LearningMachine

What do we think is the buying power of each of these folks working for a company currently located in a city that is not very expensive compared to the buying power of the analyst or software engineer working for a company that had already picked to be located in a big city for talent? Probably lower, right? While WFH a lot more of the time will be standard, WFH 100% of the time will probably take some time to pick up. Assuming it picks up for some percentage of these folks and that these folks are able to move, what is the radius of the area they will be targeting within their new region? Will it be 1-mile radius (p* 1 square mile) like it was for some of those rich analysts and software engineers, or will it by 20-mile radius (p* 400 square miles)? Probably latter, right?

Totally agree that high tech employers want to be able to attract top talent wherever they are. This is why big tech companies are leasing new NYC office sqft even in the middle of the pandemic. They want to be able to attract the top technical talent in the biggest metropolitan region of almost 20 million people. My point is that the game has changed a little. In order to attract and retain top talent, tech companies are now also competing over offering WFH and hybrid work benefits. This means for that newly hired Facebook engineer, he no longer is required to get to office daily, and his/her desirability of being able to walk to work has gone down, and the living options for that engineer have gone up quadratically within the region. The desirability of being close to cities is still there, but his residence doesn't have to be walkable distance to work. Now, that engineer might still want to be in the wider city region of slightly bigger radius for dating life and other reasons, e.g. expanding their desired region from within 1 mile of work (pi * 1 square mile) to within 10 miles from work (pi * 100 square miles). However, for folks with families, dating infrastructure might not be as important a reason, and they can expand their radius for the area farther from within 1 mile of work (pi * 1 square mile) to within 20 miles of work (pi * 400 square miles). The desirability of being close to cities is still there, but work doesn't have to be in immediate vicinity within the region anymore. I am already starting to see that folks who used to want to live within 1 mile radius of work are now willing to look much farther out within the region, while still having access to all the city has to offer.

The demand to relocate out of expensive cities seems to be high according a survey by Blind, which verifies employees by asking them to provide their company email address. Roughly third are willing to relocate even with a pay cut. In addition, 40-45% will relocate without a paycut, depending on city/company. Here are results broken down by company and by city: https://www.teamblind.com/blog/index.php/2020/09/14/44-of-professionals-are-happy-to-take-a-pay-cut/ https://usblog.teamblind.com/wp-content/uploads/2020/05/PayCut.pdf https://docs.google.com/spreadsheets/d/1zF_jxowBZYkiJIeatZAm3soelVBpoFf1TbjEZVwxBpA/edit#gid=171959972

I meant during and after GFC, Detroit residential vacancy hit above 20%, causing banks to give away houses for $1 in some cases to avoid liability for property taxes and vandalism. I am not saying it will get that bad in every city. What I am saying is 20% vacancy can cause more than 50% drop in prices. I'm also not saying prices will fall 50% in cities with certainty. What I am saying is the effective supply of options is going up way more than 20% for that well-paid analyst or software engineer, and that in history, we have examples of even just a 20% effective supply increase causing a big drop in prices. So, I think probability is high that there will be some drop in prices for residential real estate in expensive cities. Many factors will determine the amount of that drop, e.g. how fast the trend materializes, how much existing housing is already available in desirable locations [desirable defined in the new era where they don't have to be within 5 miles from work], how fast can developers build new houses on the outskirts in good school districts that these folks would want to move to, the magnitude of new supply from developers vs. the demand, how much regulations and zoning slow down these developers, etc.

Agreed, you wouldn't want to lose these. That said, assuming you were close to your work before, would you now willing to be 30 minutes away from some of these needs if you could get an estate now for the same price, e.g. say with a farm, view, horses, heliport, airport, or something else you like? Maybe you have to go too far in your area, but do you think some small percentage of people might be willing to consider that option for their next house? For each extra mile you're willing to add now, the options grow quadratically with new options being available in area of size pi * (new_distance ^2 - old_distance^2). So, if you were willing to be only 5 miles away from these options before, you could cover only pi^25 square miles. Now, if you can go 20 miles, your options for living go up to pi^400 square miles. If you are willing to go 30 miles, your options for living have expanded to pi^900 square miles. I feel the oligopoly power of the living options within pi^25 square miles has certainly diminished by the availability of living options in p^900 square miles, while keeping access to things that are important. All it takes is a small percentage of people to start exercising this option of leveraging increased effective supply as 20% incremental supply can lead to moves in prices as 20% vacancy in Detroit showed us. Here, the effective supply has increased quadratically by many multiples not just 20%.

