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U.S. Commercial Real Estate Is Headed Toward a Crisis

• theandrewbailey 2y ago
  [flagged]
  • deleted 2y ago
    [deleted]
• apwell23 2y ago
  > There’s Trouble Brewing > The clock is ticking > a reckoning > full-blown financial crisis I've been hearing about this since at-least 2021. How long will it take for this 'crisis' to come to fruition.
  • gjsman-1000 2y ago
    Some things are like pregnancy. Complaining you’ve been waiting 9 months and 2 weeks, therefore it will be fine, is incorrect logic.
    • lazide 2y ago
      What about 10 months in?
      • gjsman-1000 2y ago
        If I just doubled down and said that 10 months of nothing happening proves there’s no greater likelihood of something happening now, then yes, it’s broken.
        • lazide 2y ago
          But something is happening, just maybe not what is being predicted eh? For instance in commercial real estate, vacancies are (and for some classes have been) through the roof for a long time. It’s unlikely this is entirely a nothing burger.
  • thejazzman 2y ago
    To be fair, the 2008 crash was predicted for awhile before it happened Not saying you're right or wrong but that's not a sound basis for judgment
    • cube2222 2y ago
      > was predicted for awhile before it happened As were the other 15 crashes that didn’t happen. Though you may of course try to identify possible triggers early and try to defuse them in advance.
  • nine_zeros 2y ago
    > I've been hearing about this since at-least 2021. How long will it take for this 'crisis' to come to fruition. This crisis has been ongoing this year like a slow burn. Investors directly related to these assets know they are making heavy losses But - this is a full blown crisis in a small segment of real estate of only large cities. As such, this is affecting only a small fraction of investor portfolios. Moreover, the bank lenders who engaged in CRE lending have the backing of a very active Federal Reserve - see SVB. This is not going to have anywhere close to the kind of impact the US housing crisis had in 2008.
  • gedy 2y ago
    Sure, but thinking back to 2008, the first clear signs of trouble were in like mid 2005, I don't think that was a case of broken clocks being correct twice a day.
    • galdosdi 2y ago
      I just watched the 2005 Jim Carrey movie Fun with Dick and Jane, about a nuclear family whose father loses his job, pension, and house working at a place like Enron or WorldCom while a CEO resembling Ken Lay played by Alec Baldwin steals the whole pension fund. Watching it yesterday was a shocker though -- I had forgotten (having been so young) that the 2008 financial crisis had roots so much earlier. But then I reminisced a little more: this was based on what I recall actually going on at the time. I was a kid at the time, who got his first minimum wage high school job working side by side with a lady who was there because her husband had his pension stolen at WorldCom. A certain class of elites really got away with a lot then, and were never held to account. Instead, their elite grifting culture just spread wider and wider. We tried in 2011. If you were alive then, you know how big Occupy Wall Street was getting. You remember how big Bernie was. But they figured out how to use social media to divide us and redirect our anger into right vs left politics instead of ultrarich crooks vs everybody else working hard. Even I had been starting to forget until Jim Carrey shook me out of my millenial reverie. The youngest kids if they have any political consciousness now it's solely channeled safely into the left vs right pattern, unable to effect meaningful change to the robber baron economy. Smartphones and recommendation algorithms truly were a powerful technology that generated great value after all-- for just a very small elite that can use it to hold off any accountability for their monstrous crimes.
  • JumpCrisscross 2y ago
    > I've been hearing about this since at-least 2021. How long will it take for this 'crisis' to come to fruition Crises foreseen and dealt with can be slowly deflated. If growth stays on track that seems plausible for CRE debt.
  • neffy 2y ago
    Hard to say. A well run bank with no bad debt on its books can absorb ~0.75% losses on its total lending in a year from income, without hitting any of the regulatory limits that would start to curtail lending. From the article, the US banking system is already above that, so it is in trouble. From that point on, it's a case of how well the banks can push the can down the road, absorbing small percentages of bad debt every year from profits, versus being forced into insolvency by the FDIC. There is a lot of leeway in this, as long as the bank still has revenue. During much of the eighties the entire US banking system was technically insolvent, but the Fed essentially just papered over it. The Italian and Japanese banking systems managed this for decades - its only an actual loss when the bank recognises it after all, so you get the zombie bank phenomenon. There is a much better understanding since 2008 of how not to crash a banking system, so I suspect this will continue to be managed out. But if any other sector goes down, or Trump gets elected (since his policies would blow up the entire financial system if actually enacted), then all bets would of course be off.
• metaphor 2y ago
  https://archive.is/GRDtK https://archive.is/GRDtK
• nekoashide 2y ago
  Every morning and evening I watch the sun shine through empty office buildings that were just recently completed. I'm not sure how economical it is to keep the lights on.
