Whether value was 'destroyed' or not depends on how you look at it. $500 billion dollars worth of assets were lost by the owners of the real estate; that value is gone, and it didn't go to someone else. It just vanished. The value didn't disappear because it transferred to someone else, it went away because the asset itself become less desirable and valuable to other people. You can imagine it being like if a farmer had a bunch of grain stored in a silo and it somehow went bad. The value of the grain is gone, because no one wants rotten grain; it isn't like someone else now has that value. Sure, the other farmers will sell more of their crops, but they still have to grow that food in addition to the rotten food... there is no efficiency gained or extra production in the economy.

The money spent on that commercial real estate is gone. Those big fancy buildings will have been wasted resources and effort.

>You can imagine it being like if a farmer had a bunch of grain stored in a silo and it somehow went bad.

It's fundamentally different, practically the opposite.

Paper losses are like a farmer realizing that the grain in his silo is bad. Knowing this when you were oblivious before is a good thing, whereas the grain going bad is obviously not.

Once you start regarding bad news as a loss, very bad stuff happens. In some contexts, we'd all agree. "Shooting the messenger" is an age-old cliche for counterproductive use of power, right?

Just saying that $X billion dollars were "lost" by market price fluctuation is dangerous, because it suggests it can be weighed numerically against real things and real peoples' lives lost.

If you were a CEO or a politician or someone powerful, would you justify destroying one warehouse or home or hurting one person, in order to avoid, say, a trillion dollar "loss" of paper value in some assets?

I mean, don't you think people do this, directly or indirectly, and it's wrong?

Stock market declines are called "corrections" for a reason.

>The money spent on that commercial real estate is gone. Those big fancy buildings will have been wasted resources and effort.

Maybe, but nobody can say for certain what the world will look like in 5, 10, 20, 50 years anyhow.

You're saying that they were unrealized gains, not losses.

In some cases, building something that nobody will use is still a loss. It still cost money to build a building, and if the one paying for that building doesn't recoup the cost the it's a lost.

Beyond that, of course you're right. It's unrealized gains, not a loss.

I wasn’t making an argument about the overall benefit to society, which is why I said it depends on what you mean by value being destroyed. It might be a long term benefit for society, but that doesn’t mean value wasn’t destroyed.

> Once you start regarding bad news as a loss, very bad stuff happens.

I like this. It's insightful, and stated in a plain way.

And equally we can say, once we start regarding good news as a gain, very bad stuff happens.

The idea of "confidence" rather than measurable, tangible facts as an economic basis has been the road to many bad things. In some ways confidence and pessimism can be seen as the ability to ignore reality. We've been inventing ways to delude ourselves in western economies for decades. For example, film and record companies counting copyright infringement as if it were an actual loss, or Twitter over-counting its users as a kind of corporate egotism.

What might really help our societies on multiple levels is a return to fact-based economics, instead of what is essentially information warfare directed at pulling off ever more audacious confidence tricks.

News is gain (of knowledge) good or bad. bad news is an opportunity to fix some weak links. Good news is an opportunity to reduce leverage, replenish reserves.

Confidence is useful. It reduces volatility in the market.

We're using two different senses of a word that seem irreconcilable. You offer a very narrow, statistical definition that pertains to the goodness/accuracy of information. I am using a psychological term that reflects the feelings people have irrespective of ground truths. These are almost opposite (at least incompatible) interpretations. And yet semantically I suspect we completely agree - acting on good information is good, and acting on bad judgement is bad.

As I am sure you know, a "confidence trick" is a way to defraud another by influencing their (psychological) confidence (or pessimism) against their better judgement and in spite of the objective facts.

Confidence is short for confidence interval. Measurement improves confidence (tightens the margin of error).

But it wasn't destroyed; it was transferred: WFH-comfortable residential properties went up in value.

But there are many more of those.

Maybe total value still decreased, because people no longer pay such a large premium for the limited city center space.

As such, total money paid on rent is less.

Total money spent on card catalogs went down since 1980. Does that mean value was destroyed?

