Almost 3 years ago, a few months into COVID, I had an epiphany – “if people can successfully telework, what effect does that have on commercial real estate? Not good.” This is the link to my July 2020 thoughts on it, if anyone wants to revisit it.

For those who have read a lot of my work – I have mentioned before that at 14 years old, I played in the World Open of Chess. No, I did not make grandmaster. Not even close, as I had to give it up competitively at 16 due to my parents divorcing and having to work weekends to make ends meet. The point of bringing this up, is I believe you see horsies and castles – and I see a way children are taught to think strategically and tactically. It helps me form macro thesis by thinking through complex combinations and using probabilities and risk to assess potential moves and countermoves. Below, I walk you through how I started thinking about this subject during COVID, and how the snooze button was hit.

What followed that thinking in summer of 2020 was $6T+ in money printing and COVID protections to try and keep real estate owners whole. No one saw that coming – but in my opinion, these macros that many of us talk about are the right way to think, but now we have to consider that in many cases, we now have to account for what “kick the can” mechanism can be invented on a Sunday to delay pain as long as possible. I think many of these kick the can measures are now up, the alarm is going off – and I don’t think some of this can be kicked anymore. But now these COVID protections are ending – and with this – we might see an exodus of the sector, and very quickly.

What is unfolding at regional banks now, along with the impending recession should now start have people looking at the commercial real estate macro, as a whole – and then look at the downstream impacts of all of the secondary and tertiary businesses surrounding them. And their rents.

I’m not trying to be a “doom and gloom” guy. Rather, I am someone who believes in how markets can prune to get stronger. In this case, I think commercial real estate is far overextended and with this, I believe at the very least we have a pruning. At the worst, well, let’s not go there quite yet.

Let’s unpack what the underlying thesis is.

Thesis –With companies facing a recession and continued higher than normal inflation, margins are to be continued to be impacted, and thus earnings should start to head lower indefinitely. Many companies have piles of cash to perhaps ride out the storm, but with banking issues now becoming prevalent, you may start to see a lot of credit tightening as risk appetites decrease. Those with strong cash positions can potential absorb some ‘temporary unpleasantness’ but those in not great shape have decisions to make. How do we cut costs? Do we lay off workers when we see 3.5% unemployment, and risk having to hire back a workforce at substantially higher costs a year from now, or do we perhaps reduce our office footprint and examine a more robust telework workforce? By keeping employees and cutting office space, the productivity of the company may have marginal decreases, but by cutting significant workforce employees, we then face significant productivity decreases. While every company will have a flavor of this decision in the next quarter or two, as time goes on and cash positions decrease, this commercial real estate bust will get worse. Companies will significantly reduce their office footprints – and this also has downstream effects for all of the restaurants and businesses that surround office spaces. These companies will have to cut staff or even perhaps face going out of business themselves.

This thesis is not perfect, as industries like construction cannot telework. However, I can tell you that in my near 25 years working in many industries, office spaces are doomed to be shrunk, by a lot. In one of the pharm companies I worked at briefly in 2013, that place is now a ghost town. It was a MASSIVE building of office space, and even when I was there in 2013 they used a lot of telework.

Walking through the thesis, let’s play this out

Problem – You are Morgan Stanley and you have a big building in downtown Manhattan at $3,000 per sq ft on a lease, with perhaps 2000 seats – you have adapted to COVID and at one point, 97% of your workforce could telework. Many years ago, my mother was a compliance officer for them based out of Manhattan, but she only had to go there once a month or two via train from Philly. Coming out of COVID, you have “ass in seat” managers that believe if someone is not in the office, they aren’t being productive. So all of these vacant seats are now getting filled back up. However, many people shaped their life with the ability to now TW and don’t want the 60-90 minute commute anymore or the long hours into the evening. These people over the last year have left a lot of these companies. What remains now are a lot of vacancies. Your people are doing 1.25x the work they did before COVID due to not being able to hire anyone in. Wages start heading north, as you have 3.5% unemployment and with dangerously low staff, you must over pay to get people in. As this is happening, over-stressed employees are now being wooed for higher wages away. Most workplaces now are facing wage inflation that is hitting. In some way, shape, or form. In interviews, everyone is asking about telework. You are having a tough time meeting quotas being understaffed. Margins are slipping with continued high costs. You are facing having to lay off people, with already being understaffed.

Solution – the cash on the books has kept you afloat. Record profits having hit previous quarters, but those earnings are now not only not possible, you may actually start to lose money. You are faced with….

