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A close relative of mine is a top real estate appraiser based in San Francisco, and she's terrified about what happens in Q2 2021, when leases will start termin
by sebmellen 6y ago
A close relative of mine is a top real estate appraiser based in San Francisco, and she's terrified about what happens in Q2 2021, when leases will start terminating en masse. She's had a call with the St. Louis Fed, as they're trying to get an idea of what this will look like. She thinks it will be a bloodbath, and deal a death blow to corporate real estate (and other capital markets by extension).
- antognini 6y agoWhy will leases be terminating in Q2 2021 in particular?
- sebmellen 6y agoThis is mainly a concern for one year leases that were renewed this March/April/May, which won't be renewed in 2021. There are many companies which budgeted for a few weeks or months of work from home, now they're transitioning permanently and the office space they were using is no longer needed.
- gruez 6y ago>This is mainly a concern for one year leases that were renewed this March/April/May, which won't be renewed in 2021 Do leases tend to get renewed in Q2?
- sebmellen 6y agoIt depends on when the lease was signed. AFAIK there's a pretty even distribution between quarters. Here's an article from this year (2020) about notable leases signed in Q2: https://www.bizjournals.com/sanjose/news/2020/07/10/six-notable-cre-leases-signed-in-silicon-valley-q2.html https://www.bizjournals.com/sanjose/news/2020/07/10/six-nota....
- freehunter 6y agoIf they signed a 12 month lease in Q2, then yes.
- bobbyi_settv 6y agoA 12 month lease for commercial real estate in SF?
- dguaraglia 6y agoThat's not uncommon. Our office in North Beach was a 12-month deal. In fact, contracts tend to be longer (24 months or so).
- ComputerGuru 6y agoI think that was the point. 12 months is atypically short.
- rightbyte 6y agoOf leases 24 months long the average lease should be 12 months in right now (given steady state). I.e half of them expire in a year. Lets say that they realised this summer that things will be different then the effect should gradually start to show almost immediately.
- sokoloff 6y agoI think that was GP’s point. We have a few one-year leases on small spaces, but most of ours are 5 year leases, usually with renewal options, sometimes with break options (for $$) at 3 years.
- freehunter 6y agoOr anything that‘s a multiple of 12. If the lease was signed in Q2 of any year, it will be up for renewal in Q2.
- astura 6y ago
- enigmo 6y agothe scope of the pandemic wasn't yet clear in Q1
- nostrademons 6y agoBut the decision to terminate happens when the lease expires at any point after the pandemic happened, not exactly as the pandemic started. If you signed a 1-year lease in 2019Q3 and then realized that you're going to permanent WFH in 2020Q2, you let the lease expire in 2020Q3 and count yourself lucky. So the impact of this should be spread across the year following lockdowns/wfh, not all concentrated in 2021Q2.
- antognini 6y agoShouldn't we already be seeing this from leases that were signed in Q3 2019?
- sebmellen 6y agoYes, and we are seeing it, but there are many leases continuing until Q2 2021 (and beyond). The past few months have seen a slow and gradual decline, but a fair number of leases are still being paid and are locked in. Q2 2021 is when that decline accelerates and drops off a cliff.
- cure 6y agoOne year leases on commercial office real estate?!? That's unheard of around here (Boston). You'll be lucky if you find a commercial landlord who will rent to you for 5 years instead of the more usual 7, 10 or 20. Subleases are a different story, of course.
- sebmellen 6y agoSorry for my lack of semantic nuance. Most of the leasers rely on payments from their subletters to pay their leases, so the effects will translate over in either case, just with more "buffer time". There are also a fair amount of 1-year direct commercial leases, depending on the area.
- CamperBob2 6y agoBecause that's when businesses stopped signing new ones, I imagine.
- faeyanpiraat 6y agoEdit: Deleted: realized I replied to old comment
- hogFeast 6y agoThis has happened every few years in corporate real estate for the past half century (Sam Zell's biography is a good take). Every. Single. Time. Valuations too high. Debt too high. Equity too low. I am pretty cynical because I have read a bit too much history and seen this so many times working in investment management but...so what? Some rich people lose a ton of money...okay? Capitalism has losers. You lose. Also, in the last crisis, a ton of people (particularly Blackstone) made a ton of money buying huge deals at the very top of the market. None of this excess came out of the market. Lots of people who borrowed tons of money were just able to take their paper to the Fed, and keep playing.
