5 ms·

I believe commercial real estate is a ticking time bomb in the financial system. So many small and regional banks have so much loans tied away in CRE, the futur

I believe commercial real estate is a ticking time bomb in the financial system. So many small and regional banks have so much loans tied away in CRE, the future of which is completely uncertain.

TuringNYC 3y ago
[flagged]
hn_throwaway_99 3y ago
You are correct, and 60 minutes did a good detailed overview of this recently: https://www.cbsnews.com/video/60minutes-2024-01-14/ https://www.cbsnews.com/video/60minutes-2024-01-14/ They highlight how the rolling nature of long-term commercial leases means that banks can kind of kick this can down the road, but only so much, and high interest rates makes this incredibly difficult. With this one it really does feel like we've jumped out of the airplane without a parachute and a lot of us are just going "Hey, nice breeze". I'm not the most optimistic sort, so I'd love to hear any thoughts on how this doesn't end in complete catastrophe. It just seems like something policy makers and market participants don't want to talk about too loudly because they're worried about spooking the market.
- Tao3300 3y ago
  It's not some big secret. If the market was going to spook it would have spooked.
  - 7thaccount 3y ago
    Not necessarily true I don't think. It's possible they will freak out over the upcoming years. There's a lot riding on commercial real estate. It isn't easy to convert to living space either.
  - baq 3y ago
    Market is too busy buying NVDA and selling puts. Everybody knows about CRE but it isn't a problem for this quarter. Besides, if it ever becomes a problem, the FED will drop a dedicated CRE credit line over the next couple weekends. (If it doesn't, though...)
    - graemep 3y ago
      The market can be blind for a long time. Bad mortgage lending was pretty obvious in the early 2000s. The dotcom boom and many other booms were obvious overvaluation. Greater fool and FOMO are powerful, especially if your incentives are short term.
  - candiddevmike 3y ago
    I think the market assumes that since everyone is exposed, no one is exposed (there will be bailouts).
    - toomuchtodo 3y ago
      FDIC bailouts or failure managements of smaller non GSIB banks who are overexposed. Haven't dived into which banks are most at risk, potential investment opportunity if their equity is publicly traded (not investing advice). https://www.fitchratings.com/research/banks/us-regional-small-banks-cre-exposure-could-pressure-ratings-24-05-2023 https://www.fitchratings.com/research/banks/us-regional-smal... https://www.fsb.org/2023/11/2023-list-of-global-systemically-important-banks-g-sibs/ https://www.fsb.org/2023/11/2023-list-of-global-systemically... Related: https://www.bloomberg.com/news/articles/2024-01-30/billionaire-sternlicht-sees-1-trillion-loss-in-office-values https://www.bloomberg.com/news/articles/2024-01-30/billionai... | https://archive.today/isGFU https://archive.today/isGFU ("Billionaire Barry Sternlicht sees more than $1 trillion of losses for office real estate, calling the properties “one asset class that never recovered” from the pandemic.")
      - toomuchtodo 3y ago
        Additional citation: https://www.bloomberg.com/news/articles/2024-01-31/new-york-community-bancorp-slumps-on-surprise-loss-dividend-cut https://www.bloomberg.com/news/articles/2024-01-31/new-york-...
  - AlexandrB 3y ago
    Same thing could have been said in 2007. "Everyone" knew there were a bunch of junk bonds floating around. What's uncertain is who is exposed and how bad is it, so which bank do you bet against?
    - ericmcer 3y ago
      In 2007 we didn't have a precedent for just printing money to cover everyone when things went down. If anything financial disasters are great for people who hold stock now. All the added money will settle there.
    - CamperBob2 3y ago
      If you owe the bank $100K, you have a problem. If you owe the bank $100M, the bank has a problem. If you owe the bank $100B, nobody has a problem, because Uncle Sam will somehow magically take care of everything. So, yeah, I'm not sure we took the right lessons away from the last time this sort of thing happened. Taxpayer-funded bailout for the commercial real estate sector coming in 3...2...1...
      - s1artibartfast 3y ago
        Uncle Sam just spreads the problem around. Your 100B debt is now everybody else's problem and they get to pay interest on your debt.
- spamizbad 3y ago
