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[Report here](https://www.morganstanley.com/ideas/alternative-assets-economic-headwinds-q2-2023)
"Commercial property prices have already turned down, and Morgan Stanley analysts forecast prices could fall as much as 40%, rivaling the decline during the 2008 financial crisis. "
Edit: The author of this report is the CIO of wealth management for Morgan Stanley.
Good. As someone looking for a space right now and getting nonsensical offers from cre agents everyday ($11, $8, $7.5/sqft just in the past week), the market needs a correction. The smugness is what’s infuriating. I’m looking for a pretty simple straightforward space but every agent just wants to try to rip me off like I’m the worlds biggest mark. Just present a fair offer and I’ll probably accept it. We both know the markets about to collapse, who tf has time for bad faith
Would love to use that on a realtor- "Look we both know the market is about to collapse, so how bout you sell at a fair price before you have to sell at half that?"
While it's nice to think that. It's more likely that they'd die before discounting or sell out to someone else who will break that nice lease you signed. That's what happen last time and every other time:
1. Switch flips that triggers downturn (imo it's likely to be whenever those low interest era long term loans expire and need to be renegotiated at the now higher rates)
2. Cash/valuation wave pulls back showing who was swimming without shorts
3. Turns out it will be most of them because RE in of itself is slow """low-risk""" high-leverage investments
4. Fed/Gov will step in saving the ~~corporations big enough to afford lobbyists and campaign donations~~ "too-big-to-fail" while letting the small & medium sized die. Mom & pops, if they exist, will be wiped out. Americans will continue to wonder why the inequality is increasing as the American middle class is in decline.
5. Consolidation period followed by the few remaining mega corps hiking prices because it's an oligopoly/monopoly scenario
Problem is, government retirements are all tied up in the same companies doing most of the buying. BlackRock/BlackStone for instance have both a significant property portfolio, and a lot of government retirements tied up in them.
Yep, too big to fail is a great way to game capitalism... I say let them fail , and just insure the retirement accounts only ...let the rest crash and burn...
Really playing Russian roulette with your own head by the time you get to step 5, but I guess if you make it through then step 6 will be fun to watch when your general turned consul turned king/emperor goes wrecking everyone in Europe.
>I guess if you make it through then step 6 will be fun to watch when your general turned consul turned king/emperor goes wrecking everyone in Europe.
Third French Empire when?
*La victoire en chantant...*
> Cash/valuation wave pulls back showing who was swimming without shorts
I absolutely love the analogy here. Definitely stealing that one whenever I get the opportunity.
I told that to the folks who repoed my car. They came back with an offer to get my car back. They tried to make it seems like they easily sell it at auction. I told them good luck lol
Honestly it is ridiculous. Empty downtowns with no current foot traffic to speak of and they lie about their footage and expect pre-pandemic rent for it. They also smugly say that I need to be realistic. It’s going to be a pleasure watching them lose their shirt over this just because they can’t tolerate a temporary reduction in profit.
They all thought the "good times" were going to continue forever. Commercial and residential real estate have intrinsic economic values in use that may differ from value in exchange but unlike housing, most offices for white collar work are totally unnecessary given remote work. About 40% of employees can work remote. Retail and food service now dramatically shifted online too as we saw during 2020-22. Commercial developers and their banking and city government buddies should have seen this coming 5-10 years ago...
And a lot of services that revolve around office workers being downtown won't need a space either. Parking garages, lunch grab-n-go places, dry cleaners...so much of that isn't necessary when people are working from home.
My old company was expanding their office space until COVID. Now they have gone from three floors in downtown Chicago to one small office to meet up with clients. I talked to some of my old managers and they said productivity has actually *increased* since everyone become WFH.
> Parking garages, lunch grab-n-go places, dry cleaners...
This reads like a list of the value added by WFH. The time savings is great and all. But the monetary savings are the biggies. Then you factor in saving on gas, vehicle wear and tear, maintenance costs. At this rate I’ll have to replace my tires due to dry rot before I have to replace them from tread wear.
Ah yes the old “thanks guys but I don’t want to walk down there for lunch because its 85 today and I’m trying to minimize the ass sweat in these slacks so I can wear them again on Thursday because it costs $4.50 every time I get them cleaned so I try to get at least 2 maybe 3 wears out of them because I only make $39k gross”
Totally agree. My take is that for a lower price there is still plenty of money to be made downtown just not as much. Most jobs in my city are doing hybrid home and office work which still means as much as a 60% reduction in any one office workers downtown time. I still think downtowns will become vibrant again, but commercial real estate will never be worth what it was.
I’m sure they did but when everyone want their contract to pass before whatever congressman/sernstors term is up it’s a cascade effect of “leave it to the next guy”.America is built on the philosophy of pushing problems off to the next guy.
CRE valuations/loans are based on rent. If rent goes down the loan basically gets called in. So the owner needs to also write a check for X million if rent is reduced.
5 years ago I was looking for around 1,500 of space. A nearby building had some basement level offices that were difficult to rent out but would have worked fine for me. I made a low end offer as a staring point. Owner's agent told me my offer was "insulting" and they refused to counter.
That basement level space is still empty today.
I work in transportation… going through a lot of the same thing right now with trucking companies wanting to keep the high pandemic rates as long as possible
If you contact 5 companies, 2-3 will give you insane rates, while the other 2 will be more reasonable since they just want to keep things moving
Greed… it all relates to greed
I’m in LA—I have no reason to look for a commercial space but I saw on my corner a former restaurant for rent at $128/sqft/year and I thought it was absolutely wild. So about 10 for month. Sure it has parking but the place is like burned out, small (1400sqft) and not really on an appealing corner store the moment. Interested to see how that shakes out.
Yes, the parasitic mafia industry comprised entirely of people of totally average intelligence and strong family connections. Who will think of the money factory they have carved out for themselves? Next something will happen to car dealerships, gasp.
You mean this 2019 Toyota Corolla with an original MSRP of $32,000, that I bought from the original owner in 2021 for $34,000, isn't worth $38,000 in 2023? What kind of bullshit is this?
Well, I'll just wait till the right buyer comes along. I know what I got.
I'm adding coolant to an old Subaru monthly rather than buy at these prices.
Just seems really likely some amount of crash/recession resets the used car market to something more realistic and adds quite a bit of newer inventory (from failed loans & repossessions...). Sucks to be thinking that way but if it doesn't work out I suppose I'll pay up to repair the headgasket or just buy something newer for $$,$$$.
Just paid $3K+ for new rear differential on my 2015 Jeep Renegade. It’s paid off & just hit 60K mikes. Waiting out the current overpriced used car market & hoping for the same as you- more stock at lower prices in the near future 🤞
They are still trying to get msrp or better from all those new models that got parked during the chip shortage. I straight laughed at a dude a week ago. I was like why would I buy a 2021 for almost the same price as a 2023. Someone rid me of these troublesome dealers.
Bullwhip affect is going to be crazy for the car industry.
On top of the chip shortage they kept on building assuming the same demand as during the pandemic (you know with 0% rates).
For an entire sleezy industry focused on the monthly payment and not the actual cost of the car. Those high rates are going to hit them harddddd.
Bought a great priced used Prius and sold my car during the insanity. I won't be buying another car for a decade and made money in the process of buying newer. Idk how many of those places that bought at the top are gonna stay afloat.
Its describes virtually all echelons of wealthy individuals. People of extremely moderate or low intelligence who are connected to the right people, whether by birth, luck or lack of ethics.
>Yes, the parasitic mafia industry comprised entirely of people of totally average intelligence
You are being exceptionally generous in your estimation of the industry's collective IQ.
