Thinking 2020
Written by Pablo González and Pedro Nonay trying to understand Covid 19’s consequences.
Entry 9 – Covid 19
May 13, 2020
Before continuing with the story, I am going to make some comments based on observations made by some of the readers of these entries. I have found them relevant, or enlightening. That is why I put them here. They are the following:
- Regarding the disappearance of the debt.
They say:
- “I only see viable, and certainly without the histrionics/clowns who decide to govern for now in some creditor countries, something similar, or, better an intermediate figure, perhaps to be discovered, between a cancellation “with consideration” (this is not a cancellation!) and a Marshall Plan. In other words, we reduce the debt in exchange for something. And if we put our minds to it, we are sure to find something, even something metaphysical, that might interest the creditor.
- The truth is that, if a man owes money to a woman, and they marry in community of property, the debt disappears. And without mediation, nor payment, nor bankruptcy. I say this to show how artificial and manageable the concept of debt is.
- With respect to the country blocks
In the exercise I did at previous entries, I said that each country has to choose a block. I do not disagree. But it does seem clear that there are more likely choices.
As we seem to be in a process of “communicating glasses” prior to the distant future of a world government, the goal is that in the end there will be the same percentages of social classes in each block, and with the same quality of life in each class.
To achieve this, there are countries that have to lower the quality of life and the number of people in their middle classes. And others have to do the opposite.
This leads us to the fact that some countries have to fight against the anger of their shrinking middle classes, and others have the support of their rising lower-middle classes.
Since blocs of countries must have homogeneous attitudes within their bloc (to avoid excessive internal immigration), it seems logical that each bloc chooses countries of its own characteristics in its lineup.
That is to say: one block will be formed by countries with shrinking middle classes (and a lot of conflict), and the other with rising ones (and almost happiness).
This reasoning would lead us to include Spain in the US block. But this reasoning would also lead us to bring Morocco into the Chinese bloc. And both things fit badly with the control of the Strait of Gibraltar. Of course, in every general rule there can be exceptions.
Conclusion: in general, I agree with the above reasoning, but I am still not at all clear about what is going to happen to Spain.
I will now pick up where I left off in entry 8. That is, I will deal first with cryptocurrency predictions, and then with real estate. I will do this by trying to maintain consistency with what I have been saying in each entry, but I caution that this is easier said than done.
20. Cryptocurrencies.
I already said, in prediction 4, that the dollar and the euro have only a few years to live.
Their substitutes will be cryptocurrencies. They will also be useful to “cover up” the bankruptcy of the old currencies with the excuse of a change to modernity. But they will not be of the Bitcoin type. I think the following things will happen:
- In less than a year, the first country-backed cryptocurrencies will start operating. China and Canada have already announced it, and the rest will be like a domino effect. I have not mentioned the already existing one in Venezuela (Petro), because that is not a currency, but a joke.
These currencies will replace the old ones (dollar, euro, …) which will gradually disappear.
For anyone unfamiliar, the difference between a state-owned cryptocurrency and Bitcoin-style cryptocurrencies is what that “state-owned” surname implies. These are coins that are not “mined”. They are created by the issuer. As such, they are susceptible to QE. In addition, the issuer has full knowledge of who holds each coin at any given moment, and what they spend it on. In other words: absolute control. In addition, the issuer can declare them as the only currency in official circulation in his country.
- The main problem of cryptocurrencies such as Bitcoin today is that they are not mature enough (this crisis has caught them being very necessary, but underage). All of them have problems of difficulty in learning how to use them for the masses (it is necessary to advance in “simplifying” tools), as well as scalability problems (they cannot yet manage the number of transactions per second that would be necessary if they were to become a widespread instrument).
Therefore, the introduction of “state” cryptos, which will be almost mandatory, may come in handy to “educate” the masses. As well as to research into advances for scalability and simplicity.
These state-owned cryptocurrencies will triumph. For a while.
After that, many people will realize that they don’t want to be so controlled. They will start “experimenting” with other cryptos (Bitcoin-style cryptos). The result will be that each person will have different cryptos for different purposes (it will be like someone who today has a bank account in euros and another in dollars). For example:
- The state´s crypto for everyday things.
