When an asset becomes a liability

A home is something that you can borrow money against as the equity in it grows. People use this money to invest in their own small business, to pay for their kids’ education, to ride out unemployment and more. This is the benefit of owning an asset.

However, if the equity was underwater, meaning they owed more money than it’s worth, it becomes a liability. Even selling it doesn’t recoup the value owed on the loan, so payments would still be necessary after the sale.

I’ve been seeing a significant amount of people complaining about being called back into the office after working successfully from home for over a year now due to the pandemic. There are articles being written about how CEOs are struggling to get people back into the office. The workers themselves are wondering why the CEOs even care when things have been going great.

I’ll tell you why they care.

They care because the banks, investors, and hedge funds that own the public companies and have representatives on the company board that hire and fire CEOs care. These people are invested in all sorts of commercial real estate, if that office space isn’t rented, the value of the commercial buildings fall. If the value of commercial buildings fall, then the stock values of the companies that have them on their asset sheets fall. When they borrowed money against their assets in commercial real estate and stocks of these public companies for leverage they thought these things would always go up in value. If they go down, they will be on the hook for money they don’t have, so if they can keep employees in the office, then rent can be justified and if rent can be justified the assets can maintain their value.

At large scales this is what economists are looking at. Bankers and investors run much of the world, they aren’t looking at the insanity of doing something that is inefficient compared to the new paradigm, they are worried about losing money.

People are incorrectly attributing it to the CEO’s sunk cost fallacy. That’s not what this is. Big money stands to lose huge money when multi-year commercial leases expire and aren’t renewed and commercial real estate prices plummet.

The CEOs aren’t always as ridiculous as they seem, but sometimes we do ridiculous things to avert a major loss we see coming from a mile away.