6 ms·

If that's true, we should expect office work to blow over in <=10 years when the leases expire.

toomuchtodo 3y ago
On the contrary, it’ll happen much sooner. About $626B in debt is coming due for debt collateralized by office buildings in the near term (my note: refinancing? at these interest rates? hooboy). I'd expect much more rapid consolidation, office demos, and conversions to residential considering the financial pain. > Landlords who try to hang on and weather the storm are likely to take a bigger hit than those who cut their losses more quickly, according to Bitner. > “There’s going to be a reckoning,” he said, “and everybody that waited to deal with the problem is going to regret they did.” With my apologies to Marie-Antoinette, "Let them take haircuts." https://www.bloomberg.com/news/articles/2023-08-23/landlords-with-1-2-trillion-of-debt-face-rising-default-risks https://www.bloomberg.com/news/articles/2023-08-23/landlords... | https://archive.is/2oRH8 https://archive.is/2oRH8 (Landlords With $1.2 Trillion of Debt Face Rising Default Risks) https://news.ycombinator.com/item?id=36901012 https://news.ycombinator.com/item?id=36901012 | https://archive.is/ELJET https://archive.is/ELJET (US Office Space Is on Track to Shrink for First Time on Record)
- vsareto 3y ago
  >conversions to residential There's going to be a rude awakening if they think that's a good solution
  - toomuchtodo 3y ago
    Cost is $100-$500/sq ft. Sometimes the math pencils out better than demoing the building or eating a loss keeping it in service as office, especially if local govs are giving incentives to keep the potential economic benefits in the area. No emotions, build a model, execute on the most favorable scenario. It's just an asset. EDIT: @bbor Absolutely. I believe the challenge is everyone's incentive is inertia. Cities don't want to lose tax dollars and economic activity, even though they will. Asset owners don't want to take haircuts, even though they will. I'm a strong union supporter so workers have agency over their working arrangements, versus being dragged back to the office because some bro who lucked into leadership says "because I say so." Rarely does anyone include happiness and quality of life in these metrics and models, which is unfortunate. Hope this helps.
    - bbor 3y ago
      Do you think there’s any room here to add a “what would be best for society” metric to this analysis, beyond just “what earns me the most money”? Obviously this realistically doesn’t happen, just curious on your stance, given your matter-of-fact take
- TuringNYC 3y ago
  >> On the contrary, it’ll happen much sooner. About $626B in debt is coming due for debt collateralized by office buildings in the near term Not quite, I dont think. If defaults happen, the new owners get the building at lower prices and thus will be willing to lease at lower prices...making RTO more feasible for companies.
  - toomuchtodo 3y ago
    > the new owners get the building at lower prices Who will make these loans? Lending has dried up for office space, and mid sized banks are in distress over these debts. Maybe PE or hedge funds can piece financing together, but without easy loans from banks, financing will be costly, impairing what purchase price you offer. https://www.reuters.com/business/finance/us-banks-sink-concerns-about-office-real-estate-loans-2023-05-31/ https://www.reuters.com/business/finance/us-banks-sink-conce... https://www.costar.com/article/328997282/big-us-banks-pull-back-on-office-and-apartment-lending https://www.costar.com/article/328997282/big-us-banks-pull-b... https://www.bizjournals.com/cincinnati/news/2023/06/27/fifth-third-office-real-estate-lending-halt.html https://www.bizjournals.com/cincinnati/news/2023/06/27/fifth... https://www.axios.com/2023/03/21/small-bank-struggles-could-hit-the-real-estate-market-hard https://www.axios.com/2023/03/21/small-bank-struggles-could-... https://www.ft.com/content/a77695ac-a516-4654-8e0f-5aeb4f4fff71 https://www.ft.com/content/a77695ac-a516-4654-8e0f-5aeb4f4ff...
    - TuringNYC 3y ago
      >> Who will make these loans? Lending has dried up for office space Once the current owners default, the banks own the buildings. They dont have the capital to carry the buildings, so they will fire-sell the buildings. someone will buy the buildings for sure, because if you fire-sell it inexpensively enough there will be buyers. There are numerous buyers, especially sovereign funds who would buy at a sufficient haircut of peak value. Just like the 2008 resi crisis, there were fire sales at 10% of original value. It isnt clear what the "recovery value" is for Commercial Real Estate, esp office buildings, but it may be so low that lenders are willing to lend. Also, it may be so low that syndicates buy outright.
- closeparen 3y ago
  Sucks for CRE investors but if offices become cheap, won’t employers be even more inclined to keep them?