Thanks Pupil for sharing your words of wisdom. Shelter vs. farm products: A rich analyst doesn't pay a big percentage of annual income for products from farms either because there is no oligopoly-type ownership concentration so far with farms. If they had the option to buy farm products from only a few non-competing farm owners, those few options could have easily extracted a big percentage of their annual income, but fortunately that is not the case so far. Both shelter and farm products come from real estate but former has been taking much more income because of need for close proximity to work so far, which has created oligopoly type structure by reducing options. I had done a survey of a group I am part of on what percentage of people would consider moving if WFH became permanent. I got about half the people. Redfin did the same survey and found about 50% people ready to move in some cities: https://www.redfin.com/news/wfh-leaving-new-york-san-francisco/ This is what I am starting to see in practice as well. The folks I'm seeing do this are not into FIRE. Rich working single folks are moving for multiple reasons, e.g. to be close to their family and buying a house in another city, etc. Rich working folks with families are buying bigger properties farther away from work. I hear you on rich folks like to be together. Here, I'm seeing working rich folks in the tech who are getting the flexibility to move and starting to leverage that flexibility together. This is similar to how we saw white flight in the 60s, where those who could afford a car, started moving to suburbs. This time also, the reason for many is not FIRE but a bigger property, newer homes, etc. Savings are just icing on the cake. All it would take is about 10-20% move to make a big impact on pricing as 20% vacancy did in Detroit.

Pupil, would it be possible to elaborate what you meant here so that we can get the benefit of your wisdom here?

This is counterintuitive, but if you actually allow more real estate developers, fewer zoning restrictions and let them build lot more, that would increase the supply so that price can come down to construction cost of buildings. Anyway, Covid should help now by effectively increasing supply by decreasing demand for needing to take the train to downtown everyday, so that folks can move further out or to other towns.

Twitter, Microsoft, Facebook, and Google have all announced some form of hybrid work post-covid, where they will let their employees work from home 100% of the time or at least more of the time than pre-covid, permanently. Some folks at some of these and other tech companies had already started to move, e.g. to be closer to their family in another city, or buy a bigger estate farther away from work. Now, they are thinking of making these moves permanent. Overall the # of options folks can pick from for their living situation has gone up more than 10 times in some cases. Beyond the cost of the building itself, I think of real estate as deriving its value from having small local oligopolies. For example, if someone needed to be able to get to work within 10-30 minutes for five days of week, they had a limited number of available multifamily landlords to rent from. Now that they don't have to go to office at all or go only 2-3 out of 7 days, for folks to keep the same total commute time per week, they could have more than 10X the number of multifamily landlords they could rent from. Same goes for the number of options of houses they would look at before and what they can look at now. I understand things are not that simple as some people will still want to be in a certain area because of family or school district, but prices are determined by marginal supply/vacancy. In Detroit, 20% vacancy had a huge impact on house prices. For prices to be impacted, all it would take is a small percentage of folks exercising their options to pick from suddenly increased # of options. In the public markets, if we suddenly had a company's oligopoly position destroyed such that we had 10X the number of companies available to buy the same product, that company's profitability and value would fall drastically. What do folks think would be the % degradation of real estate values where the oligopoly position has gone down to the level of suddenly 10X the number of options being available to buyers. Could it approach to becoming a free market where cost of housing comes down to cost of actual building itself in some cases as is already the case with rural homes, where some folks are moving?

Actually, it is more than that. In the same article, it says: Employees can work from home full time with manager approval. They can also move to a new location for remote work, with salaries adjusted based on geography if their manager approves. Imagine the repercussions on currently expensive real estate prices close to Microsoft. All it would take is a small percentage of people moving to exurbs for big estates or closer to their families in other cities to impact the incremental supply/vacancy rate. 20% vacancy/incremental supply had a huge impact on Detroit house prices.

How Twitter built its work-from-anywhere culture over time by offering work-from-home to compete for talent instead of competing just on compensation: https://www.washingtonpost.com/technology/2020/10/01/twitter-work-from-home/?arc404=true Wonder how many companies will follow this wave permanently?

If I were to consider the dimensions of (a) human time and (b) human effort, both (i) taking the stairs and (ii) driving around & parking in a dense city like Manhattan would see an improvement with elevators and autonomous cars, albeit different levels in cities vs suburbs. With autonomous cars, improvement in human time might be bigger on a percentage basis in dense cities than in suburbs. I also agree that improvement in human effort wouldn't be as big with autonomous cars as it was with elevators. By reducing (a) and (b), I think autonomous vehicles can make both (1) exurbs and (2) denser cities more livable. Some folks prefer #1, e.g. families wanting space for kids and pets. Some folks prefer #2, e.g. singles wanting human connection with many other humans. Here is a write-up that takes a balanced approach to the topic without getting religious about one extreme vs. the other: https://medium.com/jordan-writes-about-cities/will-autonomous-vehicles-lead-to-greater-sprawl-or-greater-density-yes-4e32b0fb3d35

When elevators came to buildings, desirability of high rises went up. Because of human need for in-person connection with other human beings and human need for in-person specialized services, I wonder if resolving issues resulting from density will unlock more desire for density. When fully autonomous cars come to cities, I wonder if it would be similar to elevators coming to buildings?