In a weird coincidence, I have been trying find a card catalogs or two for home storage for a couple months. These are often incredibly well-made solid wood furniture, and yet most libraries worldwide have just been scrapping them. (Their size and weight makes them extremely difficult to ship - buyers/sellers aren't well aligned.)

So, in short, yes. We also got new value, but tons is being unnecessarily destroyed.

Imagine someone were to invent a miracle power source that could be produced easily and cheaply by anyone and allowed all vehicles to be powered for free, completely obliterating the fossil fuel industry. In this situation, would you say value was created or destroyed?

If we just let the fossil fuel infrastructure rust/sink? Lots definitely destroyed.

Perhaps material-neutral "value" is not a particular good measure of anything.

Did they? Can we see that the entire value of these properties moved? Sounds like an impossible thing to measure. Considering most people already had space to work from home so they didn't move value anywhere. There is also the problem where the property which is most profitable for local governments has been the hardest hit. When you look at the maps that have been produced on this you can see some serious issues coming up where the profit centers of cities are all at risk while the ROI negative areas are expanding.

https://www.urbanthree.com/case-study/minneapolis-mn/

https://www.youtube.com/watch?v=7Nw6qyyrTeI https://www.urbanthree.com/case-study/minneapolis-mn/

> Considering most people already had space to work from home so they didn't move value anywhere.

This is a very debatable statement. Looking at my coworkers in the past two years, opinions seem to have been pretty evenly 50/50 split between people who had enough space/comfortable home to be able to work from home, and people who had no real good option to work from home (family situation, loud kids, living in a single bedroom apartment with no desk, etc). I know A LOT of people who specifically rented apartments that were only serving the purpose of "a place to sleep, close to the office", because these people's lives revolved around doing 90% of their stuff outside of their house (eat at the office, go out during weekends, travel, etc). These people got gutted when the pandemic hit and we were forced to work from home. I always wanted a large apartment (far from the office, so less expensive) at the exchange of a longer commute. I always wanted my own work/office area. And now that we're started returning to the office I applied for (and was granted) fully remote work. However I know that if this is going to become the norm for a lot of other people, apartment layout and demand is going to change.

My wife is also working from home, and we're expecting a baby. We're likely going to buy a new house and one of our specific requirements is going to be two separate offices for both me and her, plus a room for our baby. This kind of stuff wouldn't have likely happened before.

Du no about the US, but covid caused England and Wales prices to increase in rural areas far faster than urban areas

https://www.theguardian.com/society/2021/jun/20/rural-house-...

So good riddance? Do you really think someone who was able to buy real estate in Manhattan needs a handout?

Also the money didn’t disappear, it went to people smarter or luckier than them who used to own the place before. Money doesn’t disappear.

Always remember teachers pensions and nurses pensions and librarian pensions are tied up in realestate. Saying "someone" like it's a single person is not how investing works. My mother's pension lost heaps. And now yes.. she could use a handout.

yeah tied in BS contracts with unrealistic rental values in NY expecting a CVS and a Chase bank on the same building. In every Manhattan building

The pension fund could have invested in VOO. No one forced them to invest risky investments.

I wasn’t making a judgement about whether the loss was worth it or not… it might create more value in the long run. Sometimes a short term loss is worth it.

That's not how market devaluation works. The "money" (paper money value) definitely was disappeared. It doesn't flow to someone else. Markets don't work like that.

If I buy something for $100, the market value increases to $150 and then drops to $50, I've still lost $100 from the peak on paper. It didn't go to someone else.

The value of the building going down on paper is only significant when you denominate it in some currency, like dollars, or hours of labor. When the value of a thing goes from $1000 to $100, the people who lose are the holders of that thing, the people who win are the people looking to buy that thing, they can now do so with 10 hours of their labor rather than 100.

They don't gain that value. They gain a savings yes, but they can't turn around and sell that thing for 1000 to make a profit.

