_edited.jpg)
Whilst consensus seems to be that, at the very least, work culture will settle on a 3:2:2 weekly division - with three days in the office; two days working from home; and two days off - I have long bucked this trend, remaining bullish on a widespread return to the office. By extension, I’m bullish on the stricken commercial real estate market, and this is the case that I will make in this article. In the (admittedly very likely) case that I am wrong, I will also introduce what I think is a reliable hedge. If professionals are domiciled in their home, then they lose the most common excuse as to why their youngsters can’t have that puppy/bunny that they yearn for.
The Case for the Office
From what I can discern, the case for work from home is most frequently put forward by middle-aged professionals who tend to have children. In this scenario, there’s no denying that working from home is wholly beneficial in alleviating child care concerns. However, there exists a significant generational divide in regard to this issue; according to the FT, the 18-24 year old demographic is overwhelmingly in favour of office culture returning. I (touch wood) graduate this year, and all of my contemporaries whom I have spoken to are aligned in that we (self-centred and privileged) can think of little worse than escaping the quasi-house arrest that has plagued our student experience only to enter the confines of a shit box room, in a dodgy part of town, where we languish in a job that isn’t quite “the dream”, with the putative halcyon days slipping away. In short, graduates want to experience “office culture” during their twenties. Refusal to acknowledge that this is what graduates long for risks missing out on top graduate talent. The top talent will simply flock to the companies that offer them what it is that they want - the office. On a similar theme, paraphrasing Ken Cooper - Bloomberg LP Global Head of HR - the way that young professionals learn the most is through “osmosis”. That is being around those more senior than oneself, and picking up those intangibles such as how to talk to a client; the culture/tone that the company wants to strike; the subtle ways to expedite due process etc. If companies insist on shutting their offices on a permanent basis, they risk falling behind their competition, both in the graduate talent that they’re able to attract, and then in their training standards as well. Whilst companies are unlikely to privilege incoming employee sentiment over cost-cutting through office closures, they will be more concerned by how closing the office potentially threatens future standards, and therefore, their ability to win future work contracts; a direct hit to the long term outlook. Throughout the pandemic, the more seachangey employment narrative of AI has taken the backseat compared to the work from home narrative. However, this remains an important, latent issue in the world of work. In the future, more jobs will be performed by machine learning. As this technology improves, tasks that AI cannot perform will become a more important differential when companies compete with each other to win business. The onus is likely to shift increasingly towards managing interpersonal relationships, particularly within the services sector. I’m reminded here of a throw away comment made by Ray Dalio during a Clubhouse interview; that it only takes one young upstart to meet the client face to face, and ‘they’ll obviously win the contract when competing with everyone else who’s content with a Zoom pitch. As soon as this happens, work from home and digital meetings are finished.’ Dalio’s comment is an oversimplification, but it was always intended as such. The reductive levity shouldn’t take away from the broadly sensible point. This is echoed by Richard Youle, London co-Head of Private Equity at Skadden, Arps, Slate, Meagher & Flom, who has pointed out that it is harder to create new relationships over Zoom than it is face to face, and therefore, it is harder to win new work. Stressing the importance of a physical meeting place is a tacit endorsement of the office and of office culture. Similarly, Louisa Clarence-Smith at The Times makes a very interesting argument that when companies tend to reduce their staff as cost-cutting measures, there is a rise in office presenteeism. Workers seem to have this idea that if their boss has frequently seen them in the office, then they are less likely to lose their job. On Monday, the FT ran an article laying out the conclusions of their research that indicates employers subconsciously promote those who work from the office, whom they frequently see, over those who work from home. With the winding down of furlough schemes and further cost-cutting likely to take place in the near future, and especially with increased automation, it is logical that, once again, office presenteeism will increase. This is coupled with the recent changes to income tax brackets. The 40% bracket has been lowered from £50,000 to £37,000. For employees who opt to work from home, a small salary reduction is likely, as they aren’t paying transport costs nor the necessary costs of living in close proximity to the office. They may not be able to afford the tax hit with a simultaneous hit to their gross salary. The office is going to be in high demand.