  This isn't the first commercial RE bubble the US has had to cope with. We had a similar catastrophic one near the end of the 80s that bled into the 90s. People have mostly forgotten about it. Vacancies in some cities rose from 10% to 40% largely due to overbuilding. Recovery took about a decade.
- carlosjobim 3y ago
  > we've jumped out of the airplane We who? The greedy and the irresponsible who are hogging real estate to profit from the productive sectors of the economy? Good riddance, then. A "complete catastrophe" in real estate is great for every person and business who is actually productive and beneficial. There needs to be balance. If 100% of a nation's surplus productivity is swallowed into real estate profits, then you'll have a scam economy where all money and all effort goes into real estate instead of useful work.
  - hn_throwaway_99 3y ago
    This woefully and naively ignores the systemic effects. Banks hold $3 trillion in commercial real estate debt. That 60 Minutes report talks about how regional banks have huge amounts of their loan volume in commercial real estate. So to answer your question of "We who?", the answer is anyone who has a bank account, and given how the government will do everything to ensure the financial system doesn't collapse, every taxpayer. More details at https://crsreports.congress.gov/product/pdf/IN/IN12278 https://crsreports.congress.gov/product/pdf/IN/IN12278.
    - carlosjobim 3y ago
      That's arguing like a hostage taker or terrorist. "If we go down, we're going to make sure you go down with us". The people does not have to accept being taken hostage. There's no talk about systemic effects when real estate is siphoning all wealth from the population and making having a home and a family near impossible for most young workers. Edit: And anyone who has a bank account? Then where is the 500% return on the money that I've had in my bank account during the real estate boom, or do we only get to pay for real estate speculation losses without any benefit from real estate gains?
      - eszed 3y ago
        Now you're getting it....
majormajor 3y ago
It won't necessarily be cheap or free to convert, but I think it's a slow long-term haircut more than a time bomb. Land is still at very high levels of demand in most urban and suburban cities, people will find non-commercial uses for places that never get used as office again.
- potatolicious 3y ago
  One thing I keep wondering about is retail as a use for this office space. If you visit most parts of Asia you'll find that the North American focus on having retail only on the ground floor is a self-imposed and arbitrary limitation. In other parts of the world there's nothing at all strange about having a restaurant on the 8th floor of a building, or a clothing store, or a hair salon, etc etc. Personally I find that retail businesses in Asia are far more interesting as a result - retail rents are comparatively cheap, encouraging an explosion of interesting niche retail businesses (a vinyl store selling only 70s vinyl? Sure!) that still pencil out financially. Retail in US urban cores on the other hand has been stagnant, with only major chains being able to afford the skyrocketing rents. This feels like an opportunity? Imagine the kinds of interesting businesses that can be created if we took off the totally arbitrary cap on retail space.
  - kevinmchugh 3y ago
    I've never been to Asia but have heard about the mixed-use high-rises and am hopeful we'll get them. In Chicago our central business district has a decent variety of retail beyond just the chains: a small jewelers' row, a comic book shop, a record store, some independent menswear and shoe shops, and yes, all at ground level. Some buildings have a barber or gym somewhere in them, and that's pretty nice. I once heard an anecdote of two friends planning to meet up in the bar in a specific building in Tokyo and having to text to realize there were two bars, how cool is that? It seems like there's a bunch of businesses that could help make an office building more enticing - specialty coffee shop, bar, barber/salon/nail salon, dry cleaning drop-off/pickup (this one I've seen). And then the one that might really make a big difference: daycare. I'm not a parent so I assume there's a good answer why these buildings don't have daycares (commuting with the kid maybe is too difficult?)
ericmcer 3y ago
Tons of unused commercial real estate coupled with tons of people who cant afford housing... I wouldn't be mad if govt used my tax dollars to incentivize conversion of giant downtown office complexes into mixed use buildings.