• phkahler 2y ago
  When looking for a cause, none of these bankers or economists seem to get that it can also be seen as a consequence of using debt to fuel the economy. The 1990s were a fairly good time economically in the US, but interest rates were quite a bit higher than people are used to now. Maybe they should figure out why that is, since turning the knob all the way down to zero isn't really viable long term.
  • JumpCrisscross 2y ago
    > none of these bankers or economists seem to get that it can also be seen as a consequence of using debt to fuel the economy Solvency is capital-stack agnostic. The debt can make it worse. But the question of how it's financed is being ignored because it isn't particularly pertinent.
    • voisin 2y ago
      What are you talking about? Solvency is defined as the “state of having enough funds or liquid assets to pay all of one's debts”. Your statement couldn’t be more incorrect. Debt to equity/assets is the key consideration. Too much debt in a capital stack by definition decreases solvency (all else equal)
      • JumpCrisscross 2y ago
        > Your statement couldn’t be more incorrect. Debt to equity/assets is the key consideration Oof, HN and its armchair finance. Solvency is leverage agnostic because it doesn’t directly change with leverage. You don’t cite the source for your quote, but it should be obligations or liabilities, not debt. When liabilities exceed assets, you’re insolvent. Being debt free doesn’t guarantee solvency. In practice they’re related because interest expense flows through to the income statement. But that is indirect. And you can lever something up infinitely without changing its solvency profile. (You change its risk, which in this sense means the probability is becomes insolvent in the future. Within the context of real estate, where extend and pretend is common, this distinction is highly relevant.) The CRE problem is not a creature of debt. It’s a function of a previously-useful asset becoming, suddenly, less useful.
• sam0x17 2y ago
  That's one market that's never coming back to its former glory IMO, especially with WFH showing some real staying power in the tech industry. Give it 10 years and I predict virtually all desk jobs will be WFH or hybrid (ignoring, for a moment, whatever effects LLMs will also have on typical desk jobs) That said, yes FANG and a few of the big big corporations are adamantly trying to get/keep people back in the office. Many of these companies also just finished building multi-billion dollar campuses. Imagine the heads that will roll when they finally admit to themselves that these campuses were a total waste of money, and don't even have much re-sale value because no one needs corporate CRE anymore. This is more true than I think a lot of people realize, even where I am in fairly rural east coast USA, many of the office buildings in town have been vacant since the pandemic. No one needs these structures anymore. Even traditionally in-person venues like doctors' offices are slowly starting to shift a double digit percentage of their appointments to video calls. The writing is on the wall. sell sell sell
  • JumpCrisscross 2y ago
    > especially with WFH showing some real staying power in the tech industry There is also something to be said about the political environment. White-collar workers, particularly tech workers, aren't popular. Tech jobs in urban centres are on the consensus chopping block. That means the space they occupied, these offices, are obsolete--irrespective of WFH v RTO.
  • vundercind 2y ago
    In my friend group, I know four non-tech office workers (as in: they aren’t personally in tech, and also don’t work at a tech company). Two are fully remote, and two are hybrid at about 80% WFH. It’s become way more common even outside of tech.
  • nobodyandproud 2y ago
    This may age badly, but imho: Long term, the meaningful work will be work that absolutely require in-person presence. The office space sprawl of today will adjust to small-scale, experimental industry space, with a heavy emphasis on automation and custom engineering (industry v2). Well after the collapse of today’s inflated commercial real estate.
• GenerWork 2y ago
  It's been heading towards a crisis ever since Covid. Depending on when the Fed lowers rates, the end result will be pushed off for a few more years, but you're going to see lots of buildings given up on. My personal belief is that there's a lot of negotiation behind the scenes as both banks and property owners work out deals to make it seem not as bad. There's also the issue of cities like NYC who rely heavily on office building property taxes for funding.
  • schmidtleonard 2y ago
    Also, didn't the fed buy $2T of mortgage backed securities during the pandemic? EDIT: Not quite https://fred.stlouisfed.org/series/WSHOMCB https://fred.stlouisfed.org/series/WSHOMCB
    • GenerWork 2y ago
      I believe they bought residential MBSs, which is one of the reasons why mortgage interest rates went so low. They may have bought commercial MBSs, but if they did I don't remember reading about it.
      • metaphor 2y ago
        > They may have bought commercial MBSs, but if they did I don't remember reading about it. Readily accessible, public data that the Fed updates weekly[1] clearly shows $9.943 billion at peak and currently sitting on $8.142 billion. [1] https://fred.stlouisfed.org/graph/?g=1qE9d https://fred.stlouisfed.org/graph/?g=1qE9d
  • jauntywundrkind 2y ago
    I've heard it said that banks/property owners aren't super excited to renegotiate to something more reasonable, because having something sitting there vacant unused lets them keep the pretense about the property's value. If they start cutting rents, they risk having to report the loss in expected value, and that would be so horrible that they'd rather just let the property sit.
• deleted 2y ago
  [deleted]
• slowmovintarget 2y ago
  Crisis for whom? This is how markets work... Let them work.
