5 ms·

I'm wondering if we are on the verge of a commercial property apocalypse. If rents are eventually forced down in large metropolitan areas it will wipe out billi

by Guthur 6y ago

I'm wondering if we are on the verge of a commercial property apocalypse. If rents are eventually forced down in large metropolitan areas it will wipe out billions of dollars in property wealth. Could make the GFC look like a blip.

godzillabrennus 6y ago
Commercial real estate is around a $16T industry in the USA: https://www.reit.com/data-research/research/nareit-research/estimating-size-commercial-real-estate-market-us https://www.reit.com/data-research/research/nareit-research/... Even with a correction in demand there will still be value in the property. The industry will not be wiped out.
- DevX101 6y ago
  30% market correction will effectively wipe out many players in commercial real estate. Even less than that for many. Keep in mind, real estate is often highly levered so these property owners still have to pay a bank their money.
  - baskire 6y ago
    They’d just be underwater. But if the property is cash flow positive, over time they’d recover.
- treyfitty 6y ago
  There’s evidence of properties in NYC which have been vacant for 7+ years. These properties, even with the pandemic, have not budged their rent. They simply do not care if they’re not making money. They would rather preserve their capital, bank on appreciation, and not deal with tenants than fall prey to deflationary pressures. The only explanation is the prevalence of some form of money laundering, an area I’m not an expert in.
  - pstuart 6y ago
    Not an expert either, but money laundering does seem to like real estate.
  - jarym 6y ago
    These property owners are going to become like the Bitcoin HODLers. Their approach is sound as long as they are just riding out bumps in an economic cycle but will fall apart when their is a societal shift. Commercial real estate is going the way of the newspaper industry - it will not go away, there will remain some successful examples, but the industry as a whole will be decimated.
  - vmception 6y ago
    that's not the only explanation. they are plenty of lit market public policy outcomes that promote irrational markets. its better that you aren't an expert in the lit market or the dark markets, god forbid the people form enough consensus to actually change it.
  - JumpCrisscross 6y ago
    > They would rather preserve their capital, bank on appreciation, and not deal with tenants than fall prey to deflationary pressures New York and San Francisco laws capping rent increases also deter rent decreases. Particularly if the decrease might wind up being temporary.
  - Guthur 6y ago
    They are reluctant to move the rent because commercial property value is highly dependent on the "perceived" rental value. Locking in low rents instantly wipes out the buildings value.
Shivetya 6y ago
The side effect is many metropolitan areas will be scrambling to make up loss tax revenue and if previous down turns are an example they are loathe to give up even questionable outlays. So this loss will be felt by investors and local governments I still suspect companies which own their office properties will be willing to give it up, it never ceases to amaze me the pride some executives put into having their own head quarters with all the amenities. Some come across as offended when workers want to extend the work from home situation all the while praising their people for doing so well while working from home.
code4tee 6y ago
Things will simply evolve. People said the same thing about industrial buildings in cities which are now thriving residential complexes. Lord and Taylor’s flagship store in Manhattan went bust and was going to become a WeWork, then when WeWork imploded the building was bought by Amazon and will become their offices. There won’t be a “property apocalypse” but there will be a “property evolution.” In cities with diverse economies and a strong talent base this evolution happens quite quickly. Elsewhere it happens more slowly, and thus it’s more painful, but it will eventually happen there too.
- mjayhn 6y ago
  That evolution is coming strangely close to us becoming company towns owned by billionaires. Little Vendorvilles everywhere. I wonder how much property Amazon will accumulate in the next few years. edit: Oh, yeah, I pay rent and insurance to Berkshire today, guess I'm there.
  - xwdv 6y ago
    Life could be better in company towns. They can create ecosystems of jobs that could better support the company's goals, and as the company reinvests funds to improve the quality of life and attract talent and labor, you could see improvements in things such as mass transit or perhaps a privatized police force with better accountability.
    - redshirtrob 6y ago
      That's an optimistic take (are you being sarcastic?). We've seen something similar with company stores in mining towns during the 19th and 20th centuries. They weren't exactly known for treating their residents (employees) fairly. I'd expect a much more sophisticated 21st century take on company stores before some libertarian utopia.