Not sure how it works in the US but apparently in the UK it’s the banks that make up money when giving out home loans and such. So in 2008 I guess fake money was made by banks, to over value shitty new houses, and then investment entities bought these fake money loans as investments. Turns out the entire system was fake and it just collapsed.

The way I see it this is not the case now. Real money was handed over to buy these properties (noted by how many homes were bought for all cash). Money that was redistributed, printed by the government during the pandemic but has now been in proper circulation (thus as real as it gets) and which was paid off to a bunch of property owners who now have this as actual cash (or SPY holdings).

The folks holding those assets didn’t have the money either though, until it was time to sell and they sold.

And the people buying 'gained' the difference, by not having to pay it out to gain the asset.

there's more to it though. Real estate doesn't "expire" like grain. It can be repurposed, but it would require some capital investment.

As an analogy, the grains could be fermented and turned into spirits.

And as an addendum, the value lost in the commercial real estate could be potentially considered as transferred - let's say a business either gets a cheaper rent, or stops renting offices (after this is why these commercial real estate valuation is lowered), then those businesses saved money and thus that money saved is what got "transferred".

If NYC office space in a high rise, it cannot just be repurposed for something else.

From 2009 to 2015 I lived in exactly that. It was a high-rise former bank headquarters converted to residential. The conversion was done in the wake of the collapsing commercial real estate market after 9/11. Repurposing buildings is quite common in New York, and I expect to see more conversions like this in the future.

It could be used for residential, childcare, go karts (electric … I have done this on the converted 4th floor of a car park), wework style thing, storage/warehousing, restaurant, ghost kitchens, lightweight manufacturing. Lots of potential uses. Shelter for homeless would be my favourite if it can be funded.

Unfortunately New York’s zoning laws forbid what you’re suggesting. The new mayor is attempting to change them (though is facing resistance from the city council).

Yeah imagine replumbing for residential. I guess you could gut it to the shell. Almost starting over at that point.

It would make more sense to just wait it out until the building is needed again. Refitting offices is nightmarishly difficult and the result is sub standard compared to a new build.

Of course it can. What makes you think that it couldn't be remodeledd into living spaces? Buildings in a town flip all the time from residential=>commercial=>residential.

New York’s zoning laws.

Any developer worth their salt can have that corrected. Everyone in NY walks around with someone else's hand in their pockets.

Haha, would that it were actually true.

like WFH capable apartments ....

While I agree value has been destroyed, rents should fall as a result of lower property values, and tenant companies will have more money to deploy to their businesses as a result.

A net negative to the economy to be sure, but (literal) rent-seekers aren't the only ones in the equation.

No value has been destroyed because the land and buildings are still there. There’s less demand for them than before so they can charge lower rents and the property will sell for less. But that’s because of better other options. The production possibility frontier has expanded, not contracted.

As far as intrinsic value, you are correct, the buildings are just as functional as ever. But when it comes to extrinsic value, the extra value we place on something because it is desired, that is where value was lost.

> [the value] went away because the asset itself become less desirable and valuable to other people.

That view on "value" is inherently fickly. In case they never sold their buildings, you could also argue that no value had been lost. They still have the building after all. Their speculation has a different calculation behind it now, but that's normal - speculation RoI is not guaranteed.

I assume in your analogy the general population is still buying the same amount of grain, so losing a silo of grain to rot is a pure loss to the farmer, and in a way is a loss to grain buyers (prices have to go up slightly).

But in the office space scenario, less office space is being used overall. This means that yes, landlords are losing the value of their investment, but (former) tenants are gaining access to cash flow that would have been tied up in rent and maintenance. So value has not been destroyed in the same way it was in the silo example.

I don't know if this is a good or bad thing, just pointing out a material difference in the two things you're trying to analogize.

>Housing can’t both be a good investment and be affordable

People see the extremely high valuations of some things like housing and business locations as a good thing. Instead I mostly see them as asset inflation, and the decrease in their values as a good thing for the actual products produced by an economy.

