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.
Real estate, especially prime commercial real estate was a sure bet for a while. If a company can’t service the debt the bank gets a valuable asset. It might be not so valuable with work from home taking hold.
I still doubt the whole scenario. I hope some emergency regulations to turn empty commercial real estate into housing is passed, I know it’s not ideal, but it’s not impossible.
There is certainly worry that as lease contracts expire, the combination of higher interest rates and vacant offices will create huge losses for real estate developers, and these can cause a cascading domino effect of further losses.
How the communication flows from the government or RE developers to executives is beyond my understanding, but it looks like there is not much willingness to rethink how corporate office space can be used in other ways, and more willingness to just go back to the status quo.
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.
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.
I think a lot of the impetus to return to offices is the corporate real estate market. If corporate real estate tanks, then companies that own offices will take a huge hit on their valuation and possibly affect the secured credit based on those offices. In addition to all the other investors who've paid these billion dollar atrocities of beige and concrete.
No, but they care about their company and their stock price. And the collapse of commercial real estate, especially in large cities, is an economic tsunami so big that it's terrifying. Go to downtown SF and walk around. It's a ghost town. When is it coming back? What if the answer is not for a very long time. And it's not just the big cities, even in smaller towns, law offices, etc. are still sitting empty since the pandemic. It's a huge, huge problem.
And when that impact hits, it will affect every business.
Those executives and many others know that. They're standing on the beach with the water out, knowing what's coming but helpless to stop it. But they're trying. Of course they're trying.
I have heard rumors (yes, completely lacking proof) that some major banks with huge commercial loan portfolios are using those loans as leverage to coerce companies into loudly demanding return to office. That's actually pretty easy to believe, because they'd really be hurting if commercial real estate values were to plummet.
You're right, things will move on, and I am not (personally) all that worried. Nor are the creditors who can afford to eat a loss.
My concern is more about the ripple effects. Many low-skilled workers rely on service work, and servicing corporate real estate is a real industry (janitorial services, managerial duties, parking lot attendants, plumbers, even construction). They are already having a pretty hard time of it, and if this industry vanishes, "moving on" may mean going out on the streets. San Francisco, Los Angeles, New York, and San Diego have enough homeless already.
This article dresses up truth in class warfare costume:
Companies and investors who own commercial real estate are facing a loss.
The thought is if people have to go back to the office, the commercial real estate is worth more, so there is incentive to return to the office.
I suspect we're way past the point where a work from the office mandate is going to make any measurable difference in property value. CEOs sitting on big rents and big buildings should start preparing their investors and boards for the inevitable loss and not lose sign of this:
Your competitors without big real estate costs are in a much better competitive position.
My wife used to be in commercial real estate. She said that that from what she heard from colleagues, the industry is actually doing pretty well at the moment, since so many offices have to be completely refitted for covid-19 precautions, and that's something that's also handled by those companies.
But right now a lot of places are still under contract for their leases. Might be a different story in a year or so when more leases expire and they just don't bother keeping their offices.
You want to know an industry that's really screwed? The industry she left commercial real estate for: events/conventions. Her current company has had basically no revenue since the first lockdowns, and that's not changing anytime soon.
She's been eyeing jobs in commercial real estate again as an escape from events, as they're in better shape for the moment, at least.
But back in reality, of course we all know that the commercial real estate market is by and large looking at a world of hurt. But I think by and large they’re going to muddle through. Some developers will lose their buildings, equity is definitely taking a hit and there will surely be some losses on loans. But on balance, I think the banks will be fine (and some fulcrum security holders somewhere in the capital stack will find themselves owners of, in some cases, VERY nice new buildings).
I worry less about the debt lended to finance these building than I do about the many, many pensions, retirement systems and insurance companies that rely on a structured equity return to meet their long term financing needs.
The way you said it, it seems like small businesses are being screwed over by real estate companies. That's a different cause than people not going to the office.
Working from an office is certainly good for keeping the price of commercial real estate high. And if you’re a bank who loans money to people who buy/build commercial real estate with that money, and then the value of the commercial real estate falls... well you’d be in for a giant world of pain.
If people can’t repay their loans you’re now stuck with something worth a lot less than all that money you gave out. OOPS.
I’ve been wondering what banks are going to do about this one. It’s a long term trend happening much faster than anyone could predict.
I wonder about a connection between the collapse in commercial real estate and the recent flood of editorials, news segments, interviews, public statements, tweets, etc., railing against Work-from-Home.
It feels like a lot of investor-class losses are on the verge of being realized, and they are getting desperate.
The article focuses on the small businesses serving office workers downtown, and on air travel.
Dry-cleaners, cafes, shoe repairers, gyms, beauticians, nail bars, copy centres, florists, newsagents, office supply stores, etc.
The second order effect on real estate isn't discussed. If a lot of these businesses disappear, along with a large fraction of office workers, building owners may not be able to service their costs (finance, insurance, maintenance, etc.)
I guess Wall Street will get another bail-out at that point.
i still think every single one of these return to office orders are from investors that are heavily portfolio'd (new word!) in commercial real estate and are trying to keep the bubble from bursting like it should.
There is soooo much vacant office space right now and no one is lowering prices like should happen with this much surplus.
This is an interesting story. With simple supply and demand, we have massive oversupply for office real estate and significantly reduced demand - prices should drop, right?
Except we have the bag holders, the landlords who retained leases and the banks who own the mortgages, they are going to fight tooth and nail to maintain the value of their assets, and they have deep pockets.
I've seen one story where the writer made the argument that this is why we've been seeing "you must return to the office" stories - big business must have line go up, line must never go down.
We'll see what happens but I sure hope there are no government bail-outs for this sector. Investment involves the risk of the asset depreciating.
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