    - deleted 6y ago
      [deleted]
    - aneesh297 6y ago
cnst 6y ago
Not necessarily. For the prices to decrease, someone has to have to rent or sell. Many investors don't have such a need; especially in the commercial space. I would imagine companies like WeWork may actually come out ahead here; because if your own company doesn't provide you with a place to work away from home, you might still need an office somewhere.
- ttul 6y ago
  When my office lease is up next year, we will likely not renew. WeWork or similar is the likely new “office”.
- trimbo 6y ago
  > Many investors don't have such a need; especially in the commercial space. According to [1], as of 2015, 77% of commercial real estate is owned by private equity and REITs. Those types of investments primarily generate returns via dividends that come from rent. So it seems like most investors can't let them sit empty? [1] - https://www.thebalance.com/what-is-commercial-real-estate-3305914#:~:text=It%20stated%20that%20REITs%20own,equity%2C%20which%20owns%2043.7%20percent https://www.thebalance.com/what-is-commercial-real-estate-33....
  - cnst 6y ago
    Commercial real-estate leases are often much longer than residential, so, they won't be as affected as fast. As a result, there's also a whole bunch of subleasing going on in commercial RE, hence, it may end up being a whole chain of random third-parties taking the loss for the owners of the buildings (e.g., companies that need to move out of their office after outgrowing it, etc). Surprisingly, this might make an even better argument for the come-back of WeWork -- their whole model from the start was to makeover the buildings abandoned by the tenants. Likewise, it may not affect the sale price at all, because noone would want to tank their own REITs, even if the market itself is stale -- the owners have a vested interest in keeping the bubble afloat.
- adrianmonk 6y ago
  Some people do have a need, and some people don't. The people who do have a need will put their properties on the market. Their prices will undercut everyone else's. Anyone who was thinking of selling but doesn't urgently need to will delay until it's not so much of a buyer's market. But this means there will be a buildup in the number of people who have been waiting to sell. So prices will recover slowly because it will be necessary to chew through this backlog. But, as in any downturn, there are people who are sitting on cash and looking for bargains. They will buy up some of what's for sale. (Downturns always create chaos, and there are people who are financially ruined and other people who multiply their wealth dramatically.)
sulam 6y ago
The ticking time bomb with commercial property is the debt. Many commercial real estate ventures are leveraged to the hilt. This is not unlike the housing crisis, although hopefully less painful because some underlying structural factors are less extreme (the government hasn’t felt obligated to buy the debt, unlike with home mortgages).
- JMTQp8lwXL 6y ago
  The same can be said for so-called 'Zombie' corporations. Many of them aren't growing and subsist because they have access to large quantities of low-interest debt, and partially due to the fact they employ many people, and one of the Fed's mandates is to promote low unemployment rates. When a lot of commercial real estate is sitting un- or underutilized, that's less workers and economic activity occurring.
shmel 6y ago
Why is that bad? Billionaires will have fewer billions? Why is that apocalypse?
- mardifoufs 6y ago
  Because you're wrong? REITs and private equity are incredibly important for pension funds, funding insurance policies, sovereign funds , etc. To think billionaires would be the most impacted by a real estate collapse is incredibly naive and wrong. The financial system isn't some sort of simplistic billionaires vs the world game.
papito 6y ago
There will be some of that, but also - cubicles are coming back, so we are not going to be packed like sardines in noisy open-plan spaces. We might need all that space after all.
rasz 6y ago
Most people owning commercial property dont give a fuuu. Unleased stores are sitting on NY market for 5-7 years and prices keep going up. It will all just sit idle as parked capital, and keep appreciating in value.
aeternum 6y ago
I was thinking the same thing, however due to distancing requirements won't the companies that do maintain a physical office require significantly more space? We may see a decline in the popularity of space-efficient open office spaces.

by Guthur 6y ago

godzillabrennus 6y ago

Commercial real estate is around a $16T industry in the USA: https://www.reit.com/data-research/research/nareit-research/estimating-size-commercial-real-estate-market-us https://www.reit.com/data-research/research/nareit-research/... Even with a correction in demand there will still be value in the property. The industry will not be wiped out.

