Rayan is COO/CFO at Fraction and advises several startups. Previously, Rayan was COO/CFO at Unison and ran a major Canadian pension fund.
The Roaring ’20s was the post-World War I era that ended with the Wall Street crash in 1929. That progression is well known, but what is often missed is that this occurred immediately after the Spanish flu. The Roaring ’20s are often associated with gluttony, rapid economic growth and living life to its fullest. In my experience in real estate and managing a large pension fund, I see similarities between the famed 20th-century era and the new ’20s decade we entered into this year.
Do we have the ingredients for our own Roaring ’20s?
There are enough indicators to suggest that a similar path for the next decade is probable. Technological innovation accelerated by Covid-19 is spread across most sectors of the economy, including real estate. This is reflected in equity markets that are increasingly weighted toward the digital economy and away from industrial or commodity giants.
The economy is increasingly modularized, enabling individuals to have the sophistication and know-how of billion-dollar companies. This is enabled by cloud computing, 3D printing, open-source libraries and the SaaS subscription model that adjusts to business size. There is reason to believe that this will have as significant an impact as the assembly line did in the 1920s.
On the negative side, the xenophobia that grew in the 1920s has already been rising across the world, illustrated by the election of populists in countries as diverse as the United States, the Philippines and India. Exacerbating this is the shortage many countries have experienced in personal protective equipment (PPE). As a result, governments are likely to favor manufacturing domestically and look with skepticism at foreign acquisitions of critical infrastructure in their own countries.
There was price deflation in the time after the Spanish flu. This was despite large-scale spending in war reconstruction efforts. Today, demand has not suffered to an extent where deflation is likely. However, asset inflation will be a pervasive issue because there is simply too much money available to chase a finite number of assets. This means that absent any change, including government policy, housing could become even more unaffordable, equities are likely not to crash and interest rates will likely remain low. It’s important to avoid overborrowing or we may find ourselves suffering our own version of what followed the Roaring ’20s: the Great Depression.
What does this mean for real estate?
There will be permanent changes to real estate. More flexible work arrangements — and more time spent around the home — will change how we interact with our cities.
Just like technology, real estate must continue to become multipurpose and modular. Better utilization of space is a way to bring rents to a level where businesses can better succeed. Imagine the same space operating a cafe and a dry cleaner. Utilizing our space better is good for the environment and also creates hives of activity. This highlights an existing trend that will accelerate: locating only the core components of a business in high-rent areas. The actual laundering for a dry cleaner or baking for a cafe will not happen in downtown but in cheaper industrial zones, or wherever it makes financial sense.
There is an opportunity for cities to capitalize on domestic manufacturing by rezoning retail for large malls to industrial zoning. For offices, the WeWork model is attractive because it allows for employees to work from anywhere and optimizes the use of space and meeting rooms — all while outsourcing facilities. The main hurdle for companies is getting comfortable with secure Wi-Fi networks and access to internal servers in an environment where multiple companies operate. However, these are all risks that companies are tackling today in one way or another with Covid-19. Companies are primed and ready to reduce their office footprint.
Shared coworking spaces in suburbs will thrive and see cultures emerge that are more dependent on where people are working from rather than who they work for. Pods of engineering or customer service that are able to do the same work for multiple businesses are not only easier in a post-Covid-19 economy but will further the modularization of business that helps startups scale faster. Services like outsourced HR, accounting, engineering, customer service are all well-suited to the business environment that is coming. These outsourced industries could fuel a startup boom after Covid-19.
Inequality in the Roaring ’20s was driven by access to electricity. Today, inequality will be driven by access to high-speed internet. Rural versus urban is less relevant, while access to high-speed internet will help inform real estate costs. This is even true for vacation destinations. If people can work from anywhere, the places that are already appealing and are also equipped for working remotely will have a material edge in price appreciation.
The ability to work remotely can become a status symbol. Those who cannot work remotely are typically involved in physical work — plumbers, drivers, delivery, cooking, manufacturing and more. The excess real estate supply that may result from trends in working remotely can be encouraged to repurpose through government incentives such as affordable housing and urban farming. Absent this shift, there’s a chance there will be a low supply of workers to do the jobs currently deemed essential while more farmland converts to residential use for those working from anywhere.
There are multiple hypotheses for what permanent changes will look like, but one thing should be clear: We will not return to 2019. This is no different than the rise of suburbs in post-WWI Europe or the increase in restaurants and cars in the United States in the 1920s. For our own post-pandemic era, the technology disruption of distributed and modular businesses will help define this time. The digital economy we’ve been creating is borderless, and any attempts to enforce protectionism will impact what we’ve built. We are not doomed to repeat the past, but we owe it to ourselves to reacquaint with what happened 100 years ago and glean lessons to have better outcomes.
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