It's hard to work out just how different pre-COVID-19 and post-COVID-19 world will be, because it's changing so comprehensively. Consider movie theaters. The first-order effect seems obvious: they're doomed! Even after they reopen, they can't make money with 50% of their capacity. How will they pay their rents?
Wrong question ... or, more accurately, right question, but wrong scale. Yes, AMC and co. will probably go bankrupt, and in a just world their shareholders will get wiped out and their bondholders will take a haircut -- that's capitalism, baby, or at least it should be.
The U.S. shouldn’t bail out billionaires and hedge funds during the coronavirus pandemic, Social Capital CEO Chamath Palihapitiya says. “Who cares? Let them get wiped out.” https://t.co/dIbizumtqG pic.twitter.com/u8BSVvr0B1
— CNBC (@CNBC) April 9, 2020
But let's consider the second-order effects. Inability to pay rent is only catastrophic if your landlord can rent your space to someone else. Who's going to rent massive theater spaces during a pandemic? Who's going to rent them during the recession which follows the pandemic? It's not just movies; it's basically every retail and theatrical space.
As the old joke goes: "If you owe the bank a million dollars, then you have a problem; but if you owe the bank a billion dollars, then the bank has a problem." You may think it's bad to be a movie theater, a restaurant, or a retail store, and it is ... but the second-order effect is that it's even worse to be in commercial real estate. One struggling tenant is a headache. All struggling tenants is a catastrophe.
But hey, at least you've got office space, right? Except that we just might find that a lot of companies forced to try out working from home might discover it's actually highly cost-effective:
Talked to a public company board member. 3% of their expenses are real estate. WFH is fairly effective so after this is over, they plan to downsize RE by 30% and drop 1% straight to the bottom line 😬
— Sundeep Peechu (@speechu) April 27, 2020
The same is true of retail space everywhere. Remember, "retailpocalypse" was headline fodder even before the virus prompted everyone to start getting everything delivered from the Internet. The same is true of restaurants, who were struggling to come to terms with food delivery services (please, stop using GrubHub and Seamless) even before the virus hit.
So, the first-order hit is to the obvious suspects: theaters, stadiums, restaurants, retail, gyms. The second-order hits are to owners of commercial real estate. wholesalers, service providers, etc. The third-order hit is to taxes paid to, and therefore budgets of, governments. We'll see comparable effects elsewhere, too -- e.g. first-order to airlines and buses, second-order to hotels and rental cars and events and cargo shippers, third-order to airports and governments again.
But let's focus on one particular interesting question. What happens next?
Consider San Francisco, everyone's favorite overpriced, overcrowded, inequality poster child. It has roughly 150 million square feet of combined office and retail space at the moment. If the COVID-19 lockdown-then-recession eventually eats 20% of that -- which is plausible between the retailpocalypse and what I will christen the "officepocalypse," i.e. the revealed cost savings of working from home -- that's 30 million square feet of empty space.
If converted to housing, this could increase the city's total housing stock by well over 10%. That would drive prices and rents, already pressured by the recession, way down -- while presumably still remaining simultaneously profitable, since current prices are so high. Needless to say this conversion would also create a lot of jobs. (Although, in some cases, no conversion will be required.)
While you're at it, you could take a couple million feet of those space and convert them to 200 sq. ft. mini-apartments to house every homeless person in San Francisco. (It's not that crazy a notion. New York City has been legally required to house every homeless person in its five boroughs, and it has plenty of apartments that small which people pay good money for.)
This is no panacea, of course. Nothing will be. Converting retail and office to residential will be very expensive ... although not as expensive as letting them lie there worthless without collecting any rent at all. But if our post-COVID-19 world is one in which demand for office and retail space plummets, which seems likely, let's take advantage of that space to help deal with the housing crisis which has plagued wealthy cities across the world.
Ultimately, tech companies, long blamed for gentrification and spiraling prices in San Francisco and many other cities, could become a major part of the solution to that problem, by making the tools (and setting the examples) for freeing up office space by working from home. Sadly, we can preemptively rely on this dark irony being lost on the usual outraged suspects.