- sebmellen 6y agoPoint taken, but I don't think you're taking into account the monumental impact of COVID-19. We've never had such a large, immediate, and impactful shift to work culture. Working remote was still a niche idea at the beginning of 2020, now it's ubiquitous. That has never happened before.
- hogFeast 6y agoAgreed. Very hard to estimate that effect. With corporate real estate, it is inherently local (you cannot export an office) so the question is about the swings in vacancies. Have some markets seen ~15% vacancies before? Yes, corporate real estate is very cyclical, no-one builds for years, and then the market adds 40-50% in a few years. But when it gets to 30-40% then you are probably looking for examples outside the US...and SF will be the worst-hit market, others should be less. But...the world will move on, write down the value of property, assign losses, pay off remaining creditors, the world moves on...I don't think anyone could say a fault of the last ten years has been that shareholders/creditors were forced to swallow too many losses. The strength of a capitalist economy is that losses can be assigned quickly, and everyone moves on...in theory.
- sebmellen 6y agoYou're right, things will move on, and I am not (personally) all that worried. Nor are the creditors who can afford to eat a loss. My concern is more about the ripple effects. Many low-skilled workers rely on service work, and servicing corporate real estate is a real industry (janitorial services, managerial duties, parking lot attendants, plumbers, even construction). They are already having a pretty hard time of it, and if this industry vanishes, "moving on" may mean going out on the streets. San Francisco, Los Angeles, New York, and San Diego have enough homeless already.
- marinhero 6y agoMy friend who’s also a realtor in The Bay says the exact same thing. I hope they are wrong and just being fatalists!
- api 6y agoThere is a mass exodus of people from HCOL cities as jobs go virtual as well as a massive amount of office downsizing. Residential real estate may be okay in the cities receiving this exodus in the South, Midwest, Texas, Idaho, etc. but as for HCOL cities I’m just not sure. There may be enough demand to at least cushion it. Commercial will definitely be a bloodbath of epic proportions, especially in formerly hot markets. Edit: too early for good stats but here are some cities that seem to be receiving HCOL expats as determined by the highly scientific process of observing anecdotes: Phoenix, Santa Fe, Boise, Denver, Dallas, San Antonio, Austin, Atlanta, Cincinnati, Pittsburgh, Chicago... I’m sure that list is not exhaustive. Those are just some I have seen. Those vary in terms of how not-HCOL they are but all of them are much less expensive than California, NYC, or the Seattle area. Much better places to live if you don’t have to live somewhere with $500k to $1.5m “starter homes” and other absurdities. Now that we are discovering that we can actually use this Internet thing, good riddance to that madness.
- brian-armstrong 6y agoHousing prices are actually already trending back upward in the bay area. I don't think there will really be that much of an exodus. Your company might let you retain most of your salary post-relocation but once you change jobs you'll have far fewer prospects. Also the internet doesn't help with timezone differences.
- cm2187 6y agoMight be offset by money printing
- api 6y agoHouse prices are being buoyed by insanely low rates, but if offices are downsizing CRE is toast. As for tech hubs, they are now only economically rational if you are high up at a large FAANG or similar company that is able and willing to pay huge salaries. Startups, bootstrappers, and labors of love are not going to happen there unless they are lavishly funded or only comprised of straight out of college folks willing to live on couches.
- 6y ago
- erosenbe0 6y agoIn terms of suffering, I'm more worried about the loss of support workers and supporting businesses over the long-term. Especially in a place like Chicago where the installed base of offices is much much larger than SF, and where portions of the future sales tax revenue has already been securitized and sold to investors.
- deleted 6y ago[deleted]
- reaperducer 6y agoDevelopers in Chicago are building as fast as they can right now. It's counterintuitive to people on the outside, but from what I read, it's because labor, material, and capital are dirt cheap. So the developers are putting up new skyscrapers and other mega-developments so they're in a good position to take advantage of the recovery. A new 57-story office tower opened just last week: https://www.chicagoarchitecture.org/2020/10/18/a-new-skyscraper-opens-in-the-loop/ https://www.chicagoarchitecture.org/2020/10/18/a-new-skyscra... Dozens of new residential towers have been announced, and at least a dozen are under construction, including one that's almost finished at 101 stories tall. https://www.chicagoarchitecture.org/2020/10/05/sit-back-breathe-deep-and-enjoy-the-vista/ https://www.chicagoarchitecture.org/2020/10/05/sit-back-brea...
- jtbayly 6y agoI was under the impression that building materials are very expensive right now.