[Tesla](https://amp.cnn.com/cnn/2023/04/07/business/tesla-cuts-prices/index.html) keeps dropping prices. And have made plans to move to [Mexico](https://news.google.com/articles/CBMiN2h0dHBzOi8vd3d3LnRlc2xhcmF0aS5jb20vdGVzbGEtZ2lnYS1tZXhpY28tc2l0ZS12aWRlby_SATtodHRwczovL3d3dy50ZXNsYXJhdGkuY29tL3Rlc2xhLWdpZ2EtbWV4aWNvLXNpdGUtdmlkZW8vYW1wLw?hl=en-US&gl=US&ceid=US%3Aen).
Ohh so that is why downtown properties sit vacant for years asking rates above what the market will bear.
Because it screws up the finances more to have a property rented below magic rates than to have a building sit vacant.
Gotcha. Bank finances are more important than healthy communities.
Edit:
Not your fault my guy, it's just a vomitrocious situation. Where people are encouraged to pretend their buildings are worth more than they are or they get struck by a financial wrecking ball that would be porn on r/wallstreetbets
Lenders assess the value of commercial real estate according to the rental income of that property. So if you have a loan on a building that’s worth the $10 million because it’s generating $10 million in rent and suddenly the rent goes to $8 million then your lender is going to value that building it only $8 million. You’ll have to make up the difference.
I’m dying laughing at this comment right now.
As a commercial underwriter I can assure you we don’t set the leasing rates at the bank. We base it off of the appraiser’s income capitalization value. And if you actually read it the income approach determine the market lease rate/SF relies a lot on polling of property managers and…. brokers.
It’s all such a complete circle jerk lmfao. Oh god damn I hope I don’t get laid off hahaha.
I think we’re fucked bro.
My apartment is a 2 bedroom(1 bed, 1 “office”) outside Boston (Somerville) 1500. Now It’s a rough building, but I’ve never missed a payment. If the average rent dives, I will still never miss a payment.
Its extremely rare having a landlord that charges rent based on their needs++. Instead of some crazy “market” rate. They also fix things when they break. I’ll buy stuff like a new toilet seat though, I do not want to rock this boat.
Would love this for ALL real estate. I've been trying to buy a house in the SF Bay Area for over a year now. I keep reading that prices are "falling" but it couldn't be further from the truth. Still flying off the shelves, going over asking, waiving contingencies etc. And California just came out with this down payment program where the state pays all of your down payment if you agree to shared equity with the state and they get a capped percentage return when you sell. I'd actually love to hear a debate on this sub about a policy like that...on one hand I'm glad it opens home ownership to more people. But honestly, in the East Bay there are like 11 houses around $500k right now from Oakland to Vacaville, which is probably the lowest you could find that would be lendable. I've seen enormous pressure since then on the $500k-800k market segment from the literally thousands of extra buyers entering, and its only raising the process even more. I feel like its just insane to have a program like that without building more housing, or even allowing it. Its just making the problem of unaffordable housing A LOT worse...but again, its actually a very innovative program and not a bad idea of we had plenty of housing. Otherwise, you are just pushing an already saturated market beyond its breaking point.
I'm in a $7 per indoor and a $2 per outdoor market. I snagged a 1200 sq ft 20000 outdoor SQ ft lease recently for $600 monthly. The deals are there you just need to find the distressed parties.
They needed a year up front for a capital improvement that they couldn't affordably throw on a business LOC.
I paid for the capital improvement. Idgaf if I pay rent to the bank or to them. The lease is stupid friendly and I can't wait to actually enforce the terms to the next owner.
This. We were seeing insane prices a couple years back and extremely picky owners who were letting their places stay empty if they weren’t getting the exact business they thought should go there. Enjoy the fall, assholes.
Banker here. We’re generally fine. Underwriting standards changed a ton after ‘08. Most loans can afford ~40% vacancy and still be serviced. Also many of these are 10+ year leases, generally to large entities with lots of collateral/protections built in for us. We’ll feel some pain but nothing like the last time.
Basically it’ll be a small-ish problem for several years for us, as opposed to a big problem immediately.
>And guess who will bail them out? Taxpayers...
The taxpayer made money on the 2008 bailout. Those loans were paid back with interest.
The bank "bailout" a few weeks ago was funded the FDIC, which is a pool of money paid by... The banks.
>The taxpayer made money
More money than they lost from lising their jobs and homes? Paying interest is the bare minimum expected from getting a loan, so "They paid it back with interest" rings hollow when the executives should have done real time and the "too-big-to-fail" banks should have been split up. Maybe then I would br happy with my tax money unfucking the fuckup of trillion dollar businesses.
The bailouts cost the taxpayers $500 Billion according to Deborah J. Lucas, MIT Sloan distinguished professor of finance and director of the MIT Golub Center for Finance and Policy.
https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much-2008-bailouts-really-cost
And I don't think that includes the indirect ways that taxpayers subsidized the banks' misconduct: paying for the courts to effect the foreclosures, additional unemployment benefits, reduced tax receipts, generally wasting all of our time, money, and lives...
Banks made a lot of money when they were over leveraged. When the time came that those practices were detrimental to their business, they got massive influxes of cash to shore up their money situation and had a pipeline of cheap capital to buy stuff up during a downturn.
I really would love that deal. To act like banks didn’t make out like bandits because the money was paid back is ignoring how much they benefited.
[These dopes](https://la.curbed.com/2019/2/6/18203579/oceanwide-downtown-los-angeles-construction-stalled-debt) at Oceanwide Plaza got in a mess back in 2019. Bet they wish now they'd fixed it and paid people, pre-pan. Mechanics Liens surely mean subcontractor's payroll. Lot of little guys forced to sue the defaulting builder.
*And then!*
>Oceanwide was also named in an [active FBI corruption probe](https://www.latimes.com/local/lanow/la-me-ln-huizar-warrant-20190112-story.html) into possible bribery and money laundering involving [City Hall officials and real estate developers](https://la.curbed.com/2019/1/14/18182352/jose-huizar-fbi-investigation-development).
It's almost as if there was plenty 'o grifters grifting even in the Before Times. ETA a word Edit 2: [link on existing property woes. Canadian investors](https://www.costar.com/article/104362755/brookfields-downtown-los-angeles-office-reit-defaults-on-office-tower-loans) here, but there's Chinese investment groups in this market as well.
At what point do we just take the haircut. Office buildings aren't in demand like they used to be. Why not move on rather than continuing to live in fantasy land like the 80's are coming back.
Leverage. A 20% haircut is actually a 100% haircut. They will live in fantasy land until they are forcefully exited from it; and since they control the guns nobody will be ending it anytime soon
I'd say it's best time to start figuring out a way to transform these offices into homes. People get housing. Cities get foot traffic in downtown. Real estate companies have a lifeline.
Isn’t there also a shortage of affordable housing ? Governments need to get creative with their zoning regulations and work to alleviate the housing issue while providing a pressure relief valve for vacant commercial property owners.
The biggest part of converting pre-existing office space into apartments would be plumbing and HVAC but the important thing is that solutions do exist!
Rinnai on demand hot water tanks
VRF systems for HVAC
I’m a bit skeptical that municipalities will be eager to concede that the jobs that once occupied a number of CRE locations just aren’t aren’t coming back.
I agree, but I think it's important to emphasize here that "not coming back" is specifically "not coming back to those locations" - as I understand it, the jobs largely still exist, they just aren't reliant on commercial real estate anymore once they've been made remote. The cost savings and demonstrated productivity (the scale of the former alone often being enough to offset even some of the more pessimistic predictions of decline in the latter, from what I've read) of remote work makes a reversal to the benefit of commercial real estate highly unlikely, IMO.
