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SF commercial real estate genuinely feels like it's a slow-motion trainwreck that nobody can stop. As leases end, there's just no way that owners will be able t

• naillo 3y ago
  I would honestly bet it'll be good for the economy overall (a reset to healthy prices) not a ripple effect to cause an overall american crash
  • dantheman 3y ago
    Correct, it's not the bust that's the problem - it's the boom. The buildings were never really worth that much.
    • colinmorelli 3y ago
      There’s no “truth” to what a property is worth. It’s worth what the market will pay for it. But regardless of that, whether the values were inflated because of a market flush with cash or not, it doesn’t change the fact that crashes can and do have ripple effects.
      • sremani 3y ago
        Commercial Real Estate is valued based on Cashflow/Income (correct me if I am wrong). San Francisco should look at examples like One AT&T in STL, which was once worth 400 million that got sold for 4 million or so a year ago. https://en.wikipedia.org/wiki/909_Chestnut_Street https://en.wikipedia.org/wiki/909_Chestnut_Street
        • seanp2k2 3y ago
          4 million?!? That’s like the price of a normal old Victorian in SF if you’re lucky, and the people pooing on your front porch come free with that.
          • xnx 3y ago
            I'm guessing it must've included a lot of back taxes too?
      • SantalBlush 3y ago
        If you purchase an investment asset at a certain price with the expectation of earning a specific future cash flow on it, and your cash-flow target misses, you can absolutely say in retrospect that your investment wasn't worth what you paid for it. If you buy an ice cream cone, and it turns out to taste bad, you can say the ice cream cone wasn't worth what you paid for it. People miscalculate a product's worth all the time. The "It’s worth what the market will pay for it" mantra is quasi-economic nonsense. It isn't true.
        • colinmorelli 3y ago
          Yes, hindsight changes perception of past decisions. But there is no "end" to the economy. It ebbs and flows. Maybe today this is "worth" 75% less, but what if next year at this time it's "worth" 25% more? Now suddenly it was "worth" even more than you originally paid for it. This it the problem with how you're defining worth: it's going to change depending on when you, in the future, decide to ultimately sell it. But that's not a particularly useful definition of worth. Worth measures a moment in time. We can only price something based on what we know about it today and what we predict about it in the future, and we're not perfect predictors of the future. I think about "worth" using the only definition of worth that is particularly helpful (to me): the amount you could get for the asset if you were to sell it now. Part of that decision almost certainly a prediction of what you believe an asset will be worth in whatever time horizon you plan to sell it. You may be right or wrong about that prediction. But it doesn't change that in the moment at which your purchased the asset, it was "worth" that to you/the market. The reality is that many, many people were under the perception that the value of these assets would continue to appreciate as they were all collectively willing to pay what we now believe to be high prices for them. In hindsight, we may all have been wrong. But in that moment, I could absolutely have sold the asset for the price I paid to purchase it. So it certainly was "worth" that when the transaction happened.
          • thunky 3y ago
            > So it certainly was "worth" that when the transaction happened. Right, but it's also fair to say that in retrospect that the "worth" at the time of the transaction was incorrect since it was based on an estimated prediction of the future (as you said), which ended up being wrong.
      • cannabis_sam 3y ago
        In the same way, any ripple effects are just the natural consequence of a market economy. We chose this, and we’re getting exactly what we ordered.
      • diogenescynic 3y ago
        >There’s no “truth” to what a property is worth. It’s worth what the market will pay for it. There are historical charts and indexes that compare the price of square foot to inflation, wages, etc. There may be no one single universal truth, but there is a baseline for what real estate should cost (relative to everything else).
  • idopmstuff 3y ago
    My only hope is that because leases aren't all going to come due at once, there won't be a total collapse because everyone's simultaneously selling at fire-sale prices.
• calvinmorrison 3y ago
  Those poor landlords shouldn't have made risky investments. Thoughts and prayers. It also sounds like there's a lot more value saved by not having an office downtown with more money to be spend on QoL improvements than renting office space
  • idopmstuff 3y ago
    The problem isn't the effect on the landlords - it's the effect on everybody else. > more money to be spend on QoL improvements than renting office space Who is going to spend money on QoL improvements? The corporations who would've spent it on office space will keep it as profits, not invest it in the city of San Francisco. The city will have much less money to spend on QoL because of greatly diminished tax revenue.
