except for groceries, luxury goods and some personal services like haircuts, shopping isn't a place anymore. It's online data processing. Brick and mortar stores can't compete, so storefronts are going to empty out and no new retail space will be built.

But what about residential real estate? If people are working from home, they still need a home, right? Yes, but it no longer needs to be in an expensive urban area. In the post-virus world, Silicon Valley knowledge workers no longer need to live in the Bay Area. They can live anywhere, which leads to an exodus of people from expensive cities like San Francisco and an eventual crash in those overinflated housing prices. If new housing is ever built again, it's going to be in places where land is cheap, like three hours outside of San Francisco.

Since real estate is a slow-moving business, this is all going to play out over years rather than weeks, but the pain will still be great. Half-empty office towers will never be full again, and lodging costs in expensive cities can only go down, not up. This is bad news mainly for people who have already invested in real estate at their earlier values. People with million-dollar homes are going to see their equity plummet while their mortgage payments remain the same. Eventually this leads to defaults and foreclosures that push even more units onto an oversaturated market.

Added to this are the demographic factors that were already in play before the virus. Baby Boomers entering retirement are downsizing their from houses to condos to assisted living and eventually nursing care. Although many would like to stay in their original homes, they will need to liquidate them to pay for their retire—especially as pension systems collapses in a whole different slide of the crisis.

On the other side, the younger people who would buy these homes can't afford it. They are saddled with student debts and have little interest in the McMansions that the Baby Boomers built. There's also a crisis of numbers. The simply aren't enough young people to absorb all this excess capacity. Eventually, this will drive down home prices. Even if the Boomers can sell their McMansions, they're going to take a huge hit, and vast wealth will be lost in the process.

Even the whole notion of a "home" is becoming fluid. Personally, I don't have one. I'm recording this podcast in a rental car sitting by the side of a river in New Hampshire, but if I didn't tell you, you probably wouldn't know. I could easily be putting out the same product from anywhere in the world.

In my earlier adult years, you needed a fixed residence of some kind simply to have a telephone. You needed a home so employers could call you, but now that service is in our pockets. Even if you're talking on Zoom and employers can see where you live, a little stagecraft can make the tiniest apartment look like a proper home office. This new flexibility is great for workers, who not longer have to live in big cities and endure long commutes, but it's going to be devastating for the housing market in the big cities they left behind.

There will always be a need for places. You have to have a place to sleep and a placed to get your hair cut, and there has to be a place to repair your car, which many people will still need to get from place to place. The servers that rule our lives are located in places, but they are often remote places with cheap land and power. The tasks that don't need a place are knowledge work, which is a huge portion of our economy. Humans making decision based on electronic data don't need specific places to work in, and the current crisis is driving that home in a very painful way. It's going to be painful for people who have already invested in real estate at inflated values, and it's going to be painful for anyone whose job revolves around maintaining the places that used to house these workers.

And it's going to be painful for colleges and universities, because most higher learning doesn't need a place either. Covid-19 has taught everyone this, as classes have been cancelled and moved online. Sure, you got into Harvard, but you're not actually "going" to Harvard this semester. You're just taking some online classes with the Harvard logo them. This begs the question: Why do you need the campus at all?

For two millennia, education was a place you went to were learned men taught you things. You had to go where the learned men were because that was the only way to communicate with them. I actually visited one of these places from two millennia ago: Aristotle's Lyceum in Athens. Aristotle would stroll through the pleasant grounds while lecturing to his students. The site is just foundation remnants now, but the same model of education persisted for the next 23 centuries. The written word could convey some things, but if you wanted to interact with a teacher to guide your learning, you had to go to where the teacher was.

All of that changed, starting about 20 years ago, when technology made it possible to interact with a teacher and follow a curriculum without the teacher and student being in the same room. Today a learned scholar can give a lecture on video and potentially have it be seen by 100,000 students, knowledge can then be tested via online exams. If a student writes an essays, it still needs to be evaluated by another human, but that human can be anywhere in world, no on a certain campus

Why does every college need to re-teach the same History 101 class? The answer is, they don't. Once classes move online, huge economies of scale are possible, and the horrendous costs of higher education can potentially go down. This leaves physical campuses like Harvard out in the cold. They've got this huge overhead that an online university doesn't have.

I looked up the current cost of tuition at Harvard. It's $70,000 a year if you live on campus. At least that's how much you'd pay if your Daddy is rich. Most students get scholarships that bring down the costs, but they're still going to be indebted for years with their student loans. What are they getting for that apart from a diploma with "Harvard" on the top? Basically, not much more than an online university, especially this semester.