- A crypto (bitcoin, or other), for the “archive” of savings. They will ask for high quality, security, and little control by the government (little expropriation risk). And they will not ask for simplicity of use, nor agility in the transaction (note that what I call little agility is to take 10 minutes to have the money anywhere in the world, but the others are asked for seconds).
Note for the uninitiated: people think that Bitcoin is anonymous, and that no one knows what you do. This is a lie. By its own blockchain design, it has an absolute traceability, much greater than that of current banknotes. It is true that in your account (your address) does not put your name, but any expert can easily associate you, and then can read your expenses (as if he were having your Visa statements). Well, … it is not so easy, but they can. For example, if the person who wants to control you convinces you to make a transaction, he already knows your address. You should be careful never to make payments or charges from your Bitcoin account (make them between your Bitcoin account and your other accounts in other currencies, and then transact with the street from those accounts, but that’s something that most people won’t do). - Another crypto for payments of the kind that you do not want traceability. I don’t mean black money for ugly things (which will also be there, but it will be in different cryptos). It’s better example the expenses that you don’t want your wife to see (a binge, …), or VAT-free payments to the plumber that you don’t want the government to see. There are cryptos for that, but nobody would put their main money there. They provide confidentiality, but little reliability.
- …
- The state´s crypto for everyday things.
- So: the future is coexistence between different cryptos, for different uses, always after a period of getting used to using them, and after they improve their systems. State cryptocurrencies will be the beginning, but not the end.
- In the meantime, Bitcoin, being the best known, will be expanding its network of users. For now, it will go up in price. Perhaps up twofold in a few months, and potentially to a price of $500,000 a unit in 2 years. But with a lot of volatility until future stability is reached.
Bitcoin’s risk is that a competing cryptocurrency will make the necessary improvements before it does, and take the market away from it. It’s like what happened with the invention of the car. The money was made by Ford, not the inventor. If that happens, Bitcoin will be dead, and the other will win. Of course, the ability to make inventions is related to having the best engineers (in the crypto world they say “community of developers”) and for now Bitcoin is the one with the largest community, for the logical reason of being the oldest and most used.
- There is a huge future in cryptos destined to be the basis of what are called Smart contracts, which are electronic contracts of automatic fulfillment (without lawyers, judges, burofaxes, and so on). The idea is that, if I sign a contract with Peter that I will sell him my Amazon shares if they reach the price of xxx before the date xxx, if the circumstances are met, without anyone mediating, they automatically take the shares out of my account, and take the money I receive from Peter.
Today, the crypto queen of this world is Ethereum. But it’s the same as Bitcoin. It is an unconsolidated world, and someone can come along and do it better.
- The famous Bitcoin halving, which occurred today:
For those who don’t know, halving is an important part of Bitcoin’s design. The idea is that, every four years (approximately, because the software does not count years, but the number of blocks mined), miners will receive a reward for each bitcoin mined of half of what it was before halving. This means that the “mining worker” will be paid less for his work every four years, but it is also true that the price rises, so that the price increase may compensate him for receiving fewer units.
In previous halvings, the expected happened: a drop in the Bitcoin price shortly after the halving, and a big rise afterwards. But the previous halving was under very different circumstances than today. On the one hand, miners and four geeks were the only ones in the circuit (today there are many people with Bitcoin who are not in the mining business, so the payment for that work does not affect so much). On the other hand, the current crisis, and its effect of a flight from conventional currencies to gold or Bitcoin distorts what would be a normal situation.
I do not think that, this time, halving is so relevant. I see the anti-inflation, anti-expropriation and anti-security-seeking effect as much more important.
21. the real estate sector.
As the section I am going to deal with now is long, I will deal with it in different subsections.
The first comment, valid for all subpoints, is what I said in entry 1 about the root cause of the changes: Covid 19 is only the trigger (very sad in health), but the real cause is the post-internet technological revolution.
It is also very important to realize an essential characteristic of the real estate sector: its product (buildings) has a useful life of between 50 and 100 years. Of course there are exceptions (the pyramids, as an extreme case), but they are just that, exceptions. Any average building needs a complete reformation (if not demolition) before it reaches 100 years of life.