- lotsofpulp 6y agoYou are correct, metal prices are up 3x and wood at least 2x. Building might be happening due to demand, but not because the materials are cheap. It might be possible that labor in big cities might be cheaper, but I doubt it.
- swsh 6y agoI think you will find that material prices are <20% of the capital cost.
- Spooky23 6y agoI wouldn’t. Better to run it into the ground — this stuff will get bailed out to protect the banks.
- ChuckMcM 6y agoThis is a good point. I explained it to my mother with an analogy to a cruise ship heading toward shore at full speed. Everyone knows this means the ship will run aground, but few appreciate that given the mass (and thus momentum) the ship would travel far inland just scraping across the ground. The coming economic response to the pandemic has the potential to be like that, basically 10x the 2009 "great recession" and a lot of second and third order effects. Hard to predict what to do and it's nice to hear the Fed doing their research. The TARP program in 2009 was pretty creative and managed a pretty big thwack without nearly as much pain as their could have been.
- deleted 6y ago[deleted]
- vpass10 6y agoVideos on YouTube actually show that large ships stop astonishingly quickly when driven onto shore (mostly scrap yards).
- ChuckMcM 6y ago(mostly scrap yards) -- generally much less mass than a ship that is more seaworthy (a lot of early salvage happens before they get to the scrap shore, ships aren't fully loaded, look at their waterline in the videos). And most importantly much much less velocity (1/2mv^2 goes down rapidly with slower velocity). What is is truly impressive is that they estimate the mass, and know very closely what speed to get them too in order to solidly ground them without wasting a lot of energy getting them going faster than necessary.
- Moru 6y agoThe analogy fails to account for the captains investment in wings that makes the ship fly over land (remake offices into appartments with dirt cheap labour).
- jsjohnst 6y ago> analogy to a cruise ship heading toward shore at full speed. Everyone knows this means the ship will run aground, but few appreciate that given the mass (and thus momentum) the ship would travel far inland just scraping across the ground. Are you sure you aren’t basing that analogy on the movie Speed 2?
- kristopolous 6y agoThe other week I was on real estate sites and I saw a bunch of "apartments" in SOMA that just looked like offices with some hastily slapped on anemities, as if there was some "wink wink nudge nudge" going on and they had to call the place an "apartment" for some city ordinance but everyone knew it was an office. However, I realized it was exactly the opposite. These people were taking their office spaces and desperately chopping them up and getting up to code so they could be leased as apartments.
- FreakyT 6y agoThat actually seems like a really good idea — I’d love to see more housing in the “downtown core” areas of SF, which are like 95% office space.
- throwaway9980 6y agoEspecially good if the converted office space also provides a good work from home environment. Everyone is working from home and those that can are scrambling to expand their houses to suit a new lifestyle.
- bergstromm466 6y ago> Especially good if the converted office space also provides a good work from home environment. Or... you know... just give homeless people housing?
- adrianN 6y agoIs there data supporting the conclusion that lack of housing is what causes homelessness? I always thought that it was more of a failure of the social safety net.
- throwaway3699 6y agoLack of jobs and crushing taxes more like. Social safety nets aren't all they're cracked up to be, and leaves people trapped in that system forever.
- hn_throwaway_99 6y agoI think the data from the article on subleasing really supports this. The absolute explosion of all this unused office space available for sublease means there are already loads of companies who wish they could escape their rent payments, and very few of them will probably want additional space any time soon.
- arbuge 6y ago> and she's terrified about what happens in Q2 2021, when leases will start terminating en masse. I thought the general expectation, or at least the hope, is that that's about when things start to go back to normal.
- uptown 6y agoWhat is normal? If companies can be as productive (or close ) without the expensive office space - would they all go back to what had been considered “normal”? I doubt it.
- baby 6y agoturn it into affordable housing :) ?
- SilasX 6y agoAt risk of extreme naivety, why do failed real estate investments merit Fed support and attention? I thought they were just for maintaining a sound dollar and liquidity and the financial system, not charity for real estate kings.
- scarmig 6y agoThe central component of the American Dream is that, once you're rich, the government will do everything in its power to make sure you remain rich.
- deleted 6y ago[deleted]
- greesil 6y agoThe best government money can buy.
- tomcam 6y agoPlease describe that mechanism for me.
- greesil 6y agoWall Street bailouts, letting corporations exfiltrate revenue to off shore tax havens, defunding the IRS, oddly specific tax loopholes, tax cuts on the wealthy, letting lobbyists write the laws. That's just from thinking about it for ten seconds.
