It 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.
Depends 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.
I don’t really buy the argument. If commercial RE crashes, that means what, people take a 20% haircut on converting the buildings to condos and/or just selling for the value of the land?
We are still seeing unprecedented housing shortages, which puts a pretty high floor on how much l “downtown” land values will crash.
It's convoluted, but yes, it can cross over into the residential market in a few different ways (not as similar as '08 since '08 was largely due to poor lending actions (IMHO).
- As the commercial market is a large investment arm for financial institutions, a collapse in the commercial market can cause a credit crunch (banks don't have enough money to provide loans like they used to). Making it more difficult for people to get mortgages or loans for residential property.
- As the commercial market falls, investors and developers will begin looking toward the residential market for their investments. This could lead to an increase in residential housing availability. However, I believe this would exacerbate the trend of "build-to-rent" communities as it would provide the developer/investors with consistent, predictable, monthly income.
Ultimately, a "collapse" of the commercial real estate market would severely negatively impact the residential housing market due to consolidation. If renting out office towers is no longer profitable, why not rent out entire housing communities? And since banks are crunched and may have to further restrict their mortgage and lending practices, low and middle-class people could be further locked out of homeownership.
There's an increasing amount of commercial real estate capital flooding the residential market because there have been warning signs of a commercial real estate bust for years now. This is partially driven by low interest rates because it's better for companies looking to park their millions in single family homes. Corporations buying homes en masse is a major factor here.
Thanks for tracking. Maybe commercial real estate will have to become residential to survive the shift in demand? Economics of a skyscraper vs. residential are different, but the building still exists (I can see how not opening could be cheaper, but still, I'd like to ponder this situation.)
I have been speculating for some time that we are looking at a commercial real-estate correction or crash as many of the leases are now being held off the market by big firms (Blackrock) while larger retail is actually reducing its foot print. I don't know what the disconnect here is, but my nefarious interpretation is that the larger funds are actually holding off a crash by not leasing, thereby hiding what would be a downwardly market adjusted portfolio value. The counter to this is that office space could fill it up, but again, large firms are contracting their downtown footprints for a wide variety of reasons, including cutting costs. Only a few tech companies are expanding.
Looking at the mega projects like Hudson Yards which has lost and reduced several leases before even opening, SF's failed 7X7 mall which opened with ZERO leases and older established locations like 666 5th Ave struggling to find new buyers -- it appears pretty grim.
Putting all that together, you have an interesting crash that could actually affect the current White House in a very personal way.
Yeah maybe, but maybe its helpful to think what the holders of commercial real estate debt do to avoid the catastrophe? Surely, they are not just sitting and waiting. The offices are empty. The companies are doing just fine. There need to be external pressures applied to bring people back to the offices, I'd think.
Commercial real-estate leases are often much longer than residential, so, they won't be as affected as fast.
As a result, there's also a whole bunch of subleasing going on in commercial RE, hence, it may end up being a whole chain of random third-parties taking the loss for the owners of the buildings (e.g., companies that need to move out of their office after outgrowing it, etc). Surprisingly, this might make an even better argument for the come-back of WeWork -- their whole model from the start was to makeover the buildings abandoned by the tenants.
Likewise, it may not affect the sale price at all, because noone would want to tank their own REITs, even if the market itself is stale -- the owners have a vested interest in keeping the bubble afloat.
Business owners are adapting just fine. Commercial real estate owners are in big trouble.[1] That article says that most office real estate is leased for five years with an option to renew. Many of those renewals are not happening.
I started saying this last March, the next big crash or rather the biggest fallout from the pandemic will in commercial real estate. Just because of how the industry works, these commercial real estate companies are leveraged like crazy and it's not like you can turn around a rent/sell the property easily in this market. Banks set aside billions last quarter in expectation of this happening.
I think we're getting very close to a commercial office real-estate collapse in North America, and all the ensuing chaos that comes along with that. Commutes will plummet, houses will need space to work, neighbourhoods may need more services as people "stay local".
That is all about cheap money and tax policy. Real estate is the dumbest of markets and always booms and busts.
No matter what anyone says, eventually the business cycle will swing and everything will crash again. This is especially true of commercial development where things like depreciation and offsetting tax obligations drive profitabilty, but only for the first few years of a buildings existence.
I can`t find a link to the story (thought it was tech crunch), but I came across an an article a few weeks back speculating on all of the commercial real estate on the west coast and the possibility of residential conversions of defunct commercial space to dramatically increase housing supply in larger cities practically overnight.
I scoured the net and did not find much additional information and even tried to call a Realtor I know to see if the red-flags in commercial RE are the ripple to follow post-covid and if the downward pressure on residential home prices by residential conversions is on the horizon.
The jury is still out (not enough data), but that may end up being a bright spot of the new normal(word soup) if millions of new units become available over the next 12-24 months.
> This is a key driver of the continued climb of equity and real estate assets that seems to defy economic reality.
The real estate crash hasn't rippled ... yet.
Lots of younger people have moved home. High cost-of-living rental areas are going to lose those renters permanently. Once those younger people swallow their pride and move home ... there really isn't anything pulling them back.
Commercial real estate is like Wile E. Coyote running in mid-air trying not to look down. The commercial real estate has lots of empty spaces with no real prospect of refilling them ... yet they're placing those on the books by tacking them onto the end of the financing at the same level as they were when they were rented. That works great ... until the cash flow can't support anything at which point it all collapses together.
Of course, this is all going to hang together like the traders before 2008: "They're is a crash coming. If I'm right, it's almost impossible for me to diversify enough to survive because the trashing is going to be so thorough. If I'm wrong, I look like an idiot and lose money. So, I'll close my eyes and toe the company line and see if I can cash out before the devastation."
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