You have to mix what was said in the previous paragraph with the huge amount of money needed to build those buildings. The fact is that estimates of the value of all the buildings in the world are $217 trillion, which is something in the same range as the entire world debt.
With the above two paragraphs we find that the natural rate of replacement of the existing housing stock, due to “aging”, is 1 or 2 % per year, and that alone requires a lot of money. But, in addition to the concept of natural aging, there is the concept of “change of model”.
Therefore, the great change brought about by the technological revolution, and accelerated by Covid 19, requires a much faster replacement of the fleet, and the consequent huge investment.
Someone will say: “Why does the technological revolution make my house obsolete? And I answer with examples:
- When the elevator was invented, no one wanted to go to a house without it. There are still some buildings without elevators. And those of us who are getting on in years have seen many. I have already said that the life of buildings is long. We have all seen that buildings in magnificent locations, but without elevators, lost their value very quickly, and were relegated to deterioration, and to use by the lower classes until their early demolition.
- Further back in time, when running water became possible in houses, no one wanted a house without a bathroom (they did not exist before).
- Even further back, but in an example closer to ours, when the construction industry developed massively, many people abandoned their old huts (which is not the same as shanties), and moved to live in brick blocks (bad, but modern for their time). At that time the huts sector lost 100% of its value (which it had), and came the premature demolition, and even the oblivion of its construction.
I think we are at one of those moments. I say that because the existing buildings do not fit well with the new needs. It’s one thing for us to make do, in a bad way, until we can move house, and it’s another for the model to fit the future.
Examples of poor fit are:
- If we go to telework, we don’t have to live in the city center. Nor near the old factory or office. We can go far away (paying less per m2), and look for quality of life, or live near our hobbies (sea, mountain, …). In addition, in that bigger house, we will be able to enable a comfortable office (few middle-class houses today have room for that).
- Till recent times, young people used to make their lives on the street. Now they do it through the networks. They spend time in their rooms, which is not the same we used to spend. The living room is no longer the common place for everyone. More and more of the kids’ time is spent in their rooms. The trend is that those old bedrooms will end up becoming “suites”, where they will have room for their bed, and room for their “individual living room”.
- By the same token, the family room has long since ceased to be the place with the fireplace, with the common warmth, and with the ability to be the only place in the house to converse with someone. It has also ceased to be the place to watch TV as a family (that has disappeared). That is why the living room is losing weight (m2) in favor of the “suites”, where people make their social life without leaving home. And the kitchen is gaining weight (m2), which is still something that generates the need to share and socialize (it is becoming the new living room, which is the cause of lofts).
There are many more examples. And not only for housing. And not only for building, but also for city design (urban planning). But these sayings are enough for me to state the matter.
I can’t resist putting here the link to a blog I wrote in 2014. The trend was already clear. http://real-estatefuture.blogspot.com/2014/09/r.html
In addition to the above, of course, the great economic crisis that we are beginning to face has a great impact. But, again, I remind you that the useful life of our product is 100 years. The crisis will not last more than a small part of them.
If the need to change the entire housing stock ahead of time, due to obsolescence, accelerates the conventional construction process (probably more than doubling, on average). And, if the crisis delays it for a few years (perhaps by half). The fat number says that the volume will not fall much during the years of the crisis, and will rise sharply afterwards.
Therefore, I do see a future in the sector, but only in product adapted to the new times. The other product can only be looked at to buy at a good price the “location”, and demolish it soon to make it new. In other words, bad for the existing portfolios, and good for the development land (although I recognize that here I may be biased by what suits me, but the reasoning convinces me).
21.1. Drivers.
It is a classic in the real estate industry to talk about “location, location, location”. And it’s no lie. But you have to look at it through today’s glasses.
The fundamental driver of real estate has always been (and will always be) demographics.
It is true that there are secondary drivers, such as purchasing power (closely linked to GDP per capita and the unemployment rate), the average number of inhabitants of households, …
The existing housing stock is also very important.