One thing you for your $70,000 is the opportunity to interact with other Harvard students, who must be pretty smart if they got into Harvard. I acknowledge that there could be some value in this. There's a certain social component in leaving home to go to collage. People aren't suddenly adults the moment they graduate from high school. They need more time to develop, and college has traditionally served as a sort of halfway house between your parents' home and full self-sufficiency. There's more to campus life than just classes, and its nice to be thrown together with other high-achieving kids, but $70,000 a year or 20 years of personal debt is an absurd price to pay for these somewhat nebulous privileges,

I don't really know what online classes look like, but the process sounds pretty simple. You present the student with information; give him some exercises, and then test him on his abilities. If this is a practical exercise like dissecting a cadaver in medical school, you really got to be there, in the same room as the cadaver, but it seems to me that for 80% of the other things a university does, online learning ought to work just fine. Human feedback may be an important part of the educational process, but the human you are dealing with can still be at home in their pajamas.

I think the death blow of college campuses was struck in the early 2000s, when internet technology took off. It has just taken a while for society to figure this out, but Covid-19 has suddenly made the transformation complete. If I students get through the current semester with online learning alone and they test fairly well on their mastery of the material, then the college campus is going to be proven a fraud. Many of these physical campuses are going to collapse because they won't be recruiting enough paying students to support their bloated infrastructure. I predict that the weaker ones will simply close their doors, while the bigger institutions with prestigious names will morph into online megaliths directly competing with each other to bring down costs. Maybe someday everyone will be able to go to Harvard, and at a lot lower cost than $70,000.

Of course, I'm only talking about formal learning here: the transfer of describable knowledge and skills from one generation to the next. What about the social function: this halfway house between home and real life? Well, students will just have to find some other way to do it.

I like the system in Israel, where most young people are required to participate in national service. Usually its joining the military, but other forms of service are possible. You are taking young people out of their parents' home and throwing them together with other people their age in a dorm-like setting with a structured series of training activities. This is a chance for both knowledge transfer and the building of social skills, and the tuition cost for these students is zero. No one has to pay $70,000 or go into debt for 20 years to join the military. The country, in turn, gets a valuable labor force that it can use for a variety of purposes.

I'm not saying that's how things should be done in the US. One country is so fractured, paralyzed and insolvent right now, that I don't see any system of National Service every being implemented—or frankly anything all being implemented. I can only say that if we define education as the teaching of knowledge, then online learning works just fine for most things, and physical college campuses are dinosaurs doomed to extinction.

I don't have the same view of primary education, especially Kindergarten through 6th grade. That period is much more about social development, which can't be taught by computers. I think the actual knowledge transferred in the early years is less important that learning to obey rules and work with others. When you get into the higher grades, like 7-12, the situation gets murkier. These kids are perfectly capable of learning online, and it might be better for them in some cases. Once advantage of online learning is that a gifted student can jump ahead of all the others. They don't have to learn in lockstep with all their classmates, which I think kills the spirit of learning. If one student can do a year-long Algebra course in 6 weeks, they shouldn't be held back by all the others.

I do worry about the loss of the social component of education. Physically interacting with other humans has something to be said for it, but this has become an expensive process. I admit that I don't know what the long-term solutions are.

Correction: I do have a plan for education within my hypothetical Modular Family system. In some future world, I envision permanent households of 9 to 18 kids, educate mainly at home. They would follow traditional lesson plans, perhaps online, while being taught social skills by their siblings and elders. I introduced the Modular Family in Episode 11 of this podcast as well as an earlier video, and I expect to get back to it in future podcasts.

So I have something of a education plan for the long term. I just don't know what society at large is going to do during a transition to this model. As governments collapse under the burdens of their debts, so will public education systems. I don't have a plan for that, and I don't think anyone does.

So that's my take on real estate, be it offices, retail space, homes or college campuses. These buildings and plots of land just don't have the intrinsic value they once had, and pretty soon real estate markets and educational markets are going to realize that. Prices are going to plunge and wealth will be lost.

What I mean by lost wealth is that all that hypothetical money the real estate owner thought they had could vanish quickly. If you own a million-dollar home, you might think yourself a millionaire, but if you sell it for only a half million and or, worse yet, can't sell it at all, suddenly you feel a lot poorer. Not having this perceived wealth anymore is bound to change consumer behavior. The people who lost the wealth won't be spending money the way they used to, and this is going to have ripple effects throughout the rest of the economy.

The bottom line is that real estate is in deep trouble, along with industries based on real estate like higher education. And this is only one little slice of the economic crisis. In other podcasts, I talk about the looming crises in debt and the value of the US dollar itself. The collapse of real estate prices is enough to trigger a broader economic downturn, but that's only one pot boiling over on the stove.

The stove is full of overboiling pots right now.


Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there.