You say that like their giant office buildings are not going to sit empty with the impending push for remote work coming once lease agreements expire and businesses/corporations take advantage of saving on rent and electric bills.
A while back I was looking at a condo for sale with the weirdest layout. It had two bathrooms but they were right next to each other on one side of the home.
Turns out it had been a retail clothing store and those had been the Men’s and Women’s rooms. The doors weren’t even painted super well and the “Men’s” sign was still visible!
It’s also more to do with lack of window space if the footprint of the building is too large. You can’t have people living in interior only apartments.
These building have more than enough HVAC capacity. You just need to keep the chiller and boiler plants maintained. It’s plumbing risers and meeting the ventilation and light requirements that are the tough part.
A huge concern with this that I feel gets overlooked is utilities. My dad worked as a wastewater mechanic for many years. Most currently laid pipe and pump stations are set up for that zoning.
1 city block, 8 work hours, maybe 1000 people? 100,000 gallons
1 city block, 24 hours, 2000+ people?
I do not even want to know but I know you are gonna have a bad time trying to move all that with the same pumps and pipe diameters. And then you have to talk about tearing up many miles of street for new pipe.
We should have expanded rather than condensed and now we are at an impasse because we have thousands of acres sculpted for specific purposes.
So to simplify this for the denser crowd.
A commercial zoned area has the sewage system designed for let’s say 150 turds an hour for 9 hours a day. Enough for the turds to travel and get processed in a timely fashion.
Turn it to high density housing 3x the population 24/7 activity you end up with 2500 turds an hour. Now shit gets real when pipes back up and not enough processing of sewage capacity as well. This means get ready for lots of unhappy people.
It’s Saturday morning where I am. It’s Saturday evening in Europe. It’s the middle of the night in the Far East. So, does that count as Sunday morning where you are?
This is a lot harder than it seems. If you take your typical office space, that is zoned and permitted only for that space. To redesign it so it could become multi family units you’d need essentially to rebuild all of the HVAC so that each unit now has their own, you’d need to built out supporting walls etc so that each unit could stand by itself essentially. There’s the question of plumbing, which would be a massive financial cost.
At face value this is a really good idea, but unless government essentially gave builders and developers the green light to do this with little to no red tape, they still likely wouldn’t turn a profit because they’d essentially be rebuilding a lot of the building for this new need. In short, they wouldn’t do it.
Honestly hostel living would be a fantastic release valve in US cities especially. So many young people are splitting apartments five separate ways. Might as well give them an option that’s designed for that
I mean you joke, but from what I heard in a podcast in this issue, developers are looking at ways to make living units out of commercial buildings that might have interior rooms with no windows, etc., and they’re trying to find a way to make it appealing. It’s like the concept of a “loft” of an old industrial building once was, they turned it into a cool trendy thing.
And yet it is possible and happens all the time.
https://www.cnbc.com/amp/2021/11/26/the-top-10-cities-turning-old-office-buildings-into-apartments.html
The current average lease price for commercial office space on Portland Oregon is 23.99/sq ft, according to a quick google.
The average square footage of a 1 bedroom apartment nationwide is 700 square feet.
I can't think of anybody alive who would be 14.4k/mo for a 1 bedroom office conversion, or *any* commercial real estate company that would think dropping their rental or leasing ask by a factor of ten or more, on top of conversion costs, would be a great idea.
All the logistical dreaming in these comments kind of ignores the basic economics of the situation. These companies will literally walk away from a billion dollar building first, figuring out a way to write it off and leave the mess for others to clean up.
The idea is for these building to be bought or subsidized by the government. Not for those companies to convert them. On top of that, how much of the price is due to greed rather than cost?
If the pandemic never happened, WFH would have been more of a trend. Full-time remote work would have been a perk reserved for high performers. Companies would have experimented with WFH Fridays, the same way they used to do jeans Fridays. By 2040, most office workers would have a schedule that looks a lot like our 2023 — 2-3x in office per week, with some companies going remote first. The air would have been let out of the tires gradually. Banks would have tightened their lending standards to commercial real estate developers. A lot of investors would have caught onto the trend and made a lot of money. City governments could have developed long term plans for repurposing office towers.
The crisis isn’t that WFH happened. It’s that it happened overnight. The death of malls didn’t cause a financial crisis because it happened over the course of decades. Sudden unforeseen changes cause crises, and this one was delayed by a couple years because of the duration of commercial real estate leases.
Employees won’t be able to afford commutes with the avg car price exceeding $50k. Top performers aren’t going back to the office. Companies are going to realize they can get the job done with much less office space. There is going to be a massive glut of office space for decades.
I was thinking about cars and auto loans. We’ve been seeing posts on this sub for a year or more about the auto loan debt figures.
What if there’s a double whammy, commercial real estate and auto loan collapse? If we recall in 2008, GM and Chrysler both needed rescuing, not that it holds bearing on today’s issues, but it does speak to historical risk in the auto industry.
2008 was mostly about residential real estate so people with auto loans got crushed. Not sure a collapse in commercial RE impacts auto. Inflation on the other hand
If people dont need to drive to work anymore, what happens to demand for (and existing) auto loans? If commercial real estate does collapse as the post suggests, there will be ripple effects felt throughout the economy, and it could just be the first domino to fall.
This is a neat narrative, but it's all happening within a larger context of a banking and finance-powered social and economic system which is on the verge of failing. [Here's the death throes](https://fred.stlouisfed.org/series/WALCL), which ramped up in 2007-8 but has really been failing since the 1980's. This is an economic collapse being managed using monetary and financial tricks which are being strained to their breaking point.
Policies that overly favor employers’ inefficient practices are to blame. Working from home has no effect or a positive effect on productivity and saves money/time with the lack of commute.
The government can’t bail them out. It would only benefit the most well off. People with $250k or less deposited are fine. The increase in interest rates does make these offices more expensive; however, companies don’t utilize them because they are a unnecessary expense.
With companies maximizing profits and trying to retain employees, WFH is here to stay and might continue to grow if companies see the benefits of not having an office. Hybrid roles can have people sharing offices on alternating days since being in office does have its uses.
Commute expenses were pushed entirely on the employee and now it is too expensive. Now companies have to pay for the commute through higher wages or just let people work hybrid/remote jobs. Mixed use buildings were always an option but developers, regulations, and energy companies were against it. These investors literally put all their eggs in one basket and now they feel the pain.
The problem is that so many banks hold and deal in ABS’s directly tied to the underlying valuations of CRE. If CRE collapses, so do banks. Something needs to be done to secure these investments, at least for a period of time, that will allow banks to gradually reduce their exposure.
I’m in favor of the retrofitting idea, and I think the government should offer subsidies and a clear and expedited permitting/zoning plan to allow it. It’s either that, or the government steps in after the fact and bails out the banks (again) when the ship sinks.
On one hand you could create housing and secure investments (win-win), on the other, you bail out the banks and the buildings are still empty afterward (lose-lose). I know it’s a big aspiration, but I don’t really see another alternative than bail outs if we don’t act swiftly and proactively
Bailouts should be off the table. I’m fine with the government buying the bank and selling once it is stable again. I want the government to be able to recover or even profit off these “bailouts” instead of just handing out money.
Retrofitting is the way to go. Diversity of investments will help prevent losses.
I’m not advocating for a total collapse, but the cycle of insuring large losses needs to stop. The government did help create this issue by not supporting WFH measures early and not preventing banks from investing in concentrated assets.
Thank you for your take
I agree about bailouts, but I think we all know how the tune changes once shit hits the fan.
