Two from the WSJ.
1. Tech firms buying commercial real estate.
The biggest U.S. companies are sitting on record piles of cash. They are getting paid next to nothing for holding it, and they are running out of ways to spend it.
So they are buying a lot of commercial real estate.
I don’t get it. Commercial real estate seems to me to be an investment that is likely to lose money. Instead of a post-pandemic return to the office, my prediction is that firms are going to develop and deploy even more “remote capital,” so that in a few years office vacancies will only increase. That means that the return on investments in office buildings will be negative, which is below the return on cash. Why don’t these companies just pay dividends (or engage in stock buybacks) and let their shareholders decide how to invest the excess cash?
2. Some university endowments have soared.
Large college endowments have notched their biggest investment gains in decades, thanks to portfolios boosted by huge venture-capital returns and soaring stock markets.
Someone once called Harvard a hedge fund with a university attached to it. But it sounds like for these universities you should replace “hedge fund” with “venture capital partnership.”
The financial model I carry around in my head is this:
1. Government prints paper wealth–money and Treasury securities–to finance deficits.
2. This wealth increases the assets of the rich (and wealthy universities).
3. In the short run, the increased wealth is used to bid up asset prices, increasing the paper wealth of the rich even more.
4. The ratio of paper wealth to real economic activity gets higher and higher, until Stein’s Law kicks in.
5. Then we get a collapse of paper wealth and/or a big increase in the prices of real goods and services, in order to bring the ratio of paper wealth to real economic activity back to normal.
+1 on your financial model.
Same. It seems pretty reasonable.
Ironically (since I assume you wouldn’t want this, Arnold), it would seem to help justify a wealth tax or higher estate/gift taxes.
Commercial real estate seems to me to be an investment that is likely to lose money.
Agree, but I’m sure someone was whispering: “when reasonable opinion is against it, that’s when to buy!”
MIT is definitely a VC with a university. Also a landlord. They are building a ton in Cambridge, and renovating – but the renovation is converting office space to lab space and the new construction is also lab space. Lab work can be contracted out, but it can’t be done remotely.
Commercial Real Estate might not be a great investment, but it is at least a real asset. Perhaps they are hesitant to hold cash because they expect inflation?
“Real economic activity”
I appreciate the economic value of advertising as much as the next guy with a handful of Econ classes under his belt. Yet, Steve Sailer asked the question a while back, what if online advertising, especially on social media, doesn’t work? One wonders how stock indexes disproportionately composed of online advertising firms are going to fare in the long run. One suspects an imbalance in advertising that is growing without generating real benefits and that will collapse eventually.
Hasn’t it always been that way? Half the money I spend on advertising is wasted; the trouble is I don’t know which half. (Wanamaker).
#1. Commercial doesn’t need to be office space. It can be fulfillment centers. Though the time to buy office space is when there is blood in the streets. Last year was pretty bloody.
#2. Has #5 ever occured in the US? Or is a prediction?
I don’t know, perhaps companies are betting on commercial real estate being rezoned to residential?
I have no idea how costly the conversion would be, but there are quite a few vacant commercial pockets near me that are nice-neighborhood-adjacent.
They both look like risk-reduction efforts. Big tech firms with some regularity find themselves under stress and unable to raise funds easily. So it makes sense to keep “enough” cash on hand, invested with the banks. If the need for cash arises, call some of it back, which works like raising needed funds at bank-borrowing rates. Not as good an average return, but preventing bankruptcy is big when it happens. Similarly, commercial real estate looks, on average, like a poor investment, but in the plausible case where the economy revives and remote work falls out of favor, it’d pay off nicely. As a bonus, it balances out the risks of their online businesses: If online grows, great. If in-person grows, at least they already have the office space they need. I doubt that the cash pile is causing the real estate purchases, though.
I suspect that paying dividends (and buying back shares) is seen as a sign of having hit the limits of a tech company’s available growth, which in many cases might trigger a share price collapse (current share prices incorporate expectations of continued strong growth). That’s a pretty strong incentive not to pay dividends or buy back shares.
I don’t know why paying dividends is less popular. Perhaps it is the tax treatment. I have long thought that certain companies, instead of going on merger or acquisition campaigns, should just pay dividends. The merger or acquisition campaigns do not pencil out, often.
Share buybacks avoid certain taxes.
Dividends and buybacks are a good mix. Buybacks are better from a tax perspective, but dividends are nice to create a steady & growing income flow that can help keep you centered when markets fall.
If a stock you’ve invested in is down 25% this year and you focus on the price, that’s a bummer. However, if you focus only on the 4% increase in dividends you enjoyed, it certainly helps you sleep at night. Indeed, you may even want to add to your position.
> I don’t get it.
You’re assuming those heading these big firms know what they’re doing, they don’t.
I thought investor Cathie Wood said it well last month:
“The problem is this innovation is going to be very disruptive to the traditional world order. So the benchmarks today are constructed based on companies’ past successes. But if disruptive innovation is evolving to such a rapid extent, there’s going to be disintermediation and disruption. Companies that have learned to satisfy short-term shareholders – who want their profits and want them now – have been leveraging up to buy back shares and pay dividends.
Companies haven’t been investing enough in innovation, and we’re going to see a lot of carnage out there increasingly during the next five to 10 years. At the beginning of the S&P 500 indexes initiation, the average lifespan of a company was 100 years. We believe it’s down to a little over 20 years now – but it’s going to collapse going forward.”
Here is an experiment I ran, and which I figure nearly everyone can do. Calculate your “Personal Amazon Basket Inflation Rate” (PABIR).
I buy a lot of stuff from Amazon, so I went over my Amazon order records over the past four years and made a spreadsheet of the price I paid, the current price, and then calculated the annualized inflation rate. I then took the average of those rates, weighted by the amount of the purchase.
My PABIR was about 10% which surprised me (and made me reconsider the level of my cash balances) because many products were mostly flat. But a good number of them have indeed gone up a lot, usually it’s about 50-65% in that time period. The hot potatoes seem to be landing, but not in a smoothly and equally distributed way.
I don’t know, perhaps companies are betting on commercial real estate being rezoned to residential?
This makes sense to me. One vision of the future of big cities is as lifestyle rather than business centers — people live in them, they dine out, hit the gym, go on Tinder dates, etc, etc while working remotely for a company that may or may not be in their area. This describes both of my millennial kids — living in big cities because they like the lifestyle, but they don’t commute and work in company offices, and may never do so (both were able to work remotely even before the pandemic). So I think office towers being converted en masse to residential buildings is not at all far-fetched.
This is what has happened in my own medium sized city of Ann Arbor. Main Street, which was once hosted a typical assortment of downtown retail and offices is now almost completely converted over to restaurants, bars, entertainment, and boutique shops. This story about DTE Energy selling off its downtown office building after sending 400 workers home indefinitely is emblematic, I think. But there’s already a large new apartment building across the street nearing completion, and the probability of much or all of the former DTE office space being converted to residential seems very high.
Many people will still want to live in urban centers even as fewer and fewer work there (except in their home offices).