Lower rents or building values means businesses leasing/purchasing those buildings have more money to invest elsewhere. It could be argued that the capital will be used to drive a real ROI… something that rent does not provide.

That's in the long run though. The "destroyed value" was an evaluation based on future rental income. In a way the valuation puts a price tag on the assumed future return on purchasing the property. Someone else is now not paying that rent, but they didn't get a lump sum transfer of that valuation in cash.

The value was transferred to the companies who no longer pay that rent, no?

And the workers who don't have to spend all of that time commuting. There's a lot of value in that time. It seems like a lot of value was added elsewhere, just not for commercial office real estate companies, but that's the nature of real estate in the US.

That also depends upon the fact that how much of that $500 billion was the upfront investment made and how much was actually due to pure speculative pricing.

Isn't it more like wheat produced at a cost of $100 was selling at $500. But it can only sell at $150.

I don't think this analogy is a very good one. Grain that has gone bad has close to zero utility. But office space in a city has tons of utility. It could be converted to residential space, for example. A better analogy might be a sudden shift in tastes that caused the demand for grain to drop. The grain could still supply markets for animal feed. And the farms that planted grain this season can be converted to some other crop.

So companies that save money by not renting as much real estate and companies that supply equipment for WFH did not appreciate in value?

Not at an equal value to what was lost. Money was spent to build all those buildings, and all the things inside them, and all he services that kept them running. That money isn’t just gone. Plus, all the companies that relied on servicing commercial real estate depreciate in value.

Do you have any numbers to back it up or just making a guess? From 2020 to now Apple alone is up more than a trillion dollars in value what percentage of that was driven by wfh trend? Apple is not the only beneficiary.

More comparably grains market priced dropped. Thus grain in silo isn't worth the same anymore. So we lost food value? Even if the same calories and same utility is there still?

Some utility was lost, more value was lost. But in reality economy only lost some paper valuation, something entirely imaginary...

My theory is that companies are keeping the same office space but saving a ton of money on snacks.

The workers think they're getting a good deal but they really traded gas money for snack money. /s

I don’t know if like the spoiled grain analogy.

If my stock portfolio was worth $1000 yesterday and is only $800 we don’t say the $200 was destroyed. I have the same number of stock. It may go down further, but it can also go up to say $1100 tomorrow. Is this a new being value created, or only capricious market pricing things differently?

Until I sell, there is no real gain or loss. And for the farmer, if the grain goes bad it’s not temporarily, it will never recover. This might have been a better analogy if the underlying real estate was destroyed (uninsured and fire, etc).

We do say $200 of value was destroyed when your stock portfolio goes down $200, though. If you think about it, it is the same thing… that real estate value is owned by some business that has shareholders (either public or private)… the $500 billion in value that was destroyed came from the shareholders of the real estate companies. It is the same thing.

They are exaggerating it by not including the increases in value elsewhere, but there is "value" destroyed. The flow to other places is not as high as what was lost.

I think this is due to the perceived value of proximity not keeping up with technology. The "real" value of proximity fell as technology improved, and that was exposed during the pandemic. It's more of a correction than outright destruction, but it's not wrong that the overall asset class lost value.

It will be interesting to observe what this means for growth of cities. In the last 100 years, city sizes increased while staying within Marchetti's travel time budget [1] (1 hour for round trip) thanks to higher speeds available through motorized transport. Now that technology is redefining proximity once again, I wonder what factors will continue to encourage/discourage people to live in dense cities.

1 - http://www.cesaremarchetti.org/archive/scan/MARCHETTI-052.pd...

If we look at the most extreme case where everybody had an office or at least a desk and then everybody moves to homeoffice 100% then it massively decreases then demand for property in general. Everybody already has a home. Even if more people buy bigger homes then or rent a personal office, lots of former office space will be converted for other uses.