    • calvinmorrison 3y ago
      Assuming somehow spending money on rent is a more efficient allocation of resources than profits is absurd. For us without an office we're able to hire several more team members and embrace fully remote with east and west coast staff allowing us to expand our service coverage an additional 3 hours without having to ask team members to work outside of normal hours
• necovek 3y ago
  Perhaps they can be turned into living spaces instead, which were already at a premium in San Francisco.
  • throwaway173738 3y ago
    They responded to that in the article. If you live in San Francisco you should contact the board of supervisors and give them the quote from within the article that permit fees and other costs put the conversion costs well over what the owner could recover.
    • vlovich123 3y ago
      The city should figure out how to reasonably reduce that cost (waive permitting costs, optimize the efficiency of the permitting process, etc)
      • BurningFrog 3y ago
        A lot of people with a lot of power make a lot of money from those costs.
      • jerf 3y ago
        Some of that cost isn't really waiveable. Commercial spaces aren't residential spaces. For instance, I've heard that commercial buildings generally run the pipes only up the middle of the building, since they can centralize bathrooms and kitchens. Residential space is not generally so amenable. Residential spaces need other heating setups. Residential spaces have different load characteristics based on where the furniture goes. There's a lot of real differences between commercial and residential buildings, and just like with computer code, as you scale up the building minor differences a single-family home owner would ignore become significant differences become vast differences. In theory you could go all Mad Max and give them permissions to just start throwing up walls, creating spaces with communal bathrooms, and just dealing with it, but the amount of regulatory work to do that is pretty substantial. Even if you could get the agencies to agree to it in principle, a massively uphill battle since you're basically asking them "Hey, will you agree that you and your mission are worthless and irrelevant inside my building and pretty please promise to not worry about whether other people will start asking questions about what exactly it is you do (including the legislative bodies that provide your budget) and why it is they have to conform but I don't?", they'd immediately start putting their fingers back in the pie anyhow.
• kalkin 3y ago
  It does seem likely there's more to come, and what if anything can be done to mitigate the impact on the city's economy is an interesting question. Reasoning about that probably requires some careful disentangling of the different inputs - housing policy, remote work trends, recession and tech layoffs, etc. It's too bad this piece just takes the opportunity to launch into a list of generic conservative complaints about SF policy, which were equally applicable when rents were skyrocketing. They seem to have forgotten that it was all supposed to be Chesa Boudin's fault... Bring him back, he was better for the office market!
• vlovich123 3y ago
  It’s bad but ironically prop 13 (which I personally think is a problem) is actually helping SF here because it never had that money to begin with. Of course a smart city would bank all the profit into an emergency fund and so prop 13 would be net negative (I think California generally has done this as a state but not sure about SF). The statistic I read is about 50% of commercial buildings would have an impact on SF’s budget (ie they would drop below their initial purchase price). As for the rippling out into the banking sector, it’s plausible because it’s not just SF that’s a problem. All major cities are likely affected by this phenomenon. Cities would have to start regulating employees to go into work but I think that would be politically challenging for any politicians who attempt that.
  • dragonwriter 3y ago
    > It’s bad but ironically prop 13 (which I personally think is a problem) is actually helping SF here because it never had that money to begin with Its not actually helping, its just changing the route that the impact from the problem takes to hit city revenues. What Prop 13 does to revenues (both the very low nominal rate limit and the assessment increase limit, though people always talk about the second and ignore the first) means that San Francisco relies on other revenue streams than property taxes, such as income abd sales taxes (local and formulaic distribution of state revenues) but these streams respond to the same broad forces (and often with much higher volatility.)
• samstave 3y ago
  >no way that owners will be able to re-rent those buildings at anything close to the same price. Good! they were gouging for decades. Also, why has nobody talked about all the tax incentives given to twitter to build their HQ where it is... what happened to all those tax incentives?
• bradleyjg 3y ago
  SF is going to lose a lot if income at a time when the quality of life is already greatly suffering there In the boom decades many American city governments have become incredibly, grotesquely inefficient. Voters should now prioritize basic competence over ideological purity so that they can get on a better footing.
  • idopmstuff 3y ago
    SF is particularly tough for this - they've built up so much structural inertia in their government that even if you get someone who's incredibly competent, they're still wildly unlikely to get anything done. I actually think pretty Breed is a pretty good choice for the job, but I have no faith whatsoever in her ability to create meaningful change because of the system she's working in.