  1. Cut staff to reduce operating costs. You will then have to prune lines of service or sell off portions of your business. You are seeing potentially a longer term issue ahead. Your company, for now, is good – but all of these banking pressures then have the company worried about what next black swan is to hit. You see no way to hit productivity goals, so you need to make hard decisions and cut 10% of your staff.
  2. Cut office space, enact TW, and reduce salaries – while you have this 2,000 seat Manhattan office space, it might be costing you millions a year. You also have seen that during COVID, many who lived in the city moved 1-2 hours away in suburbs. Some of your positions you deemed “full time remote” and that person might fly in a few times a year. You can reduce your office footprint to cut operating costs. Additionally, with a robust TW plan, you are able to attract talent at lower costs and increase your productivity. Likewise, you can do a full review of your staff and realize a $300k team member that is highly valuable moved 2 hours away and has a newer family. You want to keep him, but then offer him a FT TW gig for $200k. He is not happy with the pay cut, but realizes his quality of life is 100x better and this can give him job security. Likewise, vacancies you have, you can now shop all across the country for. You can get talented people in rural areas of the country. This significantly decreases your employment costs. You still want a presence in the area, so you leave your lease for 2,000 seats and instead get a floor in someone else’s building for half the cost per sq ft and only get 200 seats.

This, to me, is inevitable, for many companies.

The problem you then run into, is, if this is a sustained recession for years – do those TW positions move to Ireland? Paris? Istanbul? Islamabad? Hong Kong? One can argue that if you remove the office space tether, your employees may then also be sourced from anywhere in the world. While this is 100000% true, I do believe that a wave like this is coming. In some way. However, with that 200 seat Manhattan office – you will still be dealing with an American company, and with this, you may already have globalization within your workforce. All this really does is reduce the American footprint to cut operating costs in office spaces.

But that does pose the solution to the low 3.5% unemployment. Think about these consequences…

  1. Your workforce becomes less dependent on an office tether and more dependent on a camera tether to your desk. I believe we are just at the infant stages of TW and there will be technologies/ideas that are improved to help keep this type of productivity high.
  2. This can lead to lower wages by improving work/life balance substantially. By offering FT TW positions, they can then capture those eager to shed massive commutes in exchange for lower wages. By removing cost of car/train/gasoline and 2 hours in transit daily, workers may find their bills are the exact same, but they now have 2-3 hours more in their day.
  3. With utilizing more TW, companies might even then market this as “being green” to use less gasoline to come into work and produce less carbon emissions. Somehow, I was put in charge of some TW policy research for a company with 125,000 people in 2008. Don’t ask me how it got to me. I don’t know. But companies today think like this – market it as “saving the whales” when you then use TW. Foreigners have ZERO clue how much Americans need cars to get to work based on how our population demographics work.
  4. This also can lead to a lower footprint of American workers – while increasing productivity (full staff) and decreasing operating costs with lower employment numbers and office costs.
  5. Think about the restaurants and shops all around these businesses. Many of these will go under as there is less foot traffic.

Whether you cut 10% of your staff OR reduce wages and offer TW, the same conclusions are inevitable, at some point….

  1. Less office space utilization. Whether you pick option 1 or 2 above with your solution, the end result is less utilization of office space.
  2. Less commercial utilization overall. While office space is a subset of this, consider all of the warehouses that may be shut down with a recession. Consider all of the shops/restaurants surrounding these which will go under. If you own commercial properties, your rents will significantly decline. Depending on your leverage, you may have to begin to sell properties to make payroll at some point.
  3. This may have commercial real estate prices plummet, as well as rents.
  4. Unemployment will go up, as these shops and warehouses will close.
  5. Regional banks, who give loans to a lot of these, will not be able to give them low cost loans to rollover debt. Many of these banks may have liquidity issues and credit will tighten.
  6. As commercial RE companies go under, these debt obligations are no longer paid to the banks, and these loans cannot be sold due to the underlying collateral is worth half of what it was 5 years ago.

Impacts to business

You will have some businesses keep the “ass in seat model” going, and cut staff and have full time in the office workers. Remember, they are already understaffed. By cutting this, you are now looking at significantly reduced productivity and still have high office costs. As time goes on, you will eventually have to prune that office space. However, instead of being able to produce 1m units of work, you can only now produce 900k units of work with the reduced workforce. The other company who reduced office space FIRST was able to keep the 1m production units. Both companies cut the same amount of costs, but the second company kept the productivity up.

However, I feel that many companies will continue down the path of “ass in seat time”, and as you can see, are at a competitive disadvantage.

  1. They have to pay their workers more to come into an office. Since TW options are now everywhere, you need to pay more to keep your talent and attract new talent. This leads to higher cost per head
  2. Your productivity is far less than your peers who adapt TW. Meaning, you now have companies that are equal peers, but one can produce 1m units and the other can only produce 900k units. This potentially has an effect on revenues, capabilities, and earnings.
  3. With a TW policy, your company can perhaps then source nationally and globally, allowing for less turnover times and less vacancy times. This allows for a longer term health with the company – vacancies can significantly reduce overall productivity and with this, overstress workers.
  4. Higher stressed workers can lead to greater illness. By having employees in close quarters and requiring them in the office – you are then returning to the pre-COVID era of someone getting sick, coming into the office, and taking out half of your accounting office for a week with a plague. During COVID, many people could TW during illness and thus not bring it into the office. This is a far superior model for productivity.