  • fred_is_fred 2y ago
    Unfortunately perhaps for tax payers who will be on the hook for TBTF banks who lent money to useless buildings.
  • voisin 2y ago
    Crisis for municipal budgets that rely on tax revenue that in many instances are disproportionately based on office values.
    • nvahalik 2y ago
      Then perhaps it is time to realign priorities.
  • 0xdde 2y ago
    Your implication being that a market crash affects no one?
• freitzkriesler2 2y ago
  This is a good thing because the rent seekers who own these properties are unwilling to lower their lease terms which is strangling businesses. There are two tiers of businesses now, those that rent their space and have expensive prices because of it and those that own and don't have to pay rent which shows off as lower prices. A CRE crises will not affect us the way the GFC did . We may see a few banks go belly up however.
• Zigurd 2y ago
  Both CRE and RRE are doing the Wile E. Coyote levitating thing for now, mostly due to banks and investors being able to delay a reckoning. Used cars got hit first because it's harder to pretend they are a good asset to hold. But it's coming. Enthusiasts of converting CRE will be disappointed because RRE is already overbuilt in some boomtowns. Only truly abandoned CRE will be economical to convert, and that will further delay widespread conversion. The earliest projects will be selected for low risk. The bottom is somewhere below pre-pandemic prices.
  • triceratops 2y ago
    Is RRE residential?
    • fred_is_fred 2y ago
      Yes. I disagree that RRE is overbuilt, perhaps in some specific areas but not in general. You are not seeing houses sit empty for 9 months in most cities, and also people need a place to sleep and cook regardless of WFH or not. On the other hand, I think commercial office space is generally overbuilt in all areas. That's a big difference between the two.
  • rasz 2y ago
    > Used cars got hit first because it's harder to pretend they are a good asset to hold. We arent even down to pre post covid prices on ordinary used cars, and dont get me started on collectibles craze.
    • mbg721 2y ago
      I thought that was more actual demand than speculation. Consumers have relatively inelastic demand for cars in general, but 1) their real income took a hit post-COVID and hasn't recovered, and 2) simply being used makes a car cheaper, since they are such poor assets to hold.
      • rasz 2y ago
• treis 2y ago
  This article seems to miss that small and regional banks are less likely to hold the type of assets that are in real trouble. The big problems are the giant downtown office towers. Those loans are more likely to be held by big banks. Or at least I imagine, I don't have any data to back that up
• PorterBHall 2y ago
  I have a basic question, because I don’t know much about real estate. If we have a brewing commercial real estate crisis, and we have a long-standing housing crisis, why isn’t one the solution for the other? Can’t some real estate developer buy an office building on the cheap and convert it into housing and make a profit? I imagine that local zoning and building codes may not allow for that, but it seems like there’s enough urgency in this issue to resolve those.
  • felixgallo 2y ago
    There are also serious physical constraints. Most office buildings were not designed to have the number of bathrooms that subdividing into an apartment complex would require for example.
  • voisin 2y ago
    This is definitely happening (see Calgary as a great example, converting 17-18 buildings from office to residential). Not all buildings can efficiently be converted (floor plate shape/size, etc), and some municipalities are slow to update zoning.
  • reubenswartz 2y ago
    This may work in some situations, but unfortunately commercial building are typically very expensive to convert to residential. Think of an office tower with centralized plumbing and HVAC, with an open floor and no real interior walls. You've got to run plumbing and HVAC everywhere, add real(ish) walls, and depending on the size of the floor plate, there may not even be a good way to get light to the right places.
  • the_snooze 2y ago
    It's more complicated than you think. Office buildings aren't configured like apartment buildings; for example, plumbing and windows/lighting. Also, depending on the local rules, an office-to-housing conversion might require adding more parking. All these are expensive things to do, because office buildings were built to be office buildings. It's not impossible to convert them to housing, but there aren't as many cases as you'd expect where it makes economic sense to do so.
• adwi 2y ago
  There needs to be a large pool of government-backed capital specifically for commercial to residential redevelopment and fast-track zoning approvals for this (somewhere along the line of City of Yes proposal in NYC). Make it 4-5%, contingent upon (or give additional subsidies for) making significant percentage affordable rentals. Use the cash to cut the centers out of the building to daylight the large floor plates. Residential rents for much more/ft than commercial so shouldn’t be a problem floating existing commercial mortgages. Maybe there’s even a program to borrow against the future higher stream of income to get non-performing loans current so these banks hold the existing paper instead of taking the write down.
  • JumpCrisscross 2y ago
    > needs to be a large pool of government-backed capital specifically for commercial to residential redevelopment and fast-track zoning approvals There is no shortage of capital in real estate. Simplify approvals and the builders will come.
• Fire-Dragon-DoL 2y ago
  You can feel better by looking at Canada though. Ah ah ah.