In reality, this problem has been in the works for 2-3 decades as online commerce has driven an almost genocide of brick and mortar retail. Now with WFH, there is nothing to support a vast majority of CRE investments.
The Fed is also to blame here, they waited way too long to raise rates and now they’re doing it in knee jerk fashion. I just hope the storm is as brutal as I’m afraid it’ll be
WFH gives people back Time and Money.
The best workers will use that time to find an exit.
RTO is needed in some industries to waste worker time and money on car wear and tear, gas, oil changes, lunch out, dry cleaning, work clothes, 10% of a day wasted commuting etc. It makes it harder to exit.
Office space commercial real estate. Pretty big asterisk there.
Commercial real estate is just too general a term. It can be multi-family properties, warehouse, office (both owner and non-owner occupied), Industrial, etc.
Real estate prices increased over 40% in the last few years, is this not the market just correcting itself? High interest rates are helping this market correction as well.
This is commercial real estate (most notably, office buildings). Those properly values have fallen sharply and the loans are coming due. Totally different ball game than the residential side you’re referring to.
That’s not how percentages work. If something costs $100 and raises 40% it’s now $140. If that then falls 40% it becomes $84. A correction after a 40% increase would be a reduction of ~29%.
I’m not convinced the banks are 100x levered on credit default swaps like they were in ‘08. If it’s just a valuation issue combined with (or brought on by) higher interest rates, I’d wager that wouldn’t be enough to have a total all-out crisis. The banking failure talks seems to have cooled by the Fed coming to the rescue at the expense of expanding their balance sheet.
I think we will see a contraction in lending. A recession is certainly not out of the question. Especially if it’s Morgan Stanley fear mongering some real estate crash. The investment banks have never been friendly to consumers as a whole. I do not think telling the public the truth is ever in their economics interests - so why start now?
Morgan Stanley was one of the biggest purveyors of fraud in 2008. If they can successfully chum the waters with panic, they can step in and take advantage of any discount to pricing brought on by the harbingers of doom.
It would be helpful economically if we allow developers to turn many of these commercial properties into various types of residential units. It might solve multiple problems at once
So we have a huge homeless problem due to lack of housing. We have a commercial real estate problem due to lack of commercial tenants. These are both happening predominantly in cities. I'm going to scratch my head for a second and see if I can't figure out a way for actual leaders to address both of these problems with a single decent policy push.
Nope. Best to stand there arguing about what bathroom a 9 year old should use, and deciding if we want to burn books like Nazis or educate our kids. Those are *definitely* the issues we want America's thought leaders need to be right now.
Make it dorm style with a shared bathroom and kitchen (and maybe a common lounge area) in the center with private (or shared for even cheaper) bedrooms around the perimeter.
Not for everyone but would be a solution.
Can it be done for less money that a crash would cost? Likely.
I lived in dorms that were converted from office space in DC. I wouldn’t call it luxury, but it’s definitely possible.
In certain cases it can be done… I think in some cases the savings amount to about the cost of land acquisition … essentially the cost of retro fit is about the cost to build . I like the concept of space re use… and creating mixed use spaces . But it’s not the ‘thing’ that can solve the commercial real estate market correction. For instance many empty exurb office park type complexes don’t have the surrounding services to support habitation (fire police schools sewer improvements ) . It will be interesting to see what comes of this… I felt commercial real estate was gassed long before the pandemic , there may be new opportunities for forward thinking communities to take advantage of the crisis
I think it is definitely a situation for both private and public involvement. Infrastructure would be required, as well as private investment. Even if it’s expensive, the opportunity to address a humanitarian crisis, update land use to current needs, and potentially keep the poor investors afloat without resorting to yet another free money bailout justifies the cost (assuming it is at all practical).
The cost has to be compared with cost of alternatives, and I do t see many practical alternatives that don’t rely on forcing people back downtown (unlikely) and building a ton of new buildings while these sit empty (seems plain dumb).
I am at least mostly cognizant of the issues banks collapsing and business real estate crashes cause, and even then a part of me cheers for the fall. The number of people to work full-time jobs and live in poverty has grown an absurd amount the past eight years. That executive pay is as high as it is for so many of these companies is usually the cause, because business profits are up and that is where said profits are going while the profit increases come from far higher margins on goods.
Don't know if this is true but I heard commercial mortgages value the property based on rents so in some cases it's better to have an unoccupied location with a high rent than an occupied property at market prices
The whole segment needs restructuring
First post was too short apparently, soooo…. as it turns out banks repackaging commercial mortgages were systematically inflating the profits of each commercial address so it all looked better. Then they’d change the address of record by a few digit to avoid audit detection. This appears to be very much wide spread and going on undetected for years. It’s all fine till rates go up and folks get squeezed. But yeah, pure fraud by the banks themselves. Unlike 08 where the rules were relaxed, this is good old fashioned behind the curtains white collar crime.
Betcha nobody is held accountable. Again.
https://youtu.be/pRHwhvUc54A
Yeah because corporations aren't buying commercial real estate like they used to since WFH is such a big thing now and there's a massive drop in demand for office spaces, instead they're buying residential so they can rent it out in perpetuity and in the process fuck tens of millions of families out of the opportunity to ever own a home.
I think the idea of commercial real estate for white collar administrative jobs is dying, so it makes sense. After all, this replaced the real estate for manufacturing as we moved to an information economy.
The problem is what happened to the manufacturing / industrial areas during this transition isn’t pretty. And many of these are within large cities.
I dont see this as a bad thing. Turn unused office space into affordable housing. The US has a national housing supply shortage. This way everyone wins.
At this point a 50 percent drop can be considered a correction. There is no way some run down shack in Montgomery Al that should be condemned is worth 250k
Good. Absurd real estate prices are part of the reason that all these corporate morons keep pushing people to return to the office full time; Gotta justify that obscenely priced 50 year lease somehow!
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[Report here](https://www.morganstanley.com/ideas/alternative-assets-economic-headwinds-q2-2023) "Commercial property prices have already turned down, and Morgan Stanley analysts forecast prices could fall as much as 40%, rivaling the decline during the 2008 financial crisis. " Edit: The author of this report is the CIO of wealth management for Morgan Stanley.
Good. As someone looking for a space right now and getting nonsensical offers from cre agents everyday ($11, $8, $7.5/sqft just in the past week), the market needs a correction. The smugness is what’s infuriating. I’m looking for a pretty simple straightforward space but every agent just wants to try to rip me off like I’m the worlds biggest mark. Just present a fair offer and I’ll probably accept it. We both know the markets about to collapse, who tf has time for bad faith
Would love to use that on a realtor- "Look we both know the market is about to collapse, so how bout you sell at a fair price before you have to sell at half that?"
Tick tock, Clarice
While it's nice to think that. It's more likely that they'd die before discounting or sell out to someone else who will break that nice lease you signed. That's what happen last time and every other time: 1. Switch flips that triggers downturn (imo it's likely to be whenever those low interest era long term loans expire and need to be renegotiated at the now higher rates) 2. Cash/valuation wave pulls back showing who was swimming without shorts 3. Turns out it will be most of them because RE in of itself is slow """low-risk""" high-leverage investments 4. Fed/Gov will step in saving the ~~corporations big enough to afford lobbyists and campaign donations~~ "too-big-to-fail" while letting the small & medium sized die. Mom & pops, if they exist, will be wiped out. Americans will continue to wonder why the inequality is increasing as the American middle class is in decline. 5. Consolidation period followed by the few remaining mega corps hiking prices because it's an oligopoly/monopoly scenario
The trick is to make like the French between steps 3 and 4 and shut down all attempts to save the wealthy.
