Home » The dark side of smart working. Small offices (and businesses) can send real estate companies, banks and GDP into crisis

The dark side of smart working. Small offices (and businesses) can send real estate companies, banks and GDP into crisis

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You sit and work from home in your slippers and the banks go down and the economy plummets. Among the long-term effects of the spread of smart working, this is not the first that springs to mind, but, if you consider “The Escape from the Office and the Big Crash” just an unlikely catastrophic scenario, know that the International Monetary Fund if they are seriously worrying about it. To put it in a nutshell how they see it: the world was already over-indebted before Covid, with Covid it has become twice as much, the last thing the banks needed is a torrent of new dancing debts, this time from large real estate. But this is exactly what could happen: all the ingredients of the lethal recipe are on the table.

Smart working has all the air of being here to last. In the US, by now, 3 million people are vaccinated a day, but only a quarter of workers in major urban areas have returned to work in the office. In Italy, at the peak of last spring, there were 4.4 million workers in smart working, but in Germany they calculate that more than one in two workers could work from home. For Italy it would mean 12 million people away from the office. These changes in everyday life are not just a matter of newspaper articles, they have concrete repercussions. In London, a large bank like HSBC announced a 40 percent reduction in its office space. Ditto JPMorgan Chase in New York. Across the United States, the average reduction exceeds 16 percent. The result is that the market is at a standstill: in Manhattan, transactions (sales or leases) in non-residential construction fell by 25 percent. In Europe the blow was even stronger. In the last quarter of 2020, office transactions in Europe were 60 percent lower than a year earlier and for the other major sector – shops – the drop was also 40 percent.

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In short, there is less and less money. In London, incomes from non-residential construction are reduced by 15 percent, in Rome by 8 percent, according to sector insiders. The less enthusiastic prophets of smart working estimate that, in the end, we will go to the office, on average, three days a week. But even such a short smart week, analysts from Fitch, one of the big rating agencies, have calculated reduction in profits of large real estate companies by 30 percent. The market has taken note: the stock prices of large American real estate, in a moment of great effervescence on Wall Street, are down by 25-30 percent.

Very bad news for those who have lent them the money to invest. As a family usually takes out a mortgage to buy a house, so real estate debts – big time – to build their office buildings or shops. And these debts are a large part of the credit portfolios of banks, insurance companies, pension funds. They had already been moving, for ten years now, on slippery ground. Globally, corporate debts had grown in the years from the financial crisis of 2010 to 2019, reaching a level equal to 91 percent of world GDP. A year of pandemic and lockdown added another 11 points, taking them to over 100 percent of GDP. A crisis in the traditionally highly exposed sector of non-residential construction could therefore pose serious financial stability problems to credit institutions already struggling, via pandemic, with increasing volumes of bad debts and bad loans.

At the Monetary Fund they tried to calculate the overall effect on the economy of a fall in the stock market of large real estate. A drop of even half a point in their stock market values, compared to the historical trend and to what the fundamentals would suggest, puts up to two points of GDP at risk within a few years. And their market capitalization is directly linked to the amount of space they can’t rent. In five years, that value can drop by as much as 15 percent, compared to the expected trend, if the amount of unoccupied square meters increases by 5 percent.

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