WFH and the real estate crisis

Over the past decades, companies (that is, employers) have shifted responsibilities (and risk) to their employees.

Employer companies replaced company-funded (and company-managed) pension plans with employee-funded (and employee-managed) 401-k retirement plans.

Employer companies have shifted the cost of medical insurance to employees. The company-run (and company-funded) benefit plan is a thing of the past. Today, the hiring process includes a form for the employee to select insurance options and authorize payment via payroll deduction.

Some companies have shifted other forms of risk to employees. Restaurants and fast-food companies, subject to large swings in demand during the day, have shifted staffing risk to employees. Instead of a steady forty-hour workweek with eight-hour shifts, employers now schedule employees with "just in time" methods, informing employees of their schedule one day in advance. Employees cannot plan for many activities, as they may (or may not) be scheduled to work in any future day.

In all of these changes, the employer shifted the risk to the employees.

Now we come to another form of risk: real estate. It may seem strange that real estate could be a risk. And it isn't; the risk is the loans companies have to buy real estate.

Many companies cannot afford the loans for their buildings. Here's why: A sizable number of companies have allowed employees to work from home (or locations of their own choosing), and away from the office. As a result, those companies need less office space than they needed in the past. So they rent less space.

It's not the tenant companies that have the risk of real estate loans -- it's the landlord companies. They made the loans and purchased the buildings.

But risk is risk, and it won't take long for landlord companies to shift this risk away from themselves. But this shift won't be easy, and it won't be like the previous shifts.

A building has two (or perhaps more) companies. One that owns the building (the landlord company), and a second (the tenant company) that leases space within. (The owner could be a group of companies in a joint effort. And a large building could have more than one tenant.)

But notice that this risk has two levels of corporations: the landlord company and the tenant company. The landlord company has employees, but they are not the employees who work in the building. Shifting the risk to them makes no sense.

The employees who work in the building are employees of the tenant company, and they have no direct connection to the landlord company. The landlord company cannot shift the risk to them, either.

Thus, the shift of risk (if a shift does occur) must move between the two companies. For the risk of real estate, the landlord company must shift the risk to its tenant companies.

That shift is difficult. It occurs not between an employer and employee, but between two companies. Shifting risk from employer to employee is relatively easy, due to the imbalance of power between the two. Shifting risk between companies is difficult: the tenant company can hire lawyers and fight the change.

If the owning company is successful, and does manage to shift the risk to its tenant company, then one might assume that the tenant company would want to shift the risk to its employees. That shift is also difficult, because there is little to change in the employment arrangement. Medical benefits and pension plans were easy to change, because employees were receiving something. With the risk of building ownership (or more specifically the risk of a lower value for the building) the employee is currently receiving... nothing. The have no share in the building, no part of the revenue, no interest in the transaction.

Savvy readers will have already thought of other ways of hedging the risk of real estate loans (or the risk of reduced demand for real estate). There are other ways; most involve some form of insurance. With them, the landlord company purchases a policy or some other instrument. The risk is shifted to a third company (the insurer) with payments.

I expect that the insurance option will be the one adopted by most companies. It works, it follows existing patterns of business, and it offers predictable payments to mitigate risk.

Sometimes you can shift risk to employees. Sometimes you can't.