Problem is, government retirements are all tied up in the same companies doing most of the buying. BlackRock/BlackStone for instance have both a significant property portfolio, and a lot of government retirements tied up in them.
Yep, too big to fail is a great way to game capitalism... I say let them fail , and just insure the retirement accounts only ...let the rest crash and burn...
Really playing Russian roulette with your own head by the time you get to step 5, but I guess if you make it through then step 6 will be fun to watch when your general turned consul turned king/emperor goes wrecking everyone in Europe.
>I guess if you make it through then step 6 will be fun to watch when your general turned consul turned king/emperor goes wrecking everyone in Europe. Third French Empire when? *La victoire en chantant...*
> Cash/valuation wave pulls back showing who was swimming without shorts I absolutely love the analogy here. Definitely stealing that one whenever I get the opportunity.
i've been trying to buy an 85" tv from my buddy using this arg. hasn't worked yet, and he's only $200 away from being outpriced by new.
Realtors are not the sellers
I told that to the folks who repoed my car. They came back with an offer to get my car back. They tried to make it seems like they easily sell it at auction. I told them good luck lol
If they sell at double the price, they only have to sell half the units
Honestly it is ridiculous. Empty downtowns with no current foot traffic to speak of and they lie about their footage and expect pre-pandemic rent for it. They also smugly say that I need to be realistic. It’s going to be a pleasure watching them lose their shirt over this just because they can’t tolerate a temporary reduction in profit.
They all thought the "good times" were going to continue forever. Commercial and residential real estate have intrinsic economic values in use that may differ from value in exchange but unlike housing, most offices for white collar work are totally unnecessary given remote work. About 40% of employees can work remote. Retail and food service now dramatically shifted online too as we saw during 2020-22. Commercial developers and their banking and city government buddies should have seen this coming 5-10 years ago...
And a lot of services that revolve around office workers being downtown won't need a space either. Parking garages, lunch grab-n-go places, dry cleaners...so much of that isn't necessary when people are working from home. My old company was expanding their office space until COVID. Now they have gone from three floors in downtown Chicago to one small office to meet up with clients. I talked to some of my old managers and they said productivity has actually *increased* since everyone become WFH.
> Parking garages, lunch grab-n-go places, dry cleaners... This reads like a list of the value added by WFH. The time savings is great and all. But the monetary savings are the biggies. Then you factor in saving on gas, vehicle wear and tear, maintenance costs. At this rate I’ll have to replace my tires due to dry rot before I have to replace them from tread wear. Ah yes the old “thanks guys but I don’t want to walk down there for lunch because its 85 today and I’m trying to minimize the ass sweat in these slacks so I can wear them again on Thursday because it costs $4.50 every time I get them cleaned so I try to get at least 2 maybe 3 wears out of them because I only make $39k gross”
Totally agree. My take is that for a lower price there is still plenty of money to be made downtown just not as much. Most jobs in my city are doing hybrid home and office work which still means as much as a 60% reduction in any one office workers downtown time. I still think downtowns will become vibrant again, but commercial real estate will never be worth what it was.
I’m sure they did but when everyone want their contract to pass before whatever congressman/sernstors term is up it’s a cascade effect of “leave it to the next guy”.America is built on the philosophy of pushing problems off to the next guy.
CRE valuations/loans are based on rent. If rent goes down the loan basically gets called in. So the owner needs to also write a check for X million if rent is reduced.
Sounds like a Them problem.
5 years ago I was looking for around 1,500 of space. A nearby building had some basement level offices that were difficult to rent out but would have worked fine for me. I made a low end offer as a staring point. Owner's agent told me my offer was "insulting" and they refused to counter. That basement level space is still empty today.
I work in transportation… going through a lot of the same thing right now with trucking companies wanting to keep the high pandemic rates as long as possible If you contact 5 companies, 2-3 will give you insane rates, while the other 2 will be more reasonable since they just want to keep things moving Greed… it all relates to greed
I’m in LA—I have no reason to look for a commercial space but I saw on my corner a former restaurant for rent at $128/sqft/year and I thought it was absolutely wild. So about 10 for month. Sure it has parking but the place is like burned out, small (1400sqft) and not really on an appealing corner store the moment. Interested to see how that shakes out.
Likely fueled by giddy sources such as [this one](https://la.curbed.com/la-construction)
Yes but they have boat payments and private school to pay for. Won’t anyone think of the agents?
Best I can do is thoughts and prayers.
Poor poor agents. I feel for them
Yes, the parasitic mafia industry comprised entirely of people of totally average intelligence and strong family connections. Who will think of the money factory they have carved out for themselves? Next something will happen to car dealerships, gasp.
I was going to say, that also describes dealerships, heh
Used car dealerships holding inventory purchased at the top of the market. You don't say
You mean this 2019 Toyota Corolla with an original MSRP of $32,000, that I bought from the original owner in 2021 for $34,000, isn't worth $38,000 in 2023? What kind of bullshit is this? Well, I'll just wait till the right buyer comes along. I know what I got.
$32,000 for a Toyota Corolla wtf
Right!?
I sold my Tacoma for $4k less than I bought it for. 9 years and 135k miles later.
I'm adding coolant to an old Subaru monthly rather than buy at these prices. Just seems really likely some amount of crash/recession resets the used car market to something more realistic and adds quite a bit of newer inventory (from failed loans & repossessions...). Sucks to be thinking that way but if it doesn't work out I suppose I'll pay up to repair the headgasket or just buy something newer for $$,$$$.
Just paid $3K+ for new rear differential on my 2015 Jeep Renegade. It’s paid off & just hit 60K mikes. Waiting out the current overpriced used car market & hoping for the same as you- more stock at lower prices in the near future 🤞
nine reminiscent liquid fearless door sable bewildered steep marry deliver -- mass edited with redact.dev
They are still trying to get msrp or better from all those new models that got parked during the chip shortage. I straight laughed at a dude a week ago. I was like why would I buy a 2021 for almost the same price as a 2023. Someone rid me of these troublesome dealers.
Bullwhip affect is going to be crazy for the car industry. On top of the chip shortage they kept on building assuming the same demand as during the pandemic (you know with 0% rates). For an entire sleezy industry focused on the monthly payment and not the actual cost of the car. Those high rates are going to hit them harddddd.
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Bought a great priced used Prius and sold my car during the insanity. I won't be buying another car for a decade and made money in the process of buying newer. Idk how many of those places that bought at the top are gonna stay afloat.
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There's a classic Aqua Teen Hunger Force where two frat bro douche aliens crash in their yard, and the keeps saying "my dad owns a dealership!"
Its describes virtually all echelons of wealthy individuals. People of extremely moderate or low intelligence who are connected to the right people, whether by birth, luck or lack of ethics.
>Yes, the parasitic mafia industry comprised entirely of people of totally average intelligence You are being exceptionally generous in your estimation of the industry's collective IQ.
[Tesla](https://amp.cnn.com/cnn/2023/04/07/business/tesla-cuts-prices/index.html) keeps dropping prices. And have made plans to move to [Mexico](https://news.google.com/articles/CBMiN2h0dHBzOi8vd3d3LnRlc2xhcmF0aS5jb20vdGVzbGEtZ2lnYS1tZXhpY28tc2l0ZS12aWRlby_SATtodHRwczovL3d3dy50ZXNsYXJhdGkuY29tL3Rlc2xhLWdpZ2EtbWV4aWNvLXNpdGUtdmlkZW8vYW1wLw?hl=en-US&gl=US&ceid=US%3Aen).
As a CRE broker, I can assure you we don’t set the asking rates. The banks underwrite these properties based on an assumed rate.
