One of the biggest landlords in Los Angeles just defaulted on $755M
fortune.com
fortune.com
Most borrowers are currently electing to extend the maturities out another year, many getting IO (interest only) extensions from their lenders, rather than fall into special servicing. "Special Servicing" is the process to take deals like this and find the best outcome for the lowest lender on the capital stack waterfall. Fortunately, there are many processes in place to handle these kinds of things and not left for the taxpayers to bailout... typically.
Bailout? Why? Because it's not just these "rich" landlords/investors that lose their money. They are pension funds, retirement funds, Teachers retirement funds, public service funds, your neighbors' annuity, etc.
The whole thing is a big circle of money that becomes increasingly more complicated in each CRE cycle of boom/bust. The sentiment in the CRE world is definitely of uncertainty and caution right now. Many are optimistic about later this year and things turning around. It's not only Office either, many multifamily deals were done with a cap rate that could not be sustained, and now the deal is no longer "cash flowing", so the borrower cannot service the loan and they can't raise rents either as that side is also under pressure. With Office, companies are still not fully in office, combined with the layoffs, and the prospect of a down economy ahead has them cutting spending where they can. The leases don't renew, and the borrower has no ability to refinance with the rate hikes.
We're in a very delicate time period right now and one catalyst can send it in either direction, very quick.
And why did those socially vital funds invest in a boom/bust industry? Oh, because bailouts will protect them during the bust. Like free insurance. Whee.
What could go wrong with a feedback loop baked into the economy?
Presumably because that's the only way they could generate the returns needed to fund the pensions?
Because retirees like when their funds earn more than T-bills and actually beat inflation and that entails taking risks. Otherwise everyone can work a hell of a lot longer.
“Beat the market” on the upside, “take from everyone” on the downside. Win win!
Compared to, say, shares or bonds issued by a consumer electronics company, or a cosmetics company, the real part of real estate is much bigger.
I am pretty sure they weren't going to share their profits with me had the ball landed on black. Screw them.
So your hot take is that retired government employees, union laborers and other beneficiaries of pensions deserve to have their contribution to the pension and their retirement income zero'd out just because you don't get some of the money?
Moral hazard.
Force bankruptcy and use any “bail out” to help the investors named above.
It's a very good way to get out of this feedback loop, and I don't ever see anyone mention this very obvious solution.* The linked paper shows all of the different mechanisms that it could be accomplished. But when people go bust, it's even more straight forward.
* Obviously, the reason it isn't talked about in main stream circles is that it would work really well (as it does in Norway and Alaska) and dispossess the ultra wealthy (and the ultra wealthy own those outlets). But thought I'd share the idea here if case people haven't been exposed to it.
My friend and I have been talking about this for a long time.
It would cost a lot less to buy these highrises and build them out for homeless, rather than the mess we pay for now.
Cities need to act fast to attract more residents near these buildings, and take over these buildings and rent them cheaply. Losing money on these buildings is preferable to letting them sit idle long-term.
The only hope for downtown LA is to convert a giant chunk of it to residential and entertainment and restaurants and put something in downtown to draw people, like a museum or something. The only thing even close to there now is the staples center, but even that doesn't have a neighborhood or stuff to do around it.
Which, perhaps coincidentally, gets at what's been a major question in American cities for quite a while now: what are we going to do about how hard it's become to build affordable housing to help people escape rent feudalism?
We're talking about California in this particular case. That's a place where one of the organizing principles of politics for generations has been preventing new housing. If you want to enable people to escape from being serfs on rent farms, you'll need to grapple with that.
As I see it, there is not any lack of housing in Western society. There are a ton of unused or underutilized housing and a on the other side a ton of employed people who are denied access because of hyper inflation in real estate prices.
In the past the elder generation would pass on their real estate to their offspring when they were making families. Then there was a period in the 20th century with high wages, were people could buy property with their wages, so that tradition stopped. Today it is not realistic for a working person to buy property without the life long debt, and that is according to plan.
Living in San Francisco is not necessary. Live somewhere cheaper and stop complaining that desireable places to live are more expensive.
On top of that, what you save financially you frequently pay for in other ways. Communities and services that can be found in large cities simply don't exist in smaller and midwest areas.
I live in a small town because I could not afford the big city near by.
Life is full of compromises, not living in the most expensive city in the country shouldn’t be considered a hardship.