All of this must be seen through the double lens of current circumstances. That of the technological revolution (which is the long-term one), and that of the Covid crisis (which is the short-term one, short in the 100-year real estate cycle).
In this section I talk about the long term (I will deal with Covid in the next section).
A first approach to the classic “location” is the existence of infrastructure. The clear example is being close to a subway station, or a highway, or within an attractive city with a large airport. It is clear that infrastructures increase the value of the location.
Another way to approach “location” is demographics. But demography in the sense of growth of the city, not size of the city today. Nor vegetative growth by procreation of today’s inhabitants. Here it matters a lot if the city attracts new inhabitants (because of the technological revolution). The basic word is immigration.
The city that (for whatever reasons) is able to attract new inhabitants, will be a city that needs to create housing for them. And the one that decreases, will have to go to demolition or abandonment (case of Detroit in recent years). I also wrote about this years ago in http://real-estatefuture.blogspot.com/2014/10/the-future-of-citys-size.html
Of course, although I have said that the life of a building is 100 years. I also say that the life of a city (of its street layout and style) is a thousand years. The clear example is that the streets of ancient Rome are still the same as in the time of Julius Caesar. And it is necessary to look closely at the ability of each city to adapt to changing times. Because, if it does not have the capacity to adapt, the investment in changing everything is so great that it is more interesting to do it from scratch in another place. That is the great point to consider when facing the change we are facing: Do we do it from scratch, or do we take advantage of the existing large investments?
It must be taken into account that the current technological revolution allows for a great deal of mobility (immigration, as we used to say). This means, from the city’s point of view, that what is important is not the birth rate (which is also very slow to make the city grow), but the capacity of attraction. An example of this is today’s large American cities, which were very small in the mid-nineteenth century, and which did not become what they are because their female inhabitants had 20 children each.
Cities that are able to attract new inhabitants have a great future. The rest do not.
In the face of this, the question must be asked: which cities can attract these inhabitants, and why? History gives us infinite causes, but some common denominator.
In the past, decisions were made by politicians, or by businessmen. For example, if someone decided to set up a car factory in Valladolid, the workers had to go there. Today, if you work at Microsoft, you have no need to live in Seattle. If you are a good worker, you can live in any part of the world you like. The big change is that the power of decision making has changed. It’s gone from the top down. Now it’s the individuals who make the choice, as technology now gives them the choice of where to live. And what I have just said is much more important than it seems.
In short: In the past, the impetus for the growth of cities was a political or investment decision. Today it is the quality of life of the citizens who want to live there.
Cities that offer quality of life have a future. The others do not. Quality of life is very subjective. Each city has to look for its target public (note: Spain does not have bad cards for quality of life, or did not have them before our current government).
The other point to consider is the existing housing stock.
In a world with little change, and remembering that buildings have a useful life of 100 years, if the city has a vegetative growth, the building stock should be renewed at a rate of 1 or 2% per year. But in today’s world, where the existing stock must be considered similar to that of huts, which is tending to disappear (I know I am exaggerating, but not that much), the entire stock will have to be renovated very quickly (if the city attracts inhabitants).
I remind you again, as an example, that in 1840, New York City had less than 400,000 inhabitants, and in what is now Central Park, there were shantytowns for workers. And there were no buildings of more than 4 floors. But they knew how to adapt to the new times. Not a single one of those buildings remains (the layout of the streets remains). In 1870, New York had 1.5 million inhabitants (more than three times as many in 30 years). Today it has more than 8.5 million. And the housing stock has nothing to do with the initial one.
We can summarize that the famous “location” is investments in existing infrastructures. And that it is necessary to demolish almost all the old buildings in the few cities that know how to adapt to the new world. As well as the fact that the stock must be renovated at an immense speed. All of this is full of infinite nuances.
The current technological revolution was making the city:
- More dense, contrary to the trend called “urban sprawl”, from the 70’s until today. Until yesterday, people who had cars wanted to live in the suburbs. Today, young people go back to the center, where they walk, and where Uber or Globo apps work.