I believe commercial real estate is a ticking time bomb in the financial system. So many small and regional banks have so much loans tied away in CRE, the future of which is completely uncertain.

TuringNYC 3y ago

[flagged]

hn_throwaway_99 3y ago

You are correct, and 60 minutes did a good detailed overview of this recently: https://www.cbsnews.com/video/60minutes-2024-01-14/ https://www.cbsnews.com/video/60minutes-2024-01-14/ They highlight how the rolling nature of long-term commercial leases means that banks can kind of kick this can down the road, but only so much, and high interest rates makes this incredibly difficult. With this one it really does feel like we've jumped out of the airplane without a parachute and a lot of us are just going "Hey, nice breeze". I'm not the most optimistic sort, so I'd love to hear any thoughts on how this doesn't end in complete catastrophe. It just seems like something policy makers and market participants don't want to talk about too loudly because they're worried about spooking the market.

Tao3300 3y ago
It's not some big secret. If the market was going to spook it would have spooked.
- 7thaccount 3y ago
  Not necessarily true I don't think. It's possible they will freak out over the upcoming years. There's a lot riding on commercial real estate. It isn't easy to convert to living space either.
- baq 3y ago
  Market is too busy buying NVDA and selling puts. Everybody knows about CRE but it isn't a problem for this quarter. Besides, if it ever becomes a problem, the FED will drop a dedicated CRE credit line over the next couple weekends. (If it doesn't, though...)
  - graemep 3y ago
    The market can be blind for a long time. Bad mortgage lending was pretty obvious in the early 2000s. The dotcom boom and many other booms were obvious overvaluation. Greater fool and FOMO are powerful, especially if your incentives are short term.
- candiddevmike 3y ago
  I think the market assumes that since everyone is exposed, no one is exposed (there will be bailouts).
  - toomuchtodo 3y ago
    FDIC bailouts or failure managements of smaller non GSIB banks who are overexposed. Haven't dived into which banks are most at risk, potential investment opportunity if their equity is publicly traded (not investing advice). https://www.fitchratings.com/research/banks/us-regional-small-banks-cre-exposure-could-pressure-ratings-24-05-2023 https://www.fitchratings.com/research/banks/us-regional-smal... https://www.fsb.org/2023/11/2023-list-of-global-systemically-important-banks-g-sibs/ https://www.fsb.org/2023/11/2023-list-of-global-systemically... Related: https://www.bloomberg.com/news/articles/2024-01-30/billionaire-sternlicht-sees-1-trillion-loss-in-office-values https://www.bloomberg.com/news/articles/2024-01-30/billionai... | https://archive.today/isGFU https://archive.today/isGFU ("Billionaire Barry Sternlicht sees more than $1 trillion of losses for office real estate, calling the properties “one asset class that never recovered” from the pandemic.")
    - toomuchtodo 3y ago
      Additional citation: https://www.bloomberg.com/news/articles/2024-01-31/new-york-community-bancorp-slumps-on-surprise-loss-dividend-cut https://www.bloomberg.com/news/articles/2024-01-31/new-york-...
- AlexandrB 3y ago
  Same thing could have been said in 2007. "Everyone" knew there were a bunch of junk bonds floating around. What's uncertain is who is exposed and how bad is it, so which bank do you bet against?
  - ericmcer 3y ago
    In 2007 we didn't have a precedent for just printing money to cover everyone when things went down. If anything financial disasters are great for people who hold stock now. All the added money will settle there.
  - CamperBob2 3y ago
    If you owe the bank $100K, you have a problem. If you owe the bank $100M, the bank has a problem. If you owe the bank $100B, nobody has a problem, because Uncle Sam will somehow magically take care of everything. So, yeah, I'm not sure we took the right lessons away from the last time this sort of thing happened. Taxpayer-funded bailout for the commercial real estate sector coming in 3...2...1...
    - s1artibartfast 3y ago
      Uncle Sam just spreads the problem around. Your 100B debt is now everybody else's problem and they get to pay interest on your debt.
spamizbad 3y ago
This isn't the first commercial RE bubble the US has had to cope with. We had a similar catastrophic one near the end of the 80s that bled into the 90s. People have mostly forgotten about it. Vacancies in some cities rose from 10% to 40% largely due to overbuilding. Recovery took about a decade.
carlosjobim 3y ago
> we've jumped out of the airplane We who? The greedy and the irresponsible who are hogging real estate to profit from the productive sectors of the economy? Good riddance, then. A "complete catastrophe" in real estate is great for every person and business who is actually productive and beneficial. There needs to be balance. If 100% of a nation's surplus productivity is swallowed into real estate profits, then you'll have a scam economy where all money and all effort goes into real estate instead of useful work.
- hn_throwaway_99 3y ago
  This woefully and naively ignores the systemic effects. Banks hold $3 trillion in commercial real estate debt. That 60 Minutes report talks about how regional banks have huge amounts of their loan volume in commercial real estate. So to answer your question of "We who?", the answer is anyone who has a bank account, and given how the government will do everything to ensure the financial system doesn't collapse, every taxpayer. More details at https://crsreports.congress.gov/product/pdf/IN/IN12278 https://crsreports.congress.gov/product/pdf/IN/IN12278.
  - carlosjobim 3y ago
    That's arguing like a hostage taker or terrorist. "If we go down, we're going to make sure you go down with us". The people does not have to accept being taken hostage. There's no talk about systemic effects when real estate is siphoning all wealth from the population and making having a home and a family near impossible for most young workers. Edit: And anyone who has a bank account? Then where is the 500% return on the money that I've had in my bank account during the real estate boom, or do we only get to pay for real estate speculation losses without any benefit from real estate gains?
    - eszed 3y ago
      Now you're getting it....