Thanks SharperDingaan for sharing. To help us learn more, would it be possible to share more, e.g. your general source of "standard practice", and what frequency your source indicates for "on-site" in the burb and bigger "onsites" in the central location? In the tech world pre-Covid, some leadership teams did "offsites" once a quarter to a year and the location was determined based on making sure everyone could get there easily. Sometimes the location could be another building within the same company or a conference room at a hotel nearby. So, I was thinking Sundar was drawing an analogy to "offsites" when he mentioned "onsites". Because these onsites will now probably be done by all employees not just leadership teams, and they are meant to replace regular face-to-face daily meetings, maybe the frequency could be more than a quarter to a year, e.g. maybe once a month, or more in some unique cases that would benefit from higher frequency. I was thinking the location would be based on what works the best for the employees in the region since over time, a team could be formed from employees across the entire region not just one suburb. Over time, the location that would work for all employees in each team would tend to be a centrally accessible location. Some companies might also want to cater to both (1) young talent that wants to come into office more frequently, and (2) senior talent with families that would rather work from home. I think this is why Facebook, Apple, Amazon and Google are acquiring/leasing sites in Manhattan for the young talent to come in more frequently, and to potentially do "onsites" there as well for senior talent. All that said, looks like we both agree that the square footage needed would be so much lower than what it is today. This will end up causing both (1) company permanent sites to shrink in size, and (2) senior employees with families to spread out more into exurbs or smaller towns nearby as they need to make the trip to "onsites" only once in a while instead of daily.

Looks like a very balanced approach. For us as investors, I'm thinking two implications from his two statements in his interview with the Time Magazine at https://www.youtube.com/watch?v=hpn1rebBfqY: More employees could spread out into exurbs: Sundar wants to give employees flexibility so that they don't have to commute 2 hours, e.g. on Fridays, as those commutes prevent employees from being able to make plans with friends and families. This would mean more employees could move farther out, increasing the supply of housing they could consider for living, in turn, decreasing the price of housing within 45-min of campus. Company sites could shrink in size: Sundar wants to have concept of "onsites", when employees get together to meet in person. If employees are going to meet only for "onsites", this could reduce the square footage needed for company, decreasing demand for office space, decreasing office supply. As other companies do the same, looks like this means the impact will be effective supply available will be higher for both office space and housing options. In other words, vacancy will be higher. Incremental supply can cause big swings in price as 20% vacancy did in Detroit. What are the implications for mass transit systems? If WFH permanently cut commuting days by 50%, how do, for example, the LIRR (NYC), Metro-North (NYC), NJ Transit (north and central NJ) and SEPTA (Philly) survive? If you don't have those commuter rails, how do people get into the city on the 50% of days they want to come in? Also, what about climate change? It is common to see companies pushing toward (at least purported) carbon neutrality. How can you do that if your HQ is inaccessible except by car, which would be the case for essentially all suburban or exurban locations? More broadly, many cities are the hub in a local hub-and-spoke (road and rail) transport network that may be not be so easy to unwind. Maybe there are short-term to medium-term hiccups for transit, but I wonder if long term, businesses located on the outskirts will be able to afford to move their shrunk footprints into Manhattan for its central transit-accessible location, giving themselves access to wider pool of employees to pick from, or choose to do their "onsites" in a central location accessible through transit for most employees in the region.

Looks like a very balanced approach. For us as investors, I'm thinking two implications from his two statements in his interview with the Time Magazine at https://www.youtube.com/watch?v=hpn1rebBfqY: More employees could spread out into exurbs: Sundar wants to give employees flexibility so that they don't have to commute 2 hours, e.g. on Fridays, as those commutes prevent employees from being able to make plans with friends and families. This would mean more employees could move farther out, increasing the supply of housing they could consider for living, in turn, decreasing the price of housing within 45-min of campus. Company sites could shrink in size: Sundar wants to have concept of "onsites", when employees get together to meet in person. If employees are going to meet only for "onsites", this could reduce the square footage needed for company, decreasing demand for office space, decreasing office supply. As other companies do the same, looks like this means the impact will be effective supply available will be higher for both office space and housing options. In other words, vacancy will be higher. Incremental supply can cause big swings in price as 20% vacancy did in Detroit.

Thanks investmd. Yes, sure, I'd be interested if we can get enough of a quorum. I'm thinking folks might be more interested after public equities have gone down and back up to stable levels. Currently, folks might be focusing on public equities getting priced correctly soon :-).

BPCAP, would it be possible to share your reasoning behind this so that we can learn from your perspective?