- More mixed-use. Eliminating the trend of the mid-twentieth century in which there were residential neighborhoods, office neighborhoods, …
- More “gentrified” (a word that implies homogeneous neighborhoods by tastes of citizens, not by uses, for example, the gay neighborhood, the posh neighborhood, …). Nothing different from the old Chinese, Italian, … neighborhoods in the old American cities.
I am quoting here the new buzzwords in the industry. They are “proptech” and “REEAS”.
Proptech is nothing more than the name given to a subsector to make it “cooler”. It is said that a business is proptech when it focuses on using new technologies to improve real estate. This includes everything from autocad, to Idealista, to Aib&B, and countless other things.
REAAS is an acronym for “Real Estate as a Service”. It has a lot of conceptual background. It seeks to orient real estate towards being a service (not the classic investment in bricks). The idea is that there will be “users” of the sector (the inhabitants of the property) who will pay for the service (rent, but much more, as is the operation of all the technological services of the property). And there will be “service providers”, which will be the intermediary companies between the owner investor (the investment funds) and the user. This company will be in charge of having a repair and assistance network, so that the entire property constantly provides the service that the inhabitant demands. This company will also be in charge of everything that is needed to develop the building (the investment fund provides the money, but they are in charge of the projects, licenses, marketing, and continuous service in operation). Therefore, a concept that is tending to (slowly) disappear is the mortgage. The bank will no longer be the driver. Nor was it the owner of the money.
21.2. the virus
The virus has somewhat changed the trend. But we have to be very careful with this.
It is true that the virus will change the decisions of many people in the short term. But it is also true that the virus will pass in one or two years. Even if it will affect subconscious decisions for more years, I remind once again, that the lifespan of buildings is in the range of 100 years. Therefore, the influence of the virus on the city will be small in the long term, but large in the short term.
The influence that will be felt is that of the post-virus economic crisis. Cities that have to grow in these cash-strapped times will do so with weak infrastructures. And they will stay that way. This is the example of the cities of the former communist countries.
Meanwhile, there are “subverted” trends, such as densification. The virus has encouraged many people to live in houses with gardens, in order to be able to walk in future confinements. There is a market for that, but it will be very temporary, because it goes against the main trend.
21.3. Offices
The technological revolution already made it possible to work without going to the office. The only thing that kept them active was the inertia of the previous industrial revolution, in which bosses wanted to see their “chicks” constantly.
The virus has accelerated this. Under the name of teleworking.
Now, workers have found that they spend less time in traffic jams, and manage their time at home better.
Bosses have realized that their employees are more productive, and happier at home. In addition, they have to invest less in office rent.
The offices we know are dead. This does not mean that they will disappear, but it does mean that they will be greatly reduced and that the concept will change.
The only use of offices in the future is to encourage social contact between employees. What they call “team building”. In other words, employees will go there once a week to chat with colleagues. Offices will disappear, and everything will be contact rooms, with the excuse of conferences, or whatever. Basically, it will be almost like a club, but only for colleagues.
Of course, the change has to go hand in hand with the change in housing. Employees who do not have space at home to work in privacy will take longer to adapt.
An intermediate option will be coworking spaces. The worker will not work at home (because he does not have adequate space), but he will not spend an hour of traffic jam to go to the central office (where there is no one). What he will do is to look for a place near his home where he will work paying the “table hourly rent” with some vouchers that his boss will give him (which saves the rent of the old office in expensive places).
However, urban planning regulations must also be changed to allow these adaptations. In theory, today’s standard prohibits teleworking, because it is forbidden to use the areas defined as housing for offices. Absurd, but true. In addition, the occupational risk prevention people will also talk nonsense, who will insist on saying that a house does not meet the standards to work safely (ridiculous, but they will say it).
The change of regulations is the first step that a city has to take in its attempt to adapt to the new world. What used to be called “spotty urban planning” (yellow zone housing, blue zone offices, …. ) must come to an end. If they do not do it, the investor will have doubts, and will be forced to do something with little future.
21.4. Housing
The trends are:
- There will be space for “personal office”.
- The children’s bedrooms will be “suites”, with space for sleeping, and space for their socializing on the networks.
- The common room will lose prominence.
- The kitchen will win it.
- In the location, the important thing will be to be close to the “gentrified” tastes of the owner. And access to infrastructure.
