July 13, 2020
By Wen Shiau
Investing is making predictions and seeing around corners. We weigh in with our analysis to hold ourselves publicly accountable. No revisionists here! Will we look foolish or prescient in the years to come?
We acknowledge that the world of prediction is fraught with abysmal failure. In the early days of the computer age, many predicted that there would no longer be a need for paper because we have a computer monitor and everything will be digitally stored. After 9/11, many predicted the death of skyscrapers because they would no longer be safe.
In this same category of shortsightedness, in our humble opinion, many today predict the death of cities and offices. While we may see a short term 6-18 month negative shock to cities and offices post Covid-19, we doubt that the long term drivers for them will diminish. As investors, we look for universal truths which Ray Dalio describes as truths which hold across geographies and time.
It is obvious that over our entire history, cities have only grown, despite pandemics. This is true over the recent history of the Spanish flu of 1918 or the 1300’s Bubonic plague which killed 200,000,000 people globally.
The urbanization trend is not only true over time but over geographies, in every country. It is the mega-cities of NY, London, Paris and Shanghai which define their respective countries. After all, the urban centers are where we have the talent, financial capital and jobs. This is self-evident not only at the country but at the state level. There are many factors for the domination of the urban trend, but physicist Geoffrey West said it best: simple, mathematical laws govern the properties of cities which are more efficient than suburbs.
https://www.ted.com/talks/geoffrey_west_the_surprising_math_of_cities_and_corporations#t-772392
It may be true that co-workers may collaborate remotely, to say build code together. But there are other business and personal needs which require physicality. If you want to find the best chefs, musicians, doctors, lawyers, accountants, they’re in cities. Its profoundly absurd that the network effect, the critical mass of cities can be replicated elsewhere.
Additionally, it is important to recognize the new drivers for corporate profitability in the Tech economy. As recently as the 1990s, when the technology curve was linear and not exponential, companies competed by reducing costs. The move to China or South Carolina was to find cheap labor, cheap land and lower taxes. However, in today’s Tech economy, one is trying to solve previously unsolved problems. It’s about hiring the best talent coming from the best universities. The best talent is in cities.
Another knee jerk, emotional response is the declaration of the death of office. Many technology companies have declared that their workers can work remotely forever. It may seem initially attractive to work in rural, less expensive areas of USA as a benefit of remote working. But humans are social animals. We need to socialize for our emotional well being and to collaborate. Tech companies espoused open floor plans as necessary to create collaborative spaces for spontaneous brain storming. Moreover, it is reasonable to expect that promotions go to those workers who are seen and heard in the office, not those who are forgotten at remote work silos.
Since the dawn of the laptop and the internet, there was talk that distributed work would increase. If this were true, why is it that even within the past 20 years of increased internet speed, there has been no decrease in the need for office space. Technology has enabled us to work remotely well before Covid-19, but the trend toward collaborative physical office spaces to network and to brain storm will always be necessary.
Lastly, the uncertainty of Covid-19 will be over soon. Dr Fauci and many scientists predict that we shall have a vaccine by January 2021, but even if they are off by some months, what does it matter over a long term investment horizon of real estate?
We invest in Silicon Valley and NY and view dips in prices as an opportunity to invest, not a reversal of trend.
Cypress Capital Group
info@cypresscapgroup.com
T: 650-427-9883