Living in a resort town in Utah, I’m fairly sure a large portion of that value was transferred to Mountain West residential real estate

Pink cars are all the rage and sell for +20% One day pink is viewed as bad and now blue is the color to have. So now blue cars sell for +20% and pink sell for +0% The extrinsic value is arguably transferred, but if you are holding a pink car, you're down in value that was just lost due to a loss in extrinsic value. A"transfer" is a bit tortured imo because the change in value was not 1:1. Some WFH areas gained a lot more comparatively than other locations lost, and vice versa

So far, I suspect every dollar lost on commercial real estate has been gained on residential.

In many cases, the uplift in residential value is directly attributable to WFH (e.g. where a home office or more rural property becomes more desirable.)

How does thus work? I still live in the same place as before. If anything, less people want to live here because proximity close to work is less important. Some places gained value for sure, I think Bend Oregon is a very notable example. I don't think it is 1:1 as not everyone up and left where their office became a ghost town.

Real estate people tend to borrow a lot of money. Minimum 70% LTV = 3x leverage = a 33% decline wipes out all their equity.

And especially in big cities the "high-quality" real estate is usually break-even and all profit is made on appreciation, so any drop in income might mean some of them can't hold the property.

If they have to sell their properties and take a huge loss, it doesn't really affect you or me - it just means a different group of rich people will become the new landlords. But the old landlords won't like it, and it probably qualifies as news.

One way of looking at the "destruction" of the value of the property is based on Net Present Value of future rent payments. Let's take one hypothetical building, its owner and its tenant.

The market value of this building (not its construction cost) is the Net Present Value of future rent payments to be made by a tenant to the owner. There is a scheduled, anticipated transfer of value from tenant to owner based upon the agreed market rental value of the building.

When the agreed market rental rate declines, the amount of value to be transferred from tenant to owner declines and consequently, the present value of those future payments is lower. This is the basis for journalists or commentators to say that value has been destroyed. But, the value hasn't been "destroyed"; it has been transferred to the tenant in the form of the net present value of his rent reduction.

House prices in areas people would rather live have all gone up. Those houses also play the role of offices 3-5 times a week.

I’m not sure if it makes up for the loss in commercial real estate though, but I’d say some destruction of value and some transfer of value.

I think the whole thing becomes more clear when you remember that price is an indication of how desirable things are relative to other things rather than an indicator of intrinsic value.

If you have an asset which used to be desirable but is no more, its market value is indeed just destroyed and not transferred. It doesn’t necessarily impact the price of other goods.

Perhaps one could say that the value was adjusted downwards. It wasn't an actual thing that was destroyed - rather, a dynamic equilibrium has changed. "Value was destroyed" has all the wrong connotations - it sounds like something somebody had a moral right to was maliciously, well, destroyed.

I was about to comment on the same passage. The value has moved into housing real estate that can serve as a remote working place *and* into the less quantifiable quality of life improvement. This is the same bias used in GDP calculation vs happiness, it's a huge topic, look it up for more information.

Yes value was destroyed by these deals/builds not properly accounting for risk of a shift to WFH. Basically all the companies involved lit money on fire to the tune of $500b. Other areas benefited but this was pure vaporization of money.

You'd need to have already been equally* in residential and commercial, which are well siloed throughout all sorts of property-related industries, in order to break even and serve as a conduit for the transfer of value.

*Whatever optimal point.

An individual investor would need to have that balance to not lose value, sure.

But a society as a whole, is the $500B "destroyed"? Or is there a transfer from the property owners to the businesses that no longer rent the space? The NPV of those decreased rent costs may just happen to be about $500 billion, right?

Not to mention the value gained by all the no-longer-commuting workers.

The value of buggy-whip stocks was certainly destroyed with the advent of the motorcar.

And if everyone quit smoking it would cause the "destruction" of billions of value in the tobacco industry.

I take from the downvotes that people thought this was serious. Its absurdity was intended to show how misleading the use of the word "destruction" is when talking about economic costs derived from things that are no longer needed. Being more healthy, or more efficient, is unequivocally good!

Exactly. Until someone starts to calculate the compound healthcare and welfare costs.

Generally the tobacco industry does not pay those costs. Hence, relative to the tobacco industry, it would be a vaporization of value