The Case for Commercial Real Estate
This follows on from the case for the office, in that, it is predicated on the assumption that there will be a continued wealth of willing customers to rent office space and therefore a reliable revenue stream for the owners. This is against the backdrop of a bond market kneecapped by near 0% interest rates that has suspended the 60/40 portfolio for the foreseeable future. For many investors in the search for yield, bonds are not offering sufficiently high returns, and yet with the recent debate on whether or not we are in a global equities bubble, concerns over too great exposure to equities are likely to rise. Although, for its dubious worth, my opinion is that we are not in a bubble and a correction is far more likely than a crash, it would still be foolhardy not to take some money off of the equities table. Investors would be wise to reallocate assets, pursuing a more diverse portfolio. With bonds as an unattractive portfolio-diversifier and many left unconvinced by the volatility of cryptocurrencies, commercial real estate is a sensible, steady and reliable income stream. As established in the first section, the consensus view is bearish on commercial real estate; consequently, big ticket real estate has seen a marked downturn meaning that prices are low and bargain to be had.
Real estate as an asset is reasonably well insulated from inflation, which forms a significant part of my bullish view. Governments, and few more so than the UK’s, have taken on necessarily huge quantities of national debt throughout the covid-19 pandemic in order to fund economic stimulus and relief packages. Once we are through the pandemic, this debt will become the focus of economic policy making. Frankly, given the quantity of the debt, governments don’t have a hope in Hell of paying it off, in purest terms. They will need to inflate-away this national debt. That is, to deliberately run inflation higher than interest rates and real (productivity) growth for a sustained period of time in order to reduce the real-term cost of this debt through a concerted devaluation. Fixed income bonds are exposed to such a climate when inflation outpaces interest rates whereas, real estate is not. Real estate is referred to as an ‘inflation-proof asset’; landlords can very easily increase rent in line with inflation. Although a period of inflation/reflation throughout the 2020s is not a unanimous consensus among economists, inflation is highly likely, especially when one considers the increasingly protectionist shortening of supply chains and the recent spike in freight shipping costs from the Far East. This is set to increase further as the International Maritime Organisation steps up its crackdown on cheap and sulphur-heavy fuels. Greener fuels are more expensive, and costs will eventually be passed on to the consumer.
The Hedge Against a Return to the Office
In any case, especially one that constitutes a bet against the consensus, a reliable hedge is a sensible idea. As a bet against the office constitutes a bet on long term working from home, more conventional hedges along the lines of home office specialists, printers and hardware is perhaps the safest bet, perhaps even shed manufacturers to capitalise on the trend of setting up home offices in glorified garden sheds. However, investors seeking more lucrative returns might want to look towards the pet industry. According to the Kennel Club, in the UK, puppy registrations increased by 32% between April and July 2020 compared to the previous five year average. Even more stark is that purchases of bunnies and rabbits (house and otherwise) increased by nearly 60% in 2020. Pets such as these are long term commitments, and it really does seem that the search for companionship when deprived of the office has combined with no longer having the excuse ‘well, we work so it isn’t fair on the animal’ to provide a boom to the pet industry.
The Pet Stock Boys
With so much market volatility in 2020, pet stocks managed to fly under the radar despite Petco (trading on the NASDAQ under the clever ticker: WOOF) share price jumping 63% on its January 14th debut. The inevitable correction has come since but Petco remains comfortably above its $18 dollar debut with strengthening financials; signals that it’s beating projections; and a promising international expansion plan. Closer to home, private equity firm, EQT, are hoping to mirror this success in the UK, planning to take their holding, IVC Evidensia, public this year. With a similar underlying picture to the US of a boon in pet purchases and adoptions, there is cause to be optimistic that this veterinary and pet service provider will have a successful London debut. IVC’s funding round in February 2020 valued the enterprise at £3 billion. During the latest valuation, excited bankers who have attached themselves to the IPO have valued IVC at £12 billion, reifying the bullish outlook of pet stocks. After all, pets are long term commitments, and therefore, pet companies and pet stocks perform well through a recession. During the banking crisis-induced recession, the largest UK-listed vets owner, CVS’s, share price hardly moved because business was resilient. Its shares have since risen more than five-fold from the March 2020 lows, largely on the expectation of a repeat of this success in the face of recession and inflation. However, the significant cautionary tale attached to the possible London debuts is that, between 2008 and 2012, private equity piled into UK pet companies on the back of their recession-proofing qualities. The timely opportunity to exit may result in a saturated market. So choose your stocks wisely, and perhaps look to the US instead, where people spend more on their pets than on their children. Adducing the US Bureau of Economic Analysis, the pet accessory and toy markets has consistently outstripped the children’s toy market in the US since 2015.