DevX101 6y ago
30% market correction will effectively wipe out many players in commercial real estate. Even less than that for many. Keep in mind, real estate is often highly levered so these property owners still have to pay a bank their money.
- baskire 6y ago
  They’d just be underwater. But if the property is cash flow positive, over time they’d recover.
treyfitty 6y ago
There’s evidence of properties in NYC which have been vacant for 7+ years. These properties, even with the pandemic, have not budged their rent. They simply do not care if they’re not making money. They would rather preserve their capital, bank on appreciation, and not deal with tenants than fall prey to deflationary pressures. The only explanation is the prevalence of some form of money laundering, an area I’m not an expert in.
- pstuart 6y ago
  Not an expert either, but money laundering does seem to like real estate.
- jarym 6y ago
  These property owners are going to become like the Bitcoin HODLers. Their approach is sound as long as they are just riding out bumps in an economic cycle but will fall apart when their is a societal shift. Commercial real estate is going the way of the newspaper industry - it will not go away, there will remain some successful examples, but the industry as a whole will be decimated.
- vmception 6y ago
  that's not the only explanation. they are plenty of lit market public policy outcomes that promote irrational markets. its better that you aren't an expert in the lit market or the dark markets, god forbid the people form enough consensus to actually change it.
- JumpCrisscross 6y ago
  > They would rather preserve their capital, bank on appreciation, and not deal with tenants than fall prey to deflationary pressures New York and San Francisco laws capping rent increases also deter rent decreases. Particularly if the decrease might wind up being temporary.
- Guthur 6y ago
  They are reluctant to move the rent because commercial property value is highly dependent on the "perceived" rental value. Locking in low rents instantly wipes out the buildings value.

Shivetya 6y ago

The side effect is many metropolitan areas will be scrambling to make up loss tax revenue and if previous down turns are an example they are loathe to give up even questionable outlays. So this loss will be felt by investors and local governments I still suspect companies which own their office properties will be willing to give it up, it never ceases to amaze me the pride some executives put into having their own head quarters with all the amenities. Some come across as offended when workers want to extend the work from home situation all the while praising their people for doing so well while working from home.

code4tee 6y ago

Things will simply evolve. People said the same thing about industrial buildings in cities which are now thriving residential complexes. Lord and Taylor’s flagship store in Manhattan went bust and was going to become a WeWork, then when WeWork imploded the building was bought by Amazon and will become their offices. There won’t be a “property apocalypse” but there will be a “property evolution.” In cities with diverse economies and a strong talent base this evolution happens quite quickly. Elsewhere it happens more slowly, and thus it’s more painful, but it will eventually happen there too.

mjayhn 6y ago
That evolution is coming strangely close to us becoming company towns owned by billionaires. Little Vendorvilles everywhere. I wonder how much property Amazon will accumulate in the next few years. edit: Oh, yeah, I pay rent and insurance to Berkshire today, guess I'm there.
- xwdv 6y ago
  Life could be better in company towns. They can create ecosystems of jobs that could better support the company's goals, and as the company reinvests funds to improve the quality of life and attract talent and labor, you could see improvements in things such as mass transit or perhaps a privatized police force with better accountability.
  - redshirtrob 6y ago
    That's an optimistic take (are you being sarcastic?). We've seen something similar with company stores in mining towns during the 19th and 20th centuries. They weren't exactly known for treating their residents (employees) fairly. I'd expect a much more sophisticated 21st century take on company stores before some libertarian utopia.
  - deleted 6y ago
    [deleted]
  - aneesh297 6y ago

cnst 6y ago

Not necessarily. For the prices to decrease, someone has to have to rent or sell. Many investors don't have such a need; especially in the commercial space. I would imagine companies like WeWork may actually come out ahead here; because if your own company doesn't provide you with a place to work away from home, you might still need an office somewhere.