• jerf 3y ago
  "a lot of those buildings have large loans against them that may well become greater than the value of the buildings" You can drop the "may well". They are, right now, full stop. Massively underwater. The so-called "Harvard Business School types" always advocate for businesses to take on a lot of debt to get that sweet sweet leverage, and a lot of real estate has been mortgaged for a long time. That's not really new. But prolonged zero-percent interest rates made it both extremely appealing by making it seem like there was no downside: Don't get enough rents? It's OK, you can always roll over your debt for virtually free and try again later. 0% interest is deceptively close to real money if you get too far into "Harvard Business School" analysis and detach from reality too much... but it isn't real money. Enough people made this analysis that prices pushed up in the commercial space just like residential; in theory, at super low interest rates the value of the buildings would converge on the rents being able to cover only the interest, because someone would bid them higher until they reach that point. Don't have to worry about principal, can always roll that over. But they don't get fixed-rate 30-year-mortgages in that space. Honestly, nobody does except homeowners in the United States. When the interest rates finally go up, you can't even come close to covering the interest on those rents. The cascade of all of that happening to the entire market at once is pretty severe. So in this scenario, the businesses owning these buildings go bankrupt pretty quickly once rent has to come down at all. But that's not the real problem. Those businesses dissolve, but somebody else acquires the assets generally. The problem is that when they dissolve, they take their mortgage payments with them. Now the mortgage the bank is holding is worthless. They get to repossess a building in a rapidly deflating market. They are not particularly excited about this. As a result, the bonds for this sort of asset get marked down even more. Fortunately, the American banking system is strong, sound, resilient, and well-capitalized, I am reliably assured. So it's not a problem that the $2.9 trillion in commercial real estate loans the banking system holds as of May 10th [1] are looking at pretty significant haircuts and massive loss of collateral. (Not necessarily as bad as SF, being the biggest bubble it'll see some of the biggest drops, but definitely large double-digit percentage drops are going to be the norm across the board.) The banks are doing strongly and soundly in all their other metrics so they'll be able to handle this just fine. [1]: https://www.federalreserve.gov/releases/h8/current/ https://www.federalreserve.gov/releases/h8/current/ , Table 2, line 15, last column.
  • 3y ago
• ip26 3y ago
  Going by the StrongTowns archives, what will happen when these properties go underwater is the rent will be held the same and the building will be vacant. Writ across the entire office space of San Francisco, the result will be a disappearance of foot traffic and empty districts. Reason being the property financing is a function of market rent. Short term balloon mortgages are commonly used. If the rent for the space falls, when it comes time to refinance, you won’t be able to get a loan to cover your previous balloon payment, making you insolvent. Solution: never lower the rent, even if it means leaving the building vacant. Slowly bleeding is better than instantaneous bankruptcy.
  • Atheros 3y ago
    Who is making these loans? Do they know something we don't? Or do they just think that they'll be bailed out when it all goes bust? Last time the banks were selling the loans to other people. Is that happening again this time? This can't-lower-the-rent phenomenon is well documented at this point so I'm just having trouble figuring out why anyone with money is willing to continue taking on the large risk with limited upside (the value of the buildings).
• pclmulqdq 3y ago
  The loans against these buildings are my biggest concern here - these building owners may be about to default en-masse at a time when loan holdings are a big vulnerability to banks. That may have some weird systemic consequences like it did with housing. The city governments of SF and NY (which seem to have the biggest problems here) have honestly just gotten too big and will need to deal with the pain. The people living in the cities will survive, and honestly may have better quality of life when rent gets cheaper.
  • shagie 3y ago
    A financial YouTube blogger that I watch (hedge fund manager, a university professor and a former investment banker - https://www.youtube.com/@PBoyle/featured https://www.youtube.com/@PBoyle/featured ). He seems to have the credentials ( https://www.kcl.ac.uk/people/patrick-boyle https://www.kcl.ac.uk/people/patrick-boyle ) and his videos are straight forward and accessible and not trying to sell you anything (other than the clearly identified paid sponsorship). His most recent video is on commercial real estate - https://youtu.be/5QtCC6eUn-k https://youtu.be/5QtCC6eUn-k
• seanp2k2 3y ago
  End CA Prop 13 benefits for businesses or make them pay all the difference in back taxes when they sell the property. That would have the potential to massively help the budget and make things more fair for newer businesses moving in, so they wouldn’t be stuck trying to compete with businesses that enjoy a tax bill that at might be 1/20th of theirs.
  • readthenotes1 3y ago
    San Francisco's problems have a lot more to do with expensive garbage can/bus-stop graft than Prop 13. https://missionlocal.org/2021/09/san-francisco-garbage-can-designer/ https://missionlocal.org/2021/09/san-francisco-garbage-can-d...