Thanks Jurgis and Spekulatius for your wisdom. I was looking for someone to talk me out of it. You're right on about execution being key here. You're also right there are several players looking at prescription delivery from different angles, and a lot of money is chasing same-day prescription delivery companies, some of which might execute better than NowRx. Because it also impacts Walgreens/CVS, I'll raise it there.

Thanks Jurgis. I was thinking moat is in switching costs for their customers. Their # of customers is growing exponentially. Regarding novelty, I was thinking it is not a prerequisite for a good investment. I understand idea is easy to come up with. I've seen small local pharmacies offer same day delivery, but it has been like what the taxi-business was like - business with low customer satisfaction and time wasted in coordination. Currently, there isn't a nationwide company offering the services that are a combination of Walgreens/CVS combined with Uber/Lyft, and there is a need in the market for that.

I'd like some help of our collective wisdom to figure out the probability of profitability and valuation for NowRx. Here are some links for more info: https://www.seedinvest.com/nowrx/series.b.2 https://sec.report/Document/1702206/000114420419045501/tv529845_253g2.htm Pros: Decent Customer satisfaction: They are claiming decent NPS. I haven't had first hand experience with their service but can relate to pain of picking up medication in person during Covid situation. Low Real estate overhead: They are claiming lower real-estate overhead, but I'm wondering if Walgreens and CVS are able to achieve effectively no real-estate overhead costs for pharmacy part of their store through sales of higher-margin merchandise to heavy foot traffic. Cons: Higher Operating Expenditures: Their Operating Expenditures look high given their claims of low OpEx. I'm wondering if part of it is because of the costs of drivers to ship, which Walgreens called out in a recent quarterly call as one of the reasons they prefer customers to come to their store. Will they ever become decently profitable without diluting again and again? Lower Gross Margins: Their gross margins were lower than other pharmacies in one of the docs I came across. They claimed it is because they sell more branded medication. I also wonder if their little negotiation power won't be able to compete with higher-share retailers like Walgreens and CVS in negotiating lower prices on both branded and generic medications. Continuing Losses: The company has been making losses each year and projected to continue to make losses for now. Doesn't surprise me given high operating expenditures and lower margins above. Strong Competition: Can Amazon just kill NowRx along with killing Walgreens and CVS by introducing Same-day 2-hour Prime shipment from their PillPack acquisition? Amazon has already started getting licenses in each state. Now, they just need to have a pharmacist in each MSA just like NowRx. Capsule is also getting higher funding already, and planning to grow nationwide. High Executive compensation from raises: Is it to too early for exec team to be taking high compensation from raises?

My guess would be that BRK would not be interested, partly because you can't borrow at close to 0% interest rate for the long term in Indian Rupees. Rule of law, i.e. contract enforce-ability, truth in accounting statements and corruption, would be another issue.

Agreed, pupil, we shouldn't read too much into this one data point, and that too from mid-March 2020. Good to know though that was the price for "blank canvas" at that moment.

Wondering if anyone knows how the quality of square footage of VNO, PRGE and ESRT compares to Morgan Stanley Headquarters at 522 Fifth Avenue trading at $609 PSF?

I think he does this when he hasn't gotten in deep to understand which individual companies will be winners, and makes a relatively macro bet spread across companies he doesn't understand deeply. Sometimes, he has made it out ok with this approach, e.g. railroads before picking BNSF, South Korean stocks, and to some extent with banks before picking BAC. Other times, not diving in deep did not turn out well and he had to admit the mistakes, e.g. Irish banks during GFC, and airlines recently. I still think he bought Japanese stocks partly because he didn't want to take currency risk by buying non-Japanese stocks using proceeds from Yen-denominated bonds which will need to be paid back in Yens. Sure, he probably also figured maybe these stocks are not that expensive relative to the interest rate he is paying for Yens. I don't think he understands the companies he bought deeply at least so far given the peanut-butter-style investment. Sure, maybe he also figured in the industry he purchased, companies maybe don't compete very heavily and all might have some history of coexisting and making somewhat reasonable returns at least compared to the interest rates he is paying. I haven't looked into the companies deeply myself - a cursory glance makes it feel like they are not that simple to value. The stake of 5% in each company is too little to take a year to buy if the only concern was not impacting the market price. I wonder if he slowly yen-cost-averaged during dips because he didn't have conviction on what the true value of these companies might be, and relied on the market to figure out the value for him over a year, and because he is buying a basket, maybe thought he won't lose money in the long run given he is buying a basket and is getting low interest rates on Yens. Now, the advertisement might let him borrow Yen cheaply again to deploy in fully-owned companies he will understand deeper. This is similar to the advice he gives in the U.S. that if interest rates were to stay this low and taxes were to not go up, S&P 500 (a basket of stocks) is a great buy for the next 10 years. Now, with Yen, he is able to keep the interest rates this low by selling longer-term fixed bonds and buying a basket of stocks in Japan in an industry that he thinks might be reasonable to own at a macro level.