The CEO and The chairman of Douglas Emmett, Inc., a Santa Monica, Calif.-based real estate company worth more than $3 billion, said on a company earnings call Aug. 2 that a recession could be “good” for the commercial real estate sector “if it arises”. with a level of unemployment that puts employers back in the driver’s seat and allows them to bring all their employees back into the office. The executive, Jordan Kaplan, then repeated that “the thought would be that unemployment would be on the rise. And therefore, employers would be in the driver’s seat to get people back to the office, where they want them.
“Rather than that,” Kaplan added, “I wouldn’t be happy if we went into a recession.” He noted that “recessions are revenue-generating activity. And if my tenants are feeling the impact of the recession, then I can’t imagine how good I think that is.
Kaplan made the remarks in response to a question from Citigroup analyst Michael Griffin, who said “we’ve seen some of your office mates come out and say potentially a recession could be good for office space. …kind of curious to get your thoughts on what we might expect to impact the portfolio just given the central recessionary environment on the horizon.
Stuart McElhinney, vice president of investor relations for Douglas Emmett, told The Intercept that Kaplan was just entertaining Griffin’s argument, which he said was common on Wall Street, and that Kaplan was in fact one of them. skeptical. “I think the overwhelming majority of the sentiment is that a recession wouldn’t be good for our business or any of our customers,” McElhinney said. McElhinney explained that the phrase “putting employers back in the driver’s seat” referred to the tight labor market, which makes employers unable to impose decisions that employees resist: “There are still so many more job offers jobs than people willing to take those jobs, so there’s this sense that employers have been very reluctant to take these unpopular steps like bringing people to work.
This dynamic was also discussed in a May earnings call for Equity Commonwealth, a company with commercial real estate comparable to that of Douglas Emmett. Equity Commonwealth’s chief operating officer told analysts he had “seen false starts in our portfolio, where tenants called their employees back to the office, indicated they would need more space, but then it turned out that the employees had all the leverage, and they’re not coming back to the office…. I just think we’re going to struggle with that for a while.
Earnings calls are periodic conference calls, typically held quarterly, between executives of publicly traded companies and Wall Street investors and analysts. The discussion is often frank and honest, as executives can face legal action from disgruntled shareholders if they make misleading statements.
Douglas Emmett, Inc. owns commercial and residential real estate. According to its LinkedIn page, its commercial real estate portfolio consists of “seventy-one Class A properties” with “approximately 18.2 million leasable square feet”.
The prevalence of remote work during the Covid-19 pandemic has had a negative impact on commercial real estate in general, including Douglas Emmett, Inc. Douglas Emmett’s stock price crashed at the start of the pandemic and has not recovered. Its market capitalization stood at almost $8 billion in February 2020 and is now below $4 billion.
Earlier in the call, Kaplan said that “our number one goal is to get our rental rate back up to over 90%. Keep in mind that we went about 93% there. Right now, he said, the company was “up sharply over 80% utilization.”
A general concern about the unusual power currently wielded by employees is found in the business world.
In July, the Wall Street Journal ran an op-ed with the gleeful headline, “A rude awakening is coming for young workers: A recession will give their bosses bargaining power.” Its author, David E. Greenleaf, CEO of healthcare company Modivcare, began by writing: “Workers of a certain age and attitude will have to reckon with the coming recession. … The days of expecting employers to be grateful for your candidacy will soon be over.
Similar views were expressed by an unnamed Texas business executive in a survey conducted by the Dallas branch of the Federal Reserve. “Inflationary pressure on wages makes long-term hiring difficult,” the executive said. “I suspect that the workforce pulls its head out of its back when a correction or recession makes jobs scarce and people start to feel the pain or fear of not providing for their families and their loved ones – assuming the government doesn’t get back into the fight and pay them to do nothing more. A great lesson you taught the workforce, the politicians!
Overall, the mood in today’s executive suites demonstrates the remarkable accuracy of a famous 1943 essay titled “The Politics of Full Employment” by Polish economist Michal Kalecki.
Most economists of the day, Kalecki wrote, observing the success of Keynesianism in World War II, believed that “even in a capitalist system full employment can be secured by a program of public expenditure”.
“Maintaining full employment would bring about social and political changes that would reinvigorate the opposition of business leaders.”
In other words, rather than workers experiencing economic cycles of boom and bust – with troughs like the Great Depression and full employment only at the top – governments could engineer a largely permanent “synthetic boom”. Largely forgotten now, Martin Luther King, Jr. called on the government to use this power. His “I Have a Dream” speech was delivered at a 1963 rally titled “The March on Washington for Jobs and Freedom.” Signs at the march read “Civil rights plus full employment equals freedom.”
But doesn’t everyone want full employment? No, argued Kalecki: “the maintenance full employment would lead to social and political changes that would give new impetus to the opposition of business leaders.
Yes, he said, “It is true that profits would be higher under full employment…and even the rise in wage rates resulting from workers’ stronger bargaining power is less likely to reduce profits.” than to raise prices.
However, “in a regime of permanent full employment, the ‘bag’ [i.e., being fired] would cease to play its role as a disciplinary measure. The social position of the boss would be shaken, and the confidence and class consciousness of the working class would increase. Strikes for wage increases and improvements in working conditions would create political tensions. In other words, exactly the conditions in the United States today with a historically low unemployment rate.
“‘Discipline in the factories’ and ‘political stability’ are valued more than profits by business leaders.”
Business leaders, Kalecki believed, preferred power more relative to money. “‘Discipline in the factories’ and ‘political stability’ are valued more than profits by business leaders,” he said. “Their class instinct tells them that…unemployment is part and parcel of the ‘normal’ capitalist system.”
As the owner of an Ohio janitorial business lamented during the height of the last economic cycle: “Very few people show up for interviews, and if they do, they don’t show up for work. … I sometimes wish there was actually a higher unemployment rate.
Thus, under conditions of long-term full employment, Kalecki said, “a powerful alliance is likely to form between the interests of big business and rentiers, and they would probably find more than one economist to declare that the situation was obviously unhealthy”.
And just in time, former Treasury Secretary Lawrence Summers, one of America’s foremost economists, proclaimed in June that to curb inflation “we need two years of unemployment at 7.5 % or five years at 6% unemployment or one year at 10% unemployment”. More recently, Summers said inflation would force the Federal Reserve to create “some level of significant economic distress.”