ttul 6y ago
When my office lease is up next year, we will likely not renew. WeWork or similar is the likely new “office”.
trimbo 6y ago
> Many investors don't have such a need; especially in the commercial space. According to [1], as of 2015, 77% of commercial real estate is owned by private equity and REITs. Those types of investments primarily generate returns via dividends that come from rent. So it seems like most investors can't let them sit empty? [1] - https://www.thebalance.com/what-is-commercial-real-estate-3305914#:~:text=It%20stated%20that%20REITs%20own,equity%2C%20which%20owns%2043.7%20percent https://www.thebalance.com/what-is-commercial-real-estate-33....
- cnst 6y ago
  Commercial real-estate leases are often much longer than residential, so, they won't be as affected as fast. As a result, there's also a whole bunch of subleasing going on in commercial RE, hence, it may end up being a whole chain of random third-parties taking the loss for the owners of the buildings (e.g., companies that need to move out of their office after outgrowing it, etc). Surprisingly, this might make an even better argument for the come-back of WeWork -- their whole model from the start was to makeover the buildings abandoned by the tenants. Likewise, it may not affect the sale price at all, because noone would want to tank their own REITs, even if the market itself is stale -- the owners have a vested interest in keeping the bubble afloat.
adrianmonk 6y ago
Some people do have a need, and some people don't. The people who do have a need will put their properties on the market. Their prices will undercut everyone else's. Anyone who was thinking of selling but doesn't urgently need to will delay until it's not so much of a buyer's market. But this means there will be a buildup in the number of people who have been waiting to sell. So prices will recover slowly because it will be necessary to chew through this backlog. But, as in any downturn, there are people who are sitting on cash and looking for bargains. They will buy up some of what's for sale. (Downturns always create chaos, and there are people who are financially ruined and other people who multiply their wealth dramatically.)

sulam 6y ago

The ticking time bomb with commercial property is the debt. Many commercial real estate ventures are leveraged to the hilt. This is not unlike the housing crisis, although hopefully less painful because some underlying structural factors are less extreme (the government hasn’t felt obligated to buy the debt, unlike with home mortgages).

JMTQp8lwXL 6y ago
The same can be said for so-called 'Zombie' corporations. Many of them aren't growing and subsist because they have access to large quantities of low-interest debt, and partially due to the fact they employ many people, and one of the Fed's mandates is to promote low unemployment rates. When a lot of commercial real estate is sitting un- or underutilized, that's less workers and economic activity occurring.

shmel 6y ago

Why is that bad? Billionaires will have fewer billions? Why is that apocalypse?

mardifoufs 6y ago
Because you're wrong? REITs and private equity are incredibly important for pension funds, funding insurance policies, sovereign funds , etc. To think billionaires would be the most impacted by a real estate collapse is incredibly naive and wrong. The financial system isn't some sort of simplistic billionaires vs the world game.

papito 6y ago

There will be some of that, but also - cubicles are coming back, so we are not going to be packed like sardines in noisy open-plan spaces. We might need all that space after all.

rasz 6y ago

Most people owning commercial property dont give a fuuu. Unleased stores are sitting on NY market for 5-7 years and prices keep going up. It will all just sit idle as parked capital, and keep appreciating in value.

aeternum 6y ago

I was thinking the same thing, however due to distancing requirements won't the companies that do maintain a physical office require significantly more space? We may see a decline in the popularity of space-efficient open office spaces.