On the contrary, it’ll happen much sooner. About $626B in debt is coming due for debt collateralized by office buildings in the near term (my note: refinancing? at these interest rates? hooboy). I'd expect much more rapid consolidation, office demos, and conversions to residential considering the financial pain. > Landlords who try to hang on and weather the storm are likely to take a bigger hit than those who cut their losses more quickly, according to Bitner. > “There’s going to be a reckoning,” he said, “and everybody that waited to deal with the problem is going to regret they did.” With my apologies to Marie-Antoinette, "Let them take haircuts." https://www.bloomberg.com/news/articles/2023-08-23/landlords-with-1-2-trillion-of-debt-face-rising-default-risks https://www.bloomberg.com/news/articles/2023-08-23/landlords... | https://archive.is/2oRH8 https://archive.is/2oRH8 (Landlords With $1.2 Trillion of Debt Face Rising Default Risks) https://news.ycombinator.com/item?id=36901012 https://news.ycombinator.com/item?id=36901012 | https://archive.is/ELJET https://archive.is/ELJET (US Office Space Is on Track to Shrink for First Time on Record)

vsareto 3y ago
>conversions to residential There's going to be a rude awakening if they think that's a good solution
- toomuchtodo 3y ago
  Cost is $100-$500/sq ft. Sometimes the math pencils out better than demoing the building or eating a loss keeping it in service as office, especially if local govs are giving incentives to keep the potential economic benefits in the area. No emotions, build a model, execute on the most favorable scenario. It's just an asset. EDIT: @bbor Absolutely. I believe the challenge is everyone's incentive is inertia. Cities don't want to lose tax dollars and economic activity, even though they will. Asset owners don't want to take haircuts, even though they will. I'm a strong union supporter so workers have agency over their working arrangements, versus being dragged back to the office because some bro who lucked into leadership says "because I say so." Rarely does anyone include happiness and quality of life in these metrics and models, which is unfortunate. Hope this helps.
  - bbor 3y ago
    Do you think there’s any room here to add a “what would be best for society” metric to this analysis, beyond just “what earns me the most money”? Obviously this realistically doesn’t happen, just curious on your stance, given your matter-of-fact take
TuringNYC 3y ago
>> On the contrary, it’ll happen much sooner. About $626B in debt is coming due for debt collateralized by office buildings in the near term Not quite, I dont think. If defaults happen, the new owners get the building at lower prices and thus will be willing to lease at lower prices...making RTO more feasible for companies.
- toomuchtodo 3y ago
  > the new owners get the building at lower prices Who will make these loans? Lending has dried up for office space, and mid sized banks are in distress over these debts. Maybe PE or hedge funds can piece financing together, but without easy loans from banks, financing will be costly, impairing what purchase price you offer. https://www.reuters.com/business/finance/us-banks-sink-concerns-about-office-real-estate-loans-2023-05-31/ https://www.reuters.com/business/finance/us-banks-sink-conce... https://www.costar.com/article/328997282/big-us-banks-pull-back-on-office-and-apartment-lending https://www.costar.com/article/328997282/big-us-banks-pull-b... https://www.bizjournals.com/cincinnati/news/2023/06/27/fifth-third-office-real-estate-lending-halt.html https://www.bizjournals.com/cincinnati/news/2023/06/27/fifth... https://www.axios.com/2023/03/21/small-bank-struggles-could-hit-the-real-estate-market-hard https://www.axios.com/2023/03/21/small-bank-struggles-could-... https://www.ft.com/content/a77695ac-a516-4654-8e0f-5aeb4f4fff71 https://www.ft.com/content/a77695ac-a516-4654-8e0f-5aeb4f4ff...
  - TuringNYC 3y ago
    >> Who will make these loans? Lending has dried up for office space Once the current owners default, the banks own the buildings. They dont have the capital to carry the buildings, so they will fire-sell the buildings. someone will buy the buildings for sure, because if you fire-sell it inexpensively enough there will be buyers. There are numerous buyers, especially sovereign funds who would buy at a sufficient haircut of peak value. Just like the 2008 resi crisis, there were fire sales at 10% of original value. It isnt clear what the "recovery value" is for Commercial Real Estate, esp office buildings, but it may be so low that lenders are willing to lend. Also, it may be so low that syndicates buy outright.
closeparen 3y ago
Sucks for CRE investors but if offices become cheap, won’t employers be even more inclined to keep them?