- It will be essential to have easy access to services such as Uber or Globo (which can only work well in densely populated areas). Even if those services will be greatly impaired in the short term by the virus.
- Another fundamental trend is that the weight of renting versus owning will increase. For many reasons:
- The economic reason in crisis is obvious. There will be many cheap rental housing projects within a single-owner building.
- There is also the technological reason.
- The user will have fewer and fewer “personal effects” (there will no longer be books, disks or photos that are difficult to transport; everything is on the computer, or in the cloud). This will make moving less uncomfortable, as it will be almost exclusively for clothes. And you will move house more often (due to a change of job, change of tastes, or change of family needs, as is the case when children become emancipated).
- The home will have more and more technological facilities, and many service providers. Managing repairs of that will be increasingly difficult for the person living in the house. The result will be that the company that owns the building will have a repair department, because its scale will allow it. It’s like when cars became complicated with electronics: people who did their own repairs disappeared.
- The user will have fewer and fewer “personal effects” (there will no longer be books, disks or photos that are difficult to transport; everything is on the computer, or in the cloud). This will make moving less uncomfortable, as it will be almost exclusively for clothes. And you will move house more often (due to a change of job, change of tastes, or change of family needs, as is the case when children become emancipated).
- The economic reason in crisis is obvious. There will be many cheap rental housing projects within a single-owner building.
21.5. Retail
It is deader than the offices.
There will be times and styles of “deadliness”, but purchases are going to be made online.
The only way out is the showroom concept. That is, the place where people go to touch the product, or try on the clothes. But then buy online, and receive it at home without having to carry bags.
They will be something like an additional marketing or customer service cost for the brands. They will not charge for selling (the sale will be done through Amazon or equivalent). They will charge from the brand, not from the customer. They will do it for “exposing”.
That will not provide work for all the current commercial premises. Many will have to change their use to housing, bars, or other things.
Of course, what will not make any sense is the space that almost all current commercial premises have for product storage. Only the exhibition space will do.
21.6. Logistics
It is the big winner.
As everything will be bought online (after touching it in the showroom), it will be necessary to have many large logistics spaces on the outskirts of the city (where large trucks arrive with products from the factories, and from which small trucks leave for the “last mile” logistics centers). And other last mile logistics spaces, inside the city (where the small trucks arrive, and from which delivery vans or drones leave).
Most likely, last-mile logistics centers will be installed in old parking lots, which will have lost utility with the other general trend, which is to eliminate car ownership in favor of car sharing or public transportation (of course, when the virus passes, because until then, car ownership will regain weight).
21.7. Hotels
They were already dead before Covid. Airb&b style things were wiping them out.
Covid is going to give them a break. Because they offer more guarantees of cleanliness than Airb&b. But it will be a short respite.
Only those offering a highly personalized lifestyle will be able to operate.
21.8 Restaurants & pubs.
This will change very little. For the reason that it is the real estate sector most adapted to the new times, of all.
They have always offered a roof and heat, but have never asked for a check-in process. And the table “contract” has always been by the hour. High efficiency and adaptability to the client.
21.7. Urban Planning
I have already said that buildings last 100 years, and street layouts last thousands of years.
There will be some old cities that can adapt their offer to modern times, taking advantage of their existing infrastructures.
Others will be built from scratch. With very heavy investments in infrastructure.
The change of way of life is going to be so big, that there is a good niche for new projects. But only for the well thought-out ones.
In this, it is essential that the City Council understands the process. That it adapts its General Plan. That it finds and promotes the characteristics that make the inhabitant find there the quality of life of his taste. And that it identifies some major investments that will act as a driving force.
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Much more could be said (and better said). But this is what I have come up with in confinement.
Based on these ideas I am preparing my personal adaptation to the future world. Including the launch of some real estate initiatives, directly, and also the launch of technological platforms to support the sector (some very nice, but we will have to see if I am able to convince the sector, and investors, as well as to do it well).
I say goodbye, and I thank all the readers who have put up with me, and have contributed lines of thought.
A big hug, and good luck to all of you in the great experience of living in a new world and participating in its development.