majormajor 3y ago

It won't necessarily be cheap or free to convert, but I think it's a slow long-term haircut more than a time bomb. Land is still at very high levels of demand in most urban and suburban cities, people will find non-commercial uses for places that never get used as office again.

potatolicious 3y ago
One thing I keep wondering about is retail as a use for this office space. If you visit most parts of Asia you'll find that the North American focus on having retail only on the ground floor is a self-imposed and arbitrary limitation. In other parts of the world there's nothing at all strange about having a restaurant on the 8th floor of a building, or a clothing store, or a hair salon, etc etc. Personally I find that retail businesses in Asia are far more interesting as a result - retail rents are comparatively cheap, encouraging an explosion of interesting niche retail businesses (a vinyl store selling only 70s vinyl? Sure!) that still pencil out financially. Retail in US urban cores on the other hand has been stagnant, with only major chains being able to afford the skyrocketing rents. This feels like an opportunity? Imagine the kinds of interesting businesses that can be created if we took off the totally arbitrary cap on retail space.
- kevinmchugh 3y ago
  I've never been to Asia but have heard about the mixed-use high-rises and am hopeful we'll get them. In Chicago our central business district has a decent variety of retail beyond just the chains: a small jewelers' row, a comic book shop, a record store, some independent menswear and shoe shops, and yes, all at ground level. Some buildings have a barber or gym somewhere in them, and that's pretty nice. I once heard an anecdote of two friends planning to meet up in the bar in a specific building in Tokyo and having to text to realize there were two bars, how cool is that? It seems like there's a bunch of businesses that could help make an office building more enticing - specialty coffee shop, bar, barber/salon/nail salon, dry cleaning drop-off/pickup (this one I've seen). And then the one that might really make a big difference: daycare. I'm not a parent so I assume there's a good answer why these buildings don't have daycares (commuting with the kid maybe is too difficult?)

ericmcer 3y ago

Tons of unused commercial real estate coupled with tons of people who cant afford housing... I wouldn't be mad if govt used my tax dollars to incentivize conversion of giant downtown office complexes into mixed use buildings.