US office owners face $117B wall of debt repayments
ft.com
ft.com
Also, according to TFA, this is about 600 buildings, of which 224 might be problematic. What happens when they are not refinanced? They are owned by the bank just the same.
But, by the measures we have about the broad economy things are pretty good.
But as a for instance on one of the things you mentioned, our trade imbalance is less now than it was in the early 2000s. US industrial jobs have been on a negative trend for more than 50 years! That doesn’t correlate with the split between sentiment and other metrics either.
I’ve not seen that put forth as a hypothesis anywhere but I’m certainly not an expert.
Thoughts?
There is increasing wealth disparity which maybe contributes? I’m not a an expert on economic sentiment but it seems surprising that the wealthy getting a little more wealthy as a % of the economy would have broad sentiment effects, but perhaps.
If this is the level of complaining happening during an economic expansion, what are they going to do in a contraction? When wages drop precipitously? When they send out hundreds of resumes and hear back on none of them? When having unemployed friends becomes ubiquitous?
Or maybe the vibecession isn't real at all and virtually everyone saying we're in a recession doesn't actually believe it and is just virtue signaling support for poorer people?
I am aware of attempts to repurpose such properties, cheaply, to residential have generally sucked. That just indicates better, costlier options will need to be explored. High rises and high density living actually exist many places.
Does not yet sound like a hair on fire/bailouts level problem. We would need to see some Ts instead of Bs for that.
Then there’s the reality of the US economy still responding to the changes following the pandemic. Literally all modern markets have not experienced anything like this since the last pandemic was 1918. That was a very different time in international and national trade.
The market is a hugely decentralized grouping of economies. Each economy itself composed of millions to billions of individuals making individual decisions with finite resources. That’s precisely the genius of the system. No single person or policy maker could take on and make all the most optimized decisions for all the people in the global market.
A fiend in CRE explained that defaulting on these debts is a calculated risk built in to the office owners' business models.
They secure financing with the hope that the investment will pay off, but if it goes under then they let that specific building's isolated business fail. The bank takes ownership of the property and must sell it off at a discount.
The same people who owned the building originally might then go back and bid on the same building again at the new, lower rate.
Both the banks and the CRE operators understand that his is how the game is played, so it's priced in to the cost of financing (in theory). Letting the bank repossess a property is just a business decision.
But commercial mortgages usually have stipulations like a minimum rental price. Everyone boogie man’s zoning, but these mortgages also limit freedom. Many empty buildings couldn’t rent at a lower price even if they wanted to. The banks don’t want managers undercutting each other, and wrecking market value. But they will have to relent eventually.
Expect less new builds in the future, but more renovations. Building managers face a tough market right now, and will need to invest in existing stock to compete.
Builders want to build, and lenders want to lend.
I recently discovered that in my old neighborhood in Chicago, 4 high rise residential towers have started construction in a 3-block radius in the last 6 months. And over on the other side of downtown, developers have secured financing to begin construction of an 800+ foot tall apartment building on the site of the $300 million hole in the ground (an Irish developer had planned to built a 2000 foot tall building, but went bankrupt while building the foundation).
I saw a report by the city of Chicago last month that broke out office vacancy by age of the building, and in new towers the vacancy rate is single digits. Now, you and I both know that the likely explanation is that the tenants of these buildings were solid companies that signed long-term leases as the construction was finishing up. Once those first leases end, all bets are off.
But, “It Is Difficult to Get a Man to Understand Something When His Salary Depends Upon His Not Understanding It”. Builders are going to point at that stat and say that new office towers are a good investment. Lenders are going to point at that stat and say that new office towers are safe to finance.
Count on it.
Anyone happen to know how common it is for these kinds of commercial real estate loans to be rolled up into other derivatives similar to what led to the housing crisis?
It's good that you're open about only having read the headline. Another user posted a link to the full article text: https://archive.is/VYBn9
Do you realize the impact this would have on pension plans and mom and pop investment portfolios too? It isn’t just Bezos and other billionaires who would feel pain - it would be a lot of regular folk getting annihilated financially as well.
[1] https://finance.yahoo.com/news/commercial-real-estate-values...
If the 0.1% owns a disproportional amount of wealth any financial bailout will disproportionately help them.
https://www.calpers.ca.gov/page/investments/about-investment...
Maybe to level the playing field the government should publish a list of investments with high returns and implicit government guarantees so that we’d all know where to put or retirement money. It really screws with my retirement planning to only find out after the fact.