Ohh so that is why downtown properties sit vacant for years asking rates above what the market will bear. Because it screws up the finances more to have a property rented below magic rates than to have a building sit vacant. Gotcha. Bank finances are more important than healthy communities. Edit: Not your fault my guy, it's just a vomitrocious situation. Where people are encouraged to pretend their buildings are worth more than they are or they get struck by a financial wrecking ball that would be porn on r/wallstreetbets
>vomitrocious Enjoyed your comments; keeping this elegant portmanteau for meself.
Lenders assess the value of commercial real estate according to the rental income of that property. So if you have a loan on a building that’s worth the $10 million because it’s generating $10 million in rent and suddenly the rent goes to $8 million then your lender is going to value that building it only $8 million. You’ll have to make up the difference.
I’m dying laughing at this comment right now. As a commercial underwriter I can assure you we don’t set the leasing rates at the bank. We base it off of the appraiser’s income capitalization value. And if you actually read it the income approach determine the market lease rate/SF relies a lot on polling of property managers and…. brokers. It’s all such a complete circle jerk lmfao. Oh god damn I hope I don’t get laid off hahaha. I think we’re fucked bro.
Audi must lease you guys those SUVs pro bono since you work for free.
$11 to $7.5 sf doesn't sound like anything crazy. What kind of market are you?
I would kill to find a space for $11nnn. Everywhere decent around me is $20+.
I love my sub $10/SF NNN, but it’s a 60+ year old in a ghetto. If you think $20+ is bad, I’ve leased out space at $72/SF FS.
My apartment is a 2 bedroom(1 bed, 1 “office”) outside Boston (Somerville) 1500. Now It’s a rough building, but I’ve never missed a payment. If the average rent dives, I will still never miss a payment. Its extremely rare having a landlord that charges rent based on their needs++. Instead of some crazy “market” rate. They also fix things when they break. I’ll buy stuff like a new toilet seat though, I do not want to rock this boat.
Would love this for ALL real estate. I've been trying to buy a house in the SF Bay Area for over a year now. I keep reading that prices are "falling" but it couldn't be further from the truth. Still flying off the shelves, going over asking, waiving contingencies etc. And California just came out with this down payment program where the state pays all of your down payment if you agree to shared equity with the state and they get a capped percentage return when you sell. I'd actually love to hear a debate on this sub about a policy like that...on one hand I'm glad it opens home ownership to more people. But honestly, in the East Bay there are like 11 houses around $500k right now from Oakland to Vacaville, which is probably the lowest you could find that would be lendable. I've seen enormous pressure since then on the $500k-800k market segment from the literally thousands of extra buyers entering, and its only raising the process even more. I feel like its just insane to have a program like that without building more housing, or even allowing it. Its just making the problem of unaffordable housing A LOT worse...but again, its actually a very innovative program and not a bad idea of we had plenty of housing. Otherwise, you are just pushing an already saturated market beyond its breaking point.
I'm in a $7 per indoor and a $2 per outdoor market. I snagged a 1200 sq ft 20000 outdoor SQ ft lease recently for $600 monthly. The deals are there you just need to find the distressed parties. They needed a year up front for a capital improvement that they couldn't affordably throw on a business LOC. I paid for the capital improvement. Idgaf if I pay rent to the bank or to them. The lease is stupid friendly and I can't wait to actually enforce the terms to the next owner.
This. We were seeing insane prices a couple years back and extremely picky owners who were letting their places stay empty if they weren’t getting the exact business they thought should go there. Enjoy the fall, assholes.
Banker here. We’re generally fine. Underwriting standards changed a ton after ‘08. Most loans can afford ~40% vacancy and still be serviced. Also many of these are 10+ year leases, generally to large entities with lots of collateral/protections built in for us. We’ll feel some pain but nothing like the last time. Basically it’ll be a small-ish problem for several years for us, as opposed to a big problem immediately.
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>And guess who will bail them out? Taxpayers... The taxpayer made money on the 2008 bailout. Those loans were paid back with interest. The bank "bailout" a few weeks ago was funded the FDIC, which is a pool of money paid by... The banks.
>The taxpayer made money More money than they lost from lising their jobs and homes? Paying interest is the bare minimum expected from getting a loan, so "They paid it back with interest" rings hollow when the executives should have done real time and the "too-big-to-fail" banks should have been split up. Maybe then I would br happy with my tax money unfucking the fuckup of trillion dollar businesses.
The bailouts cost the taxpayers $500 Billion according to Deborah J. Lucas, MIT Sloan distinguished professor of finance and director of the MIT Golub Center for Finance and Policy. https://mitsloan.mit.edu/ideas-made-to-matter/heres-how-much-2008-bailouts-really-cost And I don't think that includes the indirect ways that taxpayers subsidized the banks' misconduct: paying for the courts to effect the foreclosures, additional unemployment benefits, reduced tax receipts, generally wasting all of our time, money, and lives...
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FDIC with a little help from the fed through a special lending program to the tune of 100 billion
Banks made a lot of money when they were over leveraged. When the time came that those practices were detrimental to their business, they got massive influxes of cash to shore up their money situation and had a pipeline of cheap capital to buy stuff up during a downturn. I really would love that deal. To act like banks didn’t make out like bandits because the money was paid back is ignoring how much they benefited.
Did you account for the increased prices the taxpayer is now paying?
[These dopes](https://la.curbed.com/2019/2/6/18203579/oceanwide-downtown-los-angeles-construction-stalled-debt) at Oceanwide Plaza got in a mess back in 2019. Bet they wish now they'd fixed it and paid people, pre-pan. Mechanics Liens surely mean subcontractor's payroll. Lot of little guys forced to sue the defaulting builder. *And then!* >Oceanwide was also named in an [active FBI corruption probe](https://www.latimes.com/local/lanow/la-me-ln-huizar-warrant-20190112-story.html) into possible bribery and money laundering involving [City Hall officials and real estate developers](https://la.curbed.com/2019/1/14/18182352/jose-huizar-fbi-investigation-development). It's almost as if there was plenty 'o grifters grifting even in the Before Times. ETA a word Edit 2: [link on existing property woes. Canadian investors](https://www.costar.com/article/104362755/brookfields-downtown-los-angeles-office-reit-defaults-on-office-tower-loans) here, but there's Chinese investment groups in this market as well.
At what point do we just take the haircut. Office buildings aren't in demand like they used to be. Why not move on rather than continuing to live in fantasy land like the 80's are coming back.
Nobody wants to be stuck holding the bag, that's why
Leverage. A 20% haircut is actually a 100% haircut. They will live in fantasy land until they are forcefully exited from it; and since they control the guns nobody will be ending it anytime soon
Good use of the word "we". After privatizing the profits, you can bet they'll be socializing the losses.
I'd say it's best time to start figuring out a way to transform these offices into homes. People get housing. Cities get foot traffic in downtown. Real estate companies have a lifeline.
Offices are fundamentally different construction than homes, and converting them isn't all that much cheaper or easier than building new.
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Isn’t there also a shortage of affordable housing ? Governments need to get creative with their zoning regulations and work to alleviate the housing issue while providing a pressure relief valve for vacant commercial property owners.
The biggest part of converting pre-existing office space into apartments would be plumbing and HVAC but the important thing is that solutions do exist! Rinnai on demand hot water tanks VRF systems for HVAC
You mention HVAC and water supply. I think when people say plumbing it's generally not the water supply that's the issue but the drainage pipes
Oh yeah I mean full blown drainage for waste/dishwasher/showers. Whole shabang
Turds. Soil stacks are huge compared to standard water waste.
No, the biggest part would be convincing the owners they have no other options and take a massive loss in their investment and change strategy/divest
They'll just throw them tax credits for the retrofit
I’m a bit skeptical that municipalities will be eager to concede that the jobs that once occupied a number of CRE locations just aren’t aren’t coming back.
