The idea behind a "sensitivity analysis" is to estimate the impact on net profit of each variable at its current value and at its highest-and-lowest reasonably foreseeable values.
So imagine you are the general or "managing" partner in a REIT, that is, a Real Estate Investment Trust. Also assume that you are managing a building that is mostly office space with retail-and-hospitality taking up the ground floor and up-scale "Walkable City" apartments on the second floor.
AI
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Cubicles are are modular and easy to rearrange. WIFI saves on rewiring. If you are leasing office space, why wouldn't you compress your remaining workers into a smaller space and renegotiate your lease or move?
Another possible impact of AI is that can purge or purify old bureaucracies that became their own customers. Reports are generated (and often not read). Employees make work for other employees. Managers demand information. Power-points are written and presented while the important decision-makers are physically present but busy responding to urgent emails and texts. As AI thins out the ranks of the "knowledge workers", even more KW output will be identified as non-value added and more drones will be eliminated. Further compression is inevitable.
So, if I were the General Manager of the office building described in the second paragraph, AI would make me very nervous because occupancy rate is the most important factor creating revenue with rate-per-square-foot a close second. The two are related. Tight supply and high occupancy rates allows me to raise rents so it is a win-win for my investors. Gross over-supply relative to demand, falling occupancy rates and collapsing prices are a lose-lose.
In some industries, AI could eliminate 60% of the knowledge workers. That would make the traditional office building a ghost-town and the revenue would fall very short of covering the fixed costs. When that happens, the building's value is in the scrap metal that can be recovered at demolition.
Energy costs
Energy is typically included in the cost of office rental. Air conditioning is considered a basic amenity like running water. The price of electricity is unstable due to the demand of data centers and AI and the aging generation and distribution infrastructure.
Availability of credit
Every business attempts to maximize the use of their money. Consequently, there are times when liquidity is tight and revolving credit is used to cover some unexpected bills.
Another consideration is that if financing was a "balloon", then it must be refinanced when the loan rolls-over.
Cost of security
Securing the facility is the responsibility of the landlord. Card readers, locks, windows, doors, cameras, security staffing, evicting squatters, repairing vandalism, legal costs are all costs associated with security. Controlling rats and vermin is a small part of that cost in an occupied building but becomes more of a problem in buildings that are partially occupied.
Yes, some of those costs are covered by insurance but the insurance companies will raise their rates in your zip-code if the number of claims goes up.
Hostile operating environment
Some jurisdictions are more land-lord friendly than others. It is faster and easier to evict non-paying tenants in some places than in others. It is easier to seek damages or evict tenants who destroy the facility in some places than in others.
Tenants who refuse to pay and are impossible to evict make it more likely that other tenants will stop paying their rent.
Tenants who destroy their space and the public spaces in the building make it more likely that other tenants or their customers will also disrespect the facility. Some tenants will keep flushing a clogged toilet because they know it will get fixed when the raw sewage drips through the ceiling of the rented space one floor down. Tenants like that torpedo occupancy rates and being able to command premium rents.
Taxes
Property valuation always lags reality.
The commercial office market got hammered by COVID, and never really recovered. Remote work emptied the cubicles and corporations stopped leasing empty space. AI is just continuing the trend. There have been attempts to make the empty office buildings into apartments, but the power, sewer and water requirements make it difficult and expensive. Skyscrapers may become largely a thing of the past.
ReplyDeleteThe big city office market, especially in major coastal cities, was starting to hurt before COVID; it accelerated the process.
DeleteMajor companies found they had lower costs and had more satisfied employees with better moral being in southern and central suburbs than in coastal inner cities.
They also found that most of their support staff didn't need to be taking up expensive inner city office space and could just as well work elsewhere, cutting commutes and stress as well as costs.
The last comparison I saw of big city vacancy rates showed Houston, Dallas, and Phoenix essentially unchanged from 5 years ago but San Fran, LA, New York and Philadelphia had lost lots of major tenants.
While I wouldn't want to work in any city, some would be better than others.