- TearsInTheRain 6y agoIt's known as "the Fed put". Whenever rich people have taken on too much risk the fed has been printing money to keep asset prices high so no one gets hurt. Im sure you know that the Fed is even directly buying corporate bonds now. This is paid for by main street through the inflation tax.
- KenoFischer 6y agoThe Fed does a lot of macroeconomic modeling and forecasting, so their analysts being interested in the effects of the pandemic on particular sectors of the economy doesn't sound particularly unusual (I have no insight in the the particular circumstances referenced in the parent comment of course).
- ryanmarsh 6y agoI’d she’s based in SF why didn’t she contact the SF Fed?
- culopatin 6y agoDifferent Feds do different things. St Louis Fed I believe is strong in data analysis and forecasting.
- dredmorbius 6y agoThis. I looked at various online domains a few years back, and STL Fed publishes far more articles than the rest of the Federal Reserve branches. ~106k STL vs. 6--8k for others. federalreserve.gov publishes about 1/2 what stlouisfed.org does. https://old.reddit.com/r/dredmorbius/comments/3hp41w/tracking_the_conversation_fp_global_100_thinkers/ https://old.reddit.com/r/dredmorbius/comments/3hp41w/trackin...
- sebmellen 6y agoShe was contacted by them based on an article she wrote, she didn't contact them.
- fred_is_fred 6y agoOh relax. They're not going to implode the buildings and nobody is going too die. Rents will fall, some bond holders will default, but at some cost point that real estate has value to someone. Rents are not going to zero.
- pbourke 6y agoBasically this. Lots of people leave. Lots of companies go fully remote or are wound up. Lots more people and companies get more bang for their buck in the real estate market. Some real estate businesses tank. The market finds a clearing price.
- LegitShady 6y agowe'll just have google/apple/etc buy out the whole city because they have the cash and nothing to do with it.
- deleted 6y ago[deleted]
- anigbrowl 6y agoI'm quite interested in what your relative thinks might be the impact of the looming property tax reform in CA; if the ballot initiative passes next month then commercial real estate will no longer be able to enjoy the prop13 caps by using pass-through entities to own the buildings, and changing the beneficial owner of the real estate holding corporation instead. Plunging rents plus escalating tax liabilities seem like a perfect financial storm.
- clams 6y agoI would love real estate markets to crash in SF and NYC. My body is fucking ready.
- greesil 6y agoCommerical real estate != residential, I wouldn't get your hopes up unless demand drops, which it totally could.
- JMTQp8lwXL 6y agoIt seems unlikely that a commercial real estate crash wouldn't have second-order effects on residential. After all, if none of this commercial space is getting used, there is less of a reason to be interesting in the residential housing that surrounds said commercial space.
- kelnos 6y agoDepends on what is meant by "commercial". If we're talking about retail and restaurants and bars, then sure, the loss of those things will make it less attractive to live in/near those locations. But if we're talking about office buildings, and the reason for the collapse is because people don't need/want offices at all (not because those offices are moving elsewhere), then I think it'll have a much smaller effect on the residential markets. What I think has a higher chance of hurting residential markets would be hiring moving away from HCoL areas because companies believe that most workers can be remote (and workers in LCoL areas are cheaper comp-wise). That hiring movement already seems to be happening, though SF home prices haven't changed much. There might just be a delayed response to that, though.
- nostrademons 6y agoWe're seeing a shift in demand across different sectors of the real estate market, not a destruction in demand. The market for office space is cratering, as is the market for 1BR apts/condos in dense urban cores. But most of the people who would've occupied those buildings are still working, they're just working from home. The market for SFHs (particularly large suburban ones with home offices) is exploding. I'm seeing some in Mountain View and the SF peninsula go for ~$350-500K (up to 15-18%) over asking.
- rhizome 6y agoI tell you what: if that comes to pass and I'm working remote, I'm looking forward to getting a sweet lease on a 150-200 sqft solo office with a nice view.
- javiramos 6y agoSame in Boston —- the office space market is a bloodbath. I have little knowledge of the commercial office space market but it’s not difficult to imagine how mass defaults in this sector could trigger a crisis.
- mattparcens 6y agoDon't know squat about corporate real estate, but why would lease terminations occur en masse in Q2 2021? I would expect that a sliding window of leases would be expiring all the time, and that the bloodbath would be slightly more gradually occurring right now.