Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Universal basic income decimates big cities
Kay Van-Petersen
Global Macro Strategist
Global Macro Strategist
Summary: Commercial real estate is crushed as workers say "bye-bye" to big city life.
The Covid-19 pandemic has only accelerated the K-shaped recovery that was driving inequality and tearing at the social fabric before the outbreak. For years, the younger generation has come to realise that even a solid education and the right attitude are not enough to get moving up the socio-economic ladder in a way that was possible for most of the 20th century. Even if younger professionals do get a job, financialisation of the economy has meant that a single income is not nearly enough to support a family, once insurance, education, and rent or mortgage payments are taken into account. And technology is another driver, with the growing, wage-deflationary forces of software, AI and automation eroding a widening swath of jobs across industries. The risk that societies are entirely torn apart results in the realisation that the Covid-19 measures weren’t a mere panic response, but the start of a permanent new universal basic income (UBI) reality.
UBI leads to a seismic rebalancing of the forces and structures within society, and how they apply geographically. Big cities have been the chief drivers of job growth for generations. But in the new era of UBI, tech-driven job redundancies, and frequent work from home jaunts made more normal by Covid-19, city office real estate is suddenly faced with 100% or worse overcapacity. Commercial office property values are crushed, together with the commercial real estate containing restaurants and shops aimed at servicing commuting worker drones.
The new UBI also drives changes in the attitude toward work and life balance, allowing many young people to stay in the communities where they grew up. Meanwhile, the professionals and the marginal workers in big cities also begin to leave, as job opportunities dry up and the quality of life in small, over-priced apartments in higher crime neighborhoods loses its appeal.
Trade: Short big city REITs, for example SL Realty Trust (SLG), which exclusively invests in Manhattan, NY office buildings, or Vornado Realty Trust (VNO), which invests in Chicago, San Francisco and NYC.
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