Jonathan
Mom and Pop stores got squeezed out by Big Box stores and Malls.
ReplyDeleteBusinesses offshored for better profits.
Then the malls hollowed out as anchor stores closed and left.
The middle class mostly college educated, the folks you're talking about in those skyscrapers above was slowly squeezed out as "right sizing" and such occurred.
COVID pointed out how weak minded we were following idiot rules about bandannas on our face to protect against a "dangerous Virus" standing 6 feet away, shutting down churches but bars, restaurants and not riots that apparently DIDN'T Require Masks as COVID didn't happen there (spit).
COVID supply chain disruptions pointed out how weak outsourcing important stuff offshore was.
And now we have some As of fiscal year 2025, more than 42 million people across over 22 million households rely on SNAP benefits, which are distributed through the EBT system.
Wonder if they are related?
The Covid response was an orgasmic spasm of irresponsibility. To quote Dire Straights "Money for nothing and your chicks for free"
DeleteWhy even look for work? That is the normal for a four-year tranche of people
"The Covid response was an orgasmic spasm of irresponsibility. To quote Dire Straights "Money for nothing and your chicks for free".
DeleteAs sung by Karens in their rush of power telling folks to OBEY THE SCIENCE. Funny, NOT Funny how fast people sought personal empowerment telling others what to do.
COVID a Milgram experiment to see how Freedom Loving Americans would respond to a 24 hour 7 day a week Propaganda campaign.
https://www.britannica.com/science/Milgram-experiment
I would be really curious to somehow track those "Why even look for work? That is the normal for a four-year tranche of people" are still on free money?
And as my point that the jobs that pay a decent wage (enough to pay rent, food, car payments and most of all for a lot of folks Child Care) have gone away.
You know the American Dream and Middle Class stuff.
That skyscraper values have dropped is a lagging indicator of troubles in the economic scene.
My bet (holding an American Eagle one ounce silver) is that the Fed will again backstop NYC "loss of tax revenue" and the remaining US Taxpayers will foot the bill as will our children.
Going to work was once an honorable thing to do. There was a stigma of shame for being "on the Dole".
You earned enough to keep yourself and perhaps a family going. Your children had a chance to do better.
Today you have to game the system to earn enough not to lose the valuable freebees that allow you to feed and PROVIDE MEDICAL CARE your family and hope the old car keeps going for another year.
What's that Bruce Hornsby song?
Standing in line, marking time
Waiting for the welfare dime
'Cause they can't buy a job
The man in the silk suit hurries by
As he catches the poor old lady's eyes
Just for fun, he says, "Get a job"
The bifurcation of America of Rich and Poor is because the destruction of the Middle Class.
The woes of desperation, baby daddies to game the system and all that is what I see.
Just the concerned musings of a grandfather looking at his grands future.
"Funny, NOT Funny how fast people sought personal empowerment telling others what to do." It reminded me of accounts of the Nazi Party - and how, in 1933, lots of career-minded people suddenly joined it.
DeleteOut in the suburbs with an office building (small) I stay pretty well occupied but half of the tenants are service providers and not knowledge workers. Many small office tenants in the small office market are satilite offices spawned by traffic congestion where the occupant found it difficult to be productive at home with its distractions. It is a time when the hands-on hobby of the knowledge worker may well be how they obtain future meals. Roger
ReplyDeleteRodger could you please expand on this?
DeleteI'm not quite sure I understand what you said. Sounds interesting.
Are you the owner of the small office building? Are you a knowledge worker vs a service provider? I'm not clear what those two work types are.
Could you expand what a knowledge worker whose hands on hobby might provide future meals is vis a vis the service worker (janitor, health care aids?)
Thanks
An issue alluded to above is the fact that office buildings and many commercial spaces are purpose built: They cannot be easily modified into another mode of functionality and in some cases were built to a corporate set of prints. Thus why one can recognized buildings as having originally been a fast food chain or drug store chain, etc. and why they often sit empty - there is not another business "just like that" that requires that kind of space.
ReplyDelete