For many of us, the culture of smaller cities and increasingly even the laws of entire states represent an existential threat, or an existential threat to our loved ones. That is much more than a "hardship."
> Live somewhere cheaper and stop complaining
This is how you eradicate civil society, if working people are priced out of where they were born. But it happens, and it has happened historically. Millions left Europe for America. Millions will leave "cemetery cities" where young people cannot afford to live. I've seen such places and know how they are. The old people there hate the younger generation, even though most young people have moved out and the few teens there are itching to get the hell out as well.
Unless you're suggesting that the government take on a bunch of debt on everyone's behalf to do this as a public service for those who are having trouble with rent, without regard for it being a financially viable project by itself. idk how it compares to the other options for doing that.
It does appear to be the case that you can qualify for "affordable housing" in NYC if you make $180,000/year ... and have a family size of at least 3. (In fact, it goes up to $290,565/year with a family size of at least 8.) However, the category of income this represents is "middle income", one level above "moderate income" and two levels above "low income". Even with a family size of 8, "low income" caps out at $140,880/year. It appears that approximately half of new affordable housing targets "low income", and most of the remaining half for incomes lower still.
(The specific term "low-income subsidy" appears to mostly refer to the "Medicare Part D Extra Help Program" and cuts off below $35k/year.)
And it doesn't really matter what any one person would or wouldn't want to live like. I wouldn't want to live in a 200sqft apartment in NYC, but apparently a lot of people are willing to pay a lot of money to do so.
The correct question is if homeless people sleeping on the concrete - would they want to live in that. And probably a good many of them wouldn't.
It wouldn't happen with the same borrower on the same deal/loan. It would go into a whole new construction type of loan (which is usually some sort of short term "mezz" financing for the transition period), and then get underwritten on maybe a 10 year.
The issue with the above now though is the transition to multi family costs a lot. Many will try and get cities/states to subsidize it. And then getting a good loan to make the deal work in unknown. Nobody makes deals like that happen when there is this much uncertainty in the CRE market. If you can't secure financing post construction to make the cap rate work.. you're done. Deal is dead.
Or homeless shelters.
Who will "pay" for making formerly useful property useful again? In a free market, that would be the current owners of that property, and that is what should happen here. No one cries for the rich investors who own commercial real estate in big cities.
Downtowns in most cities haven't recovered anywhere near sustainable levels, but rents are still being paid on many office tower floors. By the end of next year, most of those leases will be done, and nearly everyone is downsizing.
Is this true? What's the average lease length in an office tower?
This is incorrect. Standard leases are for 5 years so 20% would come due in any given year, but for larger spaces that entailed significant investment by landlord or tenant tend to be for 10 years and some as long as 20.
This is in Berlin btw. There are still new office buildings being built right now. I'd say, a lot of those projects are going to have some financial challenges. A lot of that construction was planned and financed before covid and the construction work just seems to go ahead here on automatic pilot.
One of the bigger fiasco's in Berlin on this front is a new sky scraper on the Alexander Platz (near the famous big tv tower) that was supposed to become the tallest building in Berlin (except for that tv tower). They have been working on the foundations for this for some time. But since the financial backers of this were Russian, it is doubtful the project will ever be completed and there seems to be not a lot happening on that project recently. And even if it is built, there is already plenty of available office space in existing buildings. https://berlinspectator.com/2022/07/25/berlin-alexander-towe...
There is of course a housing shortage. I'd say a lot of the empty offices are going to eventually be converted for housing. But not before there is a little real estate massacre for current building owners and investors. Office rents should be trending down at this point.
Converting office buildings into housing is harder than tearing them down and building a apartments from the ground up. Every design of the office is wrong for living: the wall placements, windows, plumbing, hvac, stairs, elevators, etc.
And I also think you are wrong in being happy that these buildings are losing tenants. This will have a significant economic on the investors (which could even be you through funds, pensions, etc), and locally on the area. Think about all the businesses and jobs that serve these offices. These areas are going to decay and that will last for decades until it will be economically viable to repurpose them. At least on the short term I am not happy to see this happening.
So tear them down and build apartments.
> This will have a significant economic on the investors
Investors can invest in tearing down useless offices and build housing, instead of throwing good money after bad money.
Funds and pensions should mitigate downside risk to be successful.