The three most important attributes of property are location, location, location. This expression has been around for a while, but 2020 to 2021 — emerging from COVID-19 — has been turning the maxim upside down. Now, maybe it’s WiFi, location, location.

COVID is spurring one of the most profound changes in commercial and residential real estate in the last 100 years by decoupling employment from location. And the effect won’t just be real estate prices; it will likely have far-reaching second-order effects on families, education, wealth inequality, salaries, and more.

Take the San Francisco Bay Area, which is home to some of the highest salaries in the country. The median home in Palo Alto is $3.2 million. The median home in Livermore, 90 minutes away during rush hour, is $1 million, and typically newer with far more land. Go out east another hour and the numbers drop even further. A 6,000+-square-foot house on 20 acres with a waterpark is $2.8 million in Wilton, CA — a mere two hours away from Silicon Valley.

People thought that self-driving cars would make “far out” real-estate far more palatable, since the commute would at least be painless. But it turns out that it was the great decoupling of employment from physical location — through remote work and more — that beat the self-driving wave.

Cities have historically been the beneficiaries of great migrations. But with COVID-19 and Zoom, the migration has been outward, not inward. Combine school closures, restrictive gathering rules, limited space, high taxes, and increasing crime rates, and then take away the accoutrements of city life — fine dining, the arts, events, etc. — and there’s been a large migration out of cities. New York City and San Francisco rents have been in free fall over the past 16 months.

Then combine record low interest rates, a giant expansion of the money supply, the willingness to bid on homes sight unseen — as the internet has done for every type of commerce except housing — and you have the largest year-over-year increase in housing costs in American history. The median sales price for existing single-family homes rose at an annual pace of 16.2 percent, according to the National Association of Realtors — a record high since 1989. 

This mobility wave is not evenly distributed, though. Blue-collar workers cannot work remotely over Zoom like many knowledge workers can. A factory worker or a janitor cannot do her job from anywhere with an internet connection. With few exceptions — the surgeons, Hollywood stars, and baseball players — the higher one’s income, the higher the chance of remote work. And there’s probably still room for property prices to rise if the Zoom economy is permanent: properties in many areas of the country could increase 5X and still feel very “affordable” to the remote-work white collar diaspora from big cities. After all, the median home in Des Moines is $166,000, but $3.2 million in Palo Alto. What if the “great Zoom migration” renders affordable parts of the country…unaffordable to their current residents?

There are downstream effects on family life, too. For an expensive metropolitan area like the Bay Area or New York City, two-earner households tend to be more common given the percentage of middle- or upper-middle-class income that goes to housing. But slash the housing cost in half — by relocating a Bay Area or NYC family to, say, Florida or Ohio — and suddenly one parent might choose to opt out of the workforce. Or more money becomes available for private school vs. public school.

One open question is whether “remote salaries” will be adjusted to local costs of living, given that it’s debatable whether housing drives salaries or salaries drive housing! Are wages in the Bay Area high because houses are expensive, or are houses expensive because wages are high? Many of the high-profile companies that announced “default remote” work policies have also announced that wages would be modified based on an employee’s location and corresponding cost of living. This smacks a bit of the famous phrase “from each according to his abilities, to each according to his needs” — versus the quality and demand for an employee’s skills.

It seems incredibly unlikely that this capitalist-yet-quasi-Marxist approach to pay will stick, though. For one, if Facebook’s labor market is now “the whole world” — why pay massive salaries in the Bay Area or New York City? It’s a classic question of supply and demand. Dramatically increase the supply of workers for a “hard-to-find Bay Area job” — say, a distributed systems engineer at Facebook with $1 million in annual compensation (!), and that compensation should drop massively. If housing follows salaries, or at the very least follows employee stock compensation, shouldn’t Bay Area housing collapse? Perhaps the end-state is that Zoom-work-capable people will simply choose where to live based on non-work factors — the climate, the recreational options, the food — and not based on job opportunities. Will young college grads want to live in a cheap suburban environment or flock to one of the major metropolitan areas?

And then there’s the big, big unknown of commercial real estate. Not surprisingly, the most expensive commercial real estate in the country tends to be in the same areas with the highest wages. If those high wages go elsewhere, what is the purpose of the expensive office? Vacancy rates are skyrocketing. Out of the estimated $17 trillion in commercial real estate, about $2.5 trillion is in office space…much of which is backed by debt, which itself is paid for with rent. 

It’s quite possible that in-person work comes roaring back, though. As the economy opens, so will hobbies and areas for distraction. During “peak pandemic,” many companies found that their distributed workforce was more productive than when said workforce was in person — more than 60 companies enacted permanent work-from-home or “digital-first” policies; Pinterest paid nearly $90 million to break a lease on a new San Francisco office. According to our own survey of 226 CEOs, more than 70 percent reported that their company could be as creative and innovative, or more so, when working remote or hybrid than when working in the office. But — and it’s a big “but” when trying to impute anything from a pandemic — almost everything outside work was closed. No ski trips, no bars, no fitness classes. Will that productivity boost last when every distraction is now open for business? Will the boss be as likely to promote employees who are remote and who could potentially miss out on key discussions that happen? And can the “planned serendipity” of in-person work be replicated remotely? Google’s Gmail was created as a side project — would that still have happened in a remote-first world? 

One thing we can be sure of: Remote work is now a permanent input into housing prices and salaries. There will be winners and losers, and a potentially historic redistribution of the world’s workforce. But if the current real estate market is any indication, much like the suburban sprawl of the 1950s, the second-order effects will be felt for decades to come. 

 

  • Alex Rampell

    Alex Rampell is a general partner at a16z where he invests in financial services and real estate companies. Prior to joining the firm, Alex was a serial entrepreneur and angel investor.

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