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'm wondering what is going to happen to the banking sector as the commercial real estate apocalypse starts to manifest in full ... banks have a lot of interest bearing loans for commercial real estate that is going to continue turning into increasing quantities of illiquid pure junk in the very near term as leases end coincident with a mass cost cutting environment and occupancy rates drop even more ... obviously this has been a concern for awhile but seems like we are approaching a real inflection point
My prediction is that commercial real estate is in for a bad time. The shift to remote work appears to be sticking enough that plenty of businesses are going to be really questioning thier facilities budget, and I doubt food or personal services are going to fully recover quickly. I have no idea what retail will do, but it had issues before the crisis.
I’m curious how hard this is going to hit commercial real estate, which already seems to be on the brink of collapse. What are the cascading effects like the subprime mortgage crisis?
I'm wondering if we are on the verge of a commercial property apocalypse. If rents are eventually forced down in large metropolitan areas it will wipe out billions of dollars in property wealth. Could make the GFC look like a blip.
Yeah this has to be long-term catastrophic for commercial real estate, which was already on the rocks. My previous company commissioned/leased and furnished an entire 12 story building in 2019, and now it's practically abandoned. Who is going lease such a thing afterwards? Seems grim to me.
Things will simply evolve. People said the same thing about industrial buildings in cities which are now thriving residential complexes. Lord and Taylor’s flagship store in Manhattan went bust and was going to become a WeWork, then when WeWork imploded the building was bought by Amazon and will become their offices. There won’t be a “property apocalypse” but there will be a “property evolution.”
In cities with diverse economies and a strong talent base this evolution happens quite quickly. Elsewhere it happens more slowly, and thus it’s more painful, but it will eventually happen there too.
I doubt it. Where I live there are swaths of commercial real estate left vacant before the pandemic. Apparently the same few property brokers are buying up all property, raising commercial rents a ton, and just sitting on it. They don't even care if they have tenets because speculation is raising the values so much they still come out ahead.
Commercial real estate has been in crisis since covid started.
Higher interest rates are the final nail in the coffin. Commercial estate is generally bought through variable rate mortgages, not fixed ones.
This means that at the same time lenders are under a deadly combination.
On one hand, higher rates means that owners need to raise rent fees (which they could for more than a decade consistently) to pay down their much expensier mortgages.
On a second hand, there's no market for their property, and if there is, it's at way reduced prices than it was before.
Third, the property value crashes, thus putting even more pressure on these mortgages to be refinanced with banks unwilling to come to terms and negotiate.
> 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."
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".
A close relative of mine is a top real estate appraiser based in San Francisco, and she's terrified about what happens in Q2 2021, when leases will start terminating en masse. She's had a call with the St. Louis Fed, as they're trying to get an idea of what this will look like. She thinks it will be a bloodbath, and deal a death blow to corporate real estate (and other capital markets by extension).
reply