Whether a company today chooses “ass in seat time” or TW, the net impacts in due time are a collapse of the commercial real estate sector. Specifically, office buildings. It doesn’t mean they will all go vacant next week, but there’s an “inevitable” play here with a recession that is not necessarily imminent. I believe the REITs that are out there will start to have assets that seriously decay, and their balance sheets of what they own would need to be constantly revisited. Last year, I got involved with a play on WPG – or Washington Prime Group. My buddy, a former IRS agent told us how this was really a great play due to the stock being valued at pennies on the dollar due to how much the RE was worth. We had puts, option plays, etc – I ended up making like $4500 on the play and documented the hell out of all of it. But even going back then, I had a really dim view of the commercial real estate sector.

Does this mean everything is going to collapse tomorrow? No. But for me, this is what I’m expecting PRIOR to mass layoffs happening. Many of us are expecting to see 200k jobs lost a week or something in a deep recession. Remember – massive inflation led to record profits, and with this, strong cash positions for a LOT of these companies. Just because you KNOW the economy is shit right now, doesn’t mean companies are rushing to lay people off. We have some phases here I believe…


  1. Weather the storm. We have good cash balances. We had record profits. While our sales are down, let’s just stay the course for 6-12 months and constantly evaluate the landscape. Let’s also look at options 6-12 months down the line on layoff plans or perhaps TW plans and do cost benefit analysis of our options.
  2. At some point – cash is drawing down and the red pill or blue pill is being taken. Do you use traditional thinking and cut staff, or go back to more TW?
  3. Either solution will have an eventual draw down on commercial real estate and this is at play. Less and less buildings are being built and this has problems for the construction industries in big cities.
  4. Office spaces are closing and 3-6 months later surrounding restaurants/shops start to lay off people that need to be there to work.
  5. REITS start to see their holdings collapse. Think of the value of these bonds going to junk. Anyone long these REITS may start to see these things start to collapse like WPG. Not at first – but this could be delayed. What started as office building REITS then bleeds to many sectors.
  6. Unemployment is over 8% and rates have gone back to zero as there is now 1-2 years ahead of bankruptcies and collapses.
  7. M&A will go on overdrive, and it’s possible the companies TODAY that have strong cash positions and ADAPT A TW posture can be the companies that buy those other companies at pennies on the dollar 1-3 years from now.
  8. At some point – you will have discussions of Sherman Antitrust Act of 1890 coming around, and a generation of millennials that have grown up with nothing but massive companies buying everything may start to see what Gen X saw growing up with the Baby Bells and splitting up large companies. The Liz Warrens of the world that I more or less don’t agree on with anything may lead these types of charges. While they want higher wages for people, they don’t understand that breaking up the largest companies into competitive rivals then has the one company that set wages broken into two that bid up wages for talent.
  9. Companies that are incorporated in this country, at some point, over 500 people, may be forced to source 51% of their employees in the US and get 51% of their supply chain from the US. With a TW policy, you inevitably will see companies realizing that they can hire from Oklahoma City at $120,000 or Ireland for $80,000. Protections eventually will be put in place.
  10. American companies, facing higher tax pressures and forced to hire more expensive workers, cannot compete against the SE Asia region anymore financially. Many American companies are either bought by global entities or choose to offshore themselves and reduce their American workforce percent of employees.

While the last 3 items on here are 100% conjecture – you start to see a path that TW can go, and it’s not unreasonable to see a lot of companies leave this country inside of 10 years. One of the companies I worked at briefly, Tyco Electronics, in 2008 – was at the time incorporated with an office of 30 in the Bahamas or something. It was in the US, but it decided to tell the US to pound sand and the HQ left. This type of thing can and will happen unless US tax policies change. They can’t, with our levels of debt. If you cannot make business attractive to American companies based on tax laws, they will leave, and so will a lot of our work force.

“Pay your fair share”, to me, means allowing businesses thrive and hire employees – and these employees should be your tax base. Allowing more companies to expand means more higher paid employees, and increases your tax bases. When you try and crush companies – they will crush you back and leave, OR higher less people to make profits and cut costs. In times LIKE this, you want to ensure business stick around and keep employees paid well. You cannot do that by crushing them with taxes. My mom was a die hard Democrat, worked for Morgan Stanley, and was a former CPA – she was also very much opposed to corporate taxes. It’s trying to chase nickels and you end up crushing the lifeblood of your economy – the American business.

Final thoughts – once this gets underway, you eventually will start to see unemployment numbers creep up as the “ass in seat” companies do what they do. Likewise, pension are next to start getting hit, along with probably increasing our retirement ages. I believe there are massive derivatives also associated with these REITS. I believe in the next 6 months some form of austerity will need to be hit, and this may be bailout of more pension funds, kicking retirement ages later, and messing with social security and medicare/medicaid stuff. This is the low hanging fruit they need to start unwinding.

I just saw this – Exter’s pyramid for the 21st century. Has commercial real estate on it. Love it. However, I would place this ABOVE stocks as I feel this sector is wiped out in order to preserve profits. We will also this year start to see the unwinding of corporate debt with zombie companies probably going under or getting M&A taken over. Lots of moving parts right now.