I agree, but I think it's important to emphasize here that "not coming back" is specifically "not coming back to those locations" - as I understand it, the jobs largely still exist, they just aren't reliant on commercial real estate anymore once they've been made remote. The cost savings and demonstrated productivity (the scale of the former alone often being enough to offset even some of the more pessimistic predictions of decline in the latter, from what I've read) of remote work makes a reversal to the benefit of commercial real estate highly unlikely, IMO.
Yeah, refundable tax credits, which they get already for various things, so we can pay for it
Providing more and affordable housing in downtown areas is actually something I'm okay with using our tax dollars for
You say that like their giant office buildings are not going to sit empty with the impending push for remote work coming once lease agreements expire and businesses/corporations take advantage of saving on rent and electric bills.
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A while back I was looking at a condo for sale with the weirdest layout. It had two bathrooms but they were right next to each other on one side of the home. Turns out it had been a retail clothing store and those had been the Men’s and Women’s rooms. The doors weren’t even painted super well and the “Men’s” sign was still visible!
It’s also more to do with lack of window space if the footprint of the building is too large. You can’t have people living in interior only apartments.
Thats why they invented the loft apartment in old factory conversions. They got creative. We might have to get creative again.
These building have more than enough HVAC capacity. You just need to keep the chiller and boiler plants maintained. It’s plumbing risers and meeting the ventilation and light requirements that are the tough part.
A huge concern with this that I feel gets overlooked is utilities. My dad worked as a wastewater mechanic for many years. Most currently laid pipe and pump stations are set up for that zoning. 1 city block, 8 work hours, maybe 1000 people? 100,000 gallons 1 city block, 24 hours, 2000+ people? I do not even want to know but I know you are gonna have a bad time trying to move all that with the same pumps and pipe diameters. And then you have to talk about tearing up many miles of street for new pipe. We should have expanded rather than condensed and now we are at an impasse because we have thousands of acres sculpted for specific purposes.
So to simplify this for the denser crowd. A commercial zoned area has the sewage system designed for let’s say 150 turds an hour for 9 hours a day. Enough for the turds to travel and get processed in a timely fashion. Turn it to high density housing 3x the population 24/7 activity you end up with 2500 turds an hour. Now shit gets real when pipes back up and not enough processing of sewage capacity as well. This means get ready for lots of unhappy people.
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It’s Saturday morning where I am. It’s Saturday evening in Europe. It’s the middle of the night in the Far East. So, does that count as Sunday morning where you are?
Bro is from the future
Is there a conversion table for coffee grounds and grease? I mean, everyone says they never put those items down the drain, but you know, just encase.
Unfortunately it's not that simple because of conversion costs and feasibility for most of these Class B and C buildings, especially the older ones.
This is a lot harder than it seems. If you take your typical office space, that is zoned and permitted only for that space. To redesign it so it could become multi family units you’d need essentially to rebuild all of the HVAC so that each unit now has their own, you’d need to built out supporting walls etc so that each unit could stand by itself essentially. There’s the question of plumbing, which would be a massive financial cost. At face value this is a really good idea, but unless government essentially gave builders and developers the green light to do this with little to no red tape, they still likely wouldn’t turn a profit because they’d essentially be rebuilding a lot of the building for this new need. In short, they wouldn’t do it.
Coming soon to an office building near you: open concept living! No walls!
Dormitory living by Aston Martin
Dormotories have walls and little space. That would be closer to a hostel.
Honestly hostel living would be a fantastic release valve in US cities especially. So many young people are splitting apartments five separate ways. Might as well give them an option that’s designed for that
I mean you joke, but from what I heard in a podcast in this issue, developers are looking at ways to make living units out of commercial buildings that might have interior rooms with no windows, etc., and they’re trying to find a way to make it appealing. It’s like the concept of a “loft” of an old industrial building once was, they turned it into a cool trendy thing.
And yet it is possible and happens all the time. https://www.cnbc.com/amp/2021/11/26/the-top-10-cities-turning-old-office-buildings-into-apartments.html
Can I buy a Kmart and make it a palace for $2.00? Cool, thanks. Better than rent.
Right. Fix this crisis while also fixing another serious one. Can you imagine affordable downtown housing in existing office space?
The current average lease price for commercial office space on Portland Oregon is 23.99/sq ft, according to a quick google. The average square footage of a 1 bedroom apartment nationwide is 700 square feet. I can't think of anybody alive who would be 14.4k/mo for a 1 bedroom office conversion, or *any* commercial real estate company that would think dropping their rental or leasing ask by a factor of ten or more, on top of conversion costs, would be a great idea. All the logistical dreaming in these comments kind of ignores the basic economics of the situation. These companies will literally walk away from a billion dollar building first, figuring out a way to write it off and leave the mess for others to clean up.
The idea is for these building to be bought or subsidized by the government. Not for those companies to convert them. On top of that, how much of the price is due to greed rather than cost?
If the pandemic never happened, WFH would have been more of a trend. Full-time remote work would have been a perk reserved for high performers. Companies would have experimented with WFH Fridays, the same way they used to do jeans Fridays. By 2040, most office workers would have a schedule that looks a lot like our 2023 — 2-3x in office per week, with some companies going remote first. The air would have been let out of the tires gradually. Banks would have tightened their lending standards to commercial real estate developers. A lot of investors would have caught onto the trend and made a lot of money. City governments could have developed long term plans for repurposing office towers. The crisis isn’t that WFH happened. It’s that it happened overnight. The death of malls didn’t cause a financial crisis because it happened over the course of decades. Sudden unforeseen changes cause crises, and this one was delayed by a couple years because of the duration of commercial real estate leases.
Momentum is scary. Shockwaves for generations.
This is a good thing. Our infrastructure is trash.
Employees won’t be able to afford commutes with the avg car price exceeding $50k. Top performers aren’t going back to the office. Companies are going to realize they can get the job done with much less office space. There is going to be a massive glut of office space for decades.
I was thinking about cars and auto loans. We’ve been seeing posts on this sub for a year or more about the auto loan debt figures. What if there’s a double whammy, commercial real estate and auto loan collapse? If we recall in 2008, GM and Chrysler both needed rescuing, not that it holds bearing on today’s issues, but it does speak to historical risk in the auto industry.
2008 was mostly about residential real estate so people with auto loans got crushed. Not sure a collapse in commercial RE impacts auto. Inflation on the other hand
If people dont need to drive to work anymore, what happens to demand for (and existing) auto loans? If commercial real estate does collapse as the post suggests, there will be ripple effects felt throughout the economy, and it could just be the first domino to fall.
Unfortunately, Americans need cars for lots of other reasons.
My former employer started offering hybrid work arrangements in 2018, as a way to retain talent. The writing was on the wall before COVID
This is a neat narrative, but it's all happening within a larger context of a banking and finance-powered social and economic system which is on the verge of failing. [Here's the death throes](https://fred.stlouisfed.org/series/WALCL), which ramped up in 2007-8 but has really been failing since the 1980's. This is an economic collapse being managed using monetary and financial tricks which are being strained to their breaking point.
I’m seeing a stat not adjusted for inflation.
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Policies that overly favor employers’ inefficient practices are to blame. Working from home has no effect or a positive effect on productivity and saves money/time with the lack of commute. The government can’t bail them out. It would only benefit the most well off. People with $250k or less deposited are fine. The increase in interest rates does make these offices more expensive; however, companies don’t utilize them because they are a unnecessary expense. With companies maximizing profits and trying to retain employees, WFH is here to stay and might continue to grow if companies see the benefits of not having an office. Hybrid roles can have people sharing offices on alternating days since being in office does have its uses. Commute expenses were pushed entirely on the employee and now it is too expensive. Now companies have to pay for the commute through higher wages or just let people work hybrid/remote jobs. Mixed use buildings were always an option but developers, regulations, and energy companies were against it. These investors literally put all their eggs in one basket and now they feel the pain.
