That last one has me really worried. A big dump of real estate on an already strained market with a lot of folks using it as investment. How many big buildings have we seen go up in the last year and remain basically empty.
Commercial real estate needs to pull its head out of its ass soon and start heavily discounting spaces or shit’s going to get real real.
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.
Where I live, there is tons of empty retail space because of Amazon, eBay, etc. I would assume that would push commercial rents down, but I evidently don’t understand that market at all.
From what I understand, commercial real estate is also going through some devaluing so maybe those rents should be going in the other direction? This seems like a last ditch attempt to keep things together long enough until rates come down (I'm not sure they'll come down enough in the near term.). I'm hoping businesses choose to move - or maybe go storefront free for a while - to speed up the correction. (I've noticed several businesses operating (purely?) out of a nearby storage place for a while now.)
Probably some company exec's trying to build an argument to protect their high cost real estate assets from depreciation.
Think of it, if say 30-50% of an office can become unused in 50-70% of companies in a city. Man will the value of that office will tumble. I'd bet it would see a noticable depreciation even if it was 30-45% unused and only 30% of companies in a city acted on it.
What amazes me is that we didn't see a faster cratering in value in office space.
On any given day in any capital city, perhaps 50% of office desks sit empty.
Yet I can't buy an office building for cents on the dollar.
Normally when supply far exceeds demand like this, companies owning those assets can't pay their bills, the building is sold, there are no buyers, auction prices crash, the crashing prices cause more companies to go underwater, those buildings are sold too, and there is a big wipeout of all leveraged property owners. Rent and purchase prices prices for office buildings fall 70%, encouraging other uses of the buildings (retail, residential, industrial), and they end up full again.
But for some reason that isn't happening. 3 years later, and still more office desks are empty than full in most capital cities.
And what exactly is the problem with depressing commercial real estate value? Personally I only see upsides for the economy. Incentive for people to try to do productive stuff instead of holding to their precious real estate and collecting rents, possibility for entrepeneurs and companies other than megacorporations to actually open stores in cities...
Some of this may be due to incentives in the way property management and owners value commercial property and calculate cash flows and fees.
In many cases, it can make more sense (to some folks) having a vacant property at a nominally high rent (look, we could make this much from this property, hence it’s worth x multiple!) then admitting that is not likely for the foreseeable future (oh shit, this property is now only capable of producing 80% of x, write downs and angry investors incoming).
It sounds weird, but the wil-e-coyote analogy is remarkably apt - in the cartoons, as long as he doesn’t look down, he keeps going just fine!
which is exactly what will happen, if there's no gov't intervention.
However, this will take years, if not a decade or two. The reason being that the real estate companies knows this is possible, and so is likely diversified, and therefore, can absorb the losses for a long time (as long as they have income elsewhere to make up for it), and hope for a reversal of demand for offices, or wait for organic growth to catch up.
They will not willingly bankrupt themselves and take a loss for no good reason - that's just stupid.
So in the mean time, the offices aren't being used efficiently. If the city is really keen on making good use of the space by making it residential, they can speed this process up by subsidizing.
Not sure what you read there but the roughly $500B figure is a real loss in the commercial real-estate sector as leases some off the books. It’s a slow burn.
There’s an additional expense to try to repurpose these building as residential but it’s a massive one that won’t come easily. You can’t just turn modern office buildings into residential building by reworking the interior. Most wouldn’t meet residential codes (like bedrooms needing windows, emergency egress, additional plumbing and waste requirements, parking etc)
Commercial real estate is going to take a massive hit the next 3-4 years and that $435B number is a real estimate in the decline in commercial real-estate value. It comes from this study.
I was speaking to the owner of the building I work in (335 Madison) about this, he said because so much is owned by families and paid off, (his included) they can afford to leave them empty vs lower the rent, therefore lowering the property values that are leveraged.
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