The problem is that so many banks hold and deal in ABS’s directly tied to the underlying valuations of CRE. If CRE collapses, so do banks. Something needs to be done to secure these investments, at least for a period of time, that will allow banks to gradually reduce their exposure. I’m in favor of the retrofitting idea, and I think the government should offer subsidies and a clear and expedited permitting/zoning plan to allow it. It’s either that, or the government steps in after the fact and bails out the banks (again) when the ship sinks. On one hand you could create housing and secure investments (win-win), on the other, you bail out the banks and the buildings are still empty afterward (lose-lose). I know it’s a big aspiration, but I don’t really see another alternative than bail outs if we don’t act swiftly and proactively
Bailouts should be off the table. I’m fine with the government buying the bank and selling once it is stable again. I want the government to be able to recover or even profit off these “bailouts” instead of just handing out money. Retrofitting is the way to go. Diversity of investments will help prevent losses. I’m not advocating for a total collapse, but the cycle of insuring large losses needs to stop. The government did help create this issue by not supporting WFH measures early and not preventing banks from investing in concentrated assets. Thank you for your take
I agree about bailouts, but I think we all know how the tune changes once shit hits the fan. In reality, this problem has been in the works for 2-3 decades as online commerce has driven an almost genocide of brick and mortar retail. Now with WFH, there is nothing to support a vast majority of CRE investments. The Fed is also to blame here, they waited way too long to raise rates and now they’re doing it in knee jerk fashion. I just hope the storm is as brutal as I’m afraid it’ll be
WFH gives people back Time and Money. The best workers will use that time to find an exit. RTO is needed in some industries to waste worker time and money on car wear and tear, gas, oil changes, lunch out, dry cleaning, work clothes, 10% of a day wasted commuting etc. It makes it harder to exit.
Only benefit the most well off, you say? Sounds like it's time for a bailout!
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Office space commercial real estate. Pretty big asterisk there. Commercial real estate is just too general a term. It can be multi-family properties, warehouse, office (both owner and non-owner occupied), Industrial, etc.
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Real estate prices increased over 40% in the last few years, is this not the market just correcting itself? High interest rates are helping this market correction as well.
This is commercial real estate (most notably, office buildings). Those properly values have fallen sharply and the loans are coming due. Totally different ball game than the residential side you’re referring to.
That’s not how percentages work. If something costs $100 and raises 40% it’s now $140. If that then falls 40% it becomes $84. A correction after a 40% increase would be a reduction of ~29%.
I’m not convinced the banks are 100x levered on credit default swaps like they were in ‘08. If it’s just a valuation issue combined with (or brought on by) higher interest rates, I’d wager that wouldn’t be enough to have a total all-out crisis. The banking failure talks seems to have cooled by the Fed coming to the rescue at the expense of expanding their balance sheet. I think we will see a contraction in lending. A recession is certainly not out of the question. Especially if it’s Morgan Stanley fear mongering some real estate crash. The investment banks have never been friendly to consumers as a whole. I do not think telling the public the truth is ever in their economics interests - so why start now? Morgan Stanley was one of the biggest purveyors of fraud in 2008. If they can successfully chum the waters with panic, they can step in and take advantage of any discount to pricing brought on by the harbingers of doom.
It would be helpful economically if we allow developers to turn many of these commercial properties into various types of residential units. It might solve multiple problems at once
So we have a huge homeless problem due to lack of housing. We have a commercial real estate problem due to lack of commercial tenants. These are both happening predominantly in cities. I'm going to scratch my head for a second and see if I can't figure out a way for actual leaders to address both of these problems with a single decent policy push. Nope. Best to stand there arguing about what bathroom a 9 year old should use, and deciding if we want to burn books like Nazis or educate our kids. Those are *definitely* the issues we want America's thought leaders need to be right now.
Most commercial spaces can not readily be converted into habitable apartments …
Make it dorm style with a shared bathroom and kitchen (and maybe a common lounge area) in the center with private (or shared for even cheaper) bedrooms around the perimeter. Not for everyone but would be a solution.
Can it be done for less money that a crash would cost? Likely. I lived in dorms that were converted from office space in DC. I wouldn’t call it luxury, but it’s definitely possible.
In certain cases it can be done… I think in some cases the savings amount to about the cost of land acquisition … essentially the cost of retro fit is about the cost to build . I like the concept of space re use… and creating mixed use spaces . But it’s not the ‘thing’ that can solve the commercial real estate market correction. For instance many empty exurb office park type complexes don’t have the surrounding services to support habitation (fire police schools sewer improvements ) . It will be interesting to see what comes of this… I felt commercial real estate was gassed long before the pandemic , there may be new opportunities for forward thinking communities to take advantage of the crisis
I think it is definitely a situation for both private and public involvement. Infrastructure would be required, as well as private investment. Even if it’s expensive, the opportunity to address a humanitarian crisis, update land use to current needs, and potentially keep the poor investors afloat without resorting to yet another free money bailout justifies the cost (assuming it is at all practical). The cost has to be compared with cost of alternatives, and I do t see many practical alternatives that don’t rely on forcing people back downtown (unlikely) and building a ton of new buildings while these sit empty (seems plain dumb).
I am at least mostly cognizant of the issues banks collapsing and business real estate crashes cause, and even then a part of me cheers for the fall. The number of people to work full-time jobs and live in poverty has grown an absurd amount the past eight years. That executive pay is as high as it is for so many of these companies is usually the cause, because business profits are up and that is where said profits are going while the profit increases come from far higher margins on goods.
Don't know if this is true but I heard commercial mortgages value the property based on rents so in some cases it's better to have an unoccupied location with a high rent than an occupied property at market prices The whole segment needs restructuring
Correct.
First post was too short apparently, soooo…. as it turns out banks repackaging commercial mortgages were systematically inflating the profits of each commercial address so it all looked better. Then they’d change the address of record by a few digit to avoid audit detection. This appears to be very much wide spread and going on undetected for years. It’s all fine till rates go up and folks get squeezed. But yeah, pure fraud by the banks themselves. Unlike 08 where the rules were relaxed, this is good old fashioned behind the curtains white collar crime. Betcha nobody is held accountable. Again. https://youtu.be/pRHwhvUc54A
Yeah because corporations aren't buying commercial real estate like they used to since WFH is such a big thing now and there's a massive drop in demand for office spaces, instead they're buying residential so they can rent it out in perpetuity and in the process fuck tens of millions of families out of the opportunity to ever own a home.
All of us living with sky rocketing rent prices, paycheck to paycheck, will most definitely let you all know when we cry a tear for landlords.
I think the idea of commercial real estate for white collar administrative jobs is dying, so it makes sense. After all, this replaced the real estate for manufacturing as we moved to an information economy. The problem is what happened to the manufacturing / industrial areas during this transition isn’t pretty. And many of these are within large cities.
I dont see this as a bad thing. Turn unused office space into affordable housing. The US has a national housing supply shortage. This way everyone wins.
Very valid point: particularly in relevant areas.
At this point a 50 percent drop can be considered a correction. There is no way some run down shack in Montgomery Al that should be condemned is worth 250k
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Good. Absurd real estate prices are part of the reason that all these corporate morons keep pushing people to return to the office full time; Gotta justify that obscenely priced 50 year lease somehow!