Only one of these two options is actually moral; in the case of no bailout, investors who have provably acknowledged the risk of investing, and who still recklessly barrelled cash into an industry that everyone knows is a bubble, take a haircut based on the risk they themselves chose.
In the bailout reality (aka reality because we all know how this ends), you commit mass theft to bail out a failed investment. We can cut onions over how broken the stock market is for the average person, as I do on a daily basis, but that isnt justification to absolve people of the basic and predictable economic consequences of their choices, and certainly not to place those consequences on someone elses back.
You won't have fixed anything, investors wont get spooked, prices wont finally come down, they will see the blood in the water and continue doubling down on risky investments. They now know the government would sooner shake you down then let their investment fail, its all upside for them and all downsides fall to you, humble tax payer.
Ideally, if we ensure adequate diversity in the market, then having companies default makes sense -- then one company going under won't trigger a string of defaults that can cripple a sector of the economy.
But when we let businesses concentrate effort or corner markets, then there can be catastrophic consequences to the economy when these large entities go belly up. Efforts should be put in place to mitigate these issues.
Ultimately, I think the pragmatic approach is to assess defaulting on debt on a case-by-case basis. I'd prefer if a panel of economists across the ideological spectrum came to a consensus for each case based on the latest understanding of the market, but I know it's more likely going to be politicians choosing the argument that best fits their worldview.
Also, aiming for better outcomes would be more important for situations affecting resources in the real world. But commercial real estate has to be one of the most abstract setups there is. The buildings will still exist. The tenants will still exist, still carrying out their business, making rent payments, and for the most part keeping up the properties. The only thing that changes is the paper ownership moves to the senior debt holder, and the more leveraged investors get wiped out.
There can be no agreement among "economist across the ideological spectrum", there can only be agreement among economists who agree with bailouts, or agreement among economists who disagree with bailouts. We have directly opposing views on what makes something moral, on how value is created, even on what money is; there cant be any agreement when the differences in fundamental assumptions directly conflict. Naturally those against bailouts will be marginalized and called fringe kooks that can be safely ignored.
Not an expert so I can only really pose the question.
I guess I can sort of see that if the company is locked into a lease. But I can't see that playing out in the long term - It's hard for me to believe that the city is ponying up more than the cost of corporate rent in tax incentives.
Additionally, I recall some of the sweetheart deals which were being offered for the new Amazon headquarters. I could believe that officials offer ludicrously good deals that never pencil out for the city. Like sports stadiums.
To wit, most employers aren't paying for each hour of employee time wasted by commuting, nor fuel/ maintenance costs for vehicles.
It might lead to higher employee turnover and difficulty hiring, but that is delayed and indirect.
That is an odd detail I was not aware of... this seems to be a significant advantage for commercial mortgages over residential ones. Are they less leveraged or something? That doesn't square with the "40 per cent of office loans on bank balance sheets were under water" statement later in the article.
This is not driven by fundamentals; this has everything to do with financing costs going back up
Seems like a disingenuous statement. Demand for office space has fallen. And according to the article, demand was overstated when these now-due loans were originally made.
“Everyone will blame Covid [for] the losses,” said John Griffin, a professor at Texas university. “But Wall Street’s aggressive underwriting of commercial mortgage debt is going to make the situation a whole lot worse than it would have been.”
"Interest only" loans are not really advantageous. It means by default you are never paying down your principal and you are forced to refinance when the balloon payment is due (usually 5 years or so). So if you signed a loan when rates were low, you would have been better off to get a long term 30 year fixed interest loan. Otherwise your payment can more than double or triple right along with interest rates.
And since you're not paying down the principal, it's easier to find your loan under water. Although it is typical for commercial real estate loans to require a 20% down payment.
Interest-only works for commercial because the building is (hopefully) making money, so some of that can be set aside to handle the last payment. That doesn't work for residential, because single-family homes don't usually make money, so residential homebuyers don't typically have ~$200,000-$2,000,000 in cash at the end of the 30 year period. But if that was feasible, you would see some loan officers trying to win business through offering interest-only mortgages with a balloon payment.
As for why underwriting didn't catch this? Underwriting is a lot like actuaries, they've got a bias towards recent population-level data. So for the last 30 years the rates of commercial default have been predictable, and it's tough to push back to execs on the risk. You're claiming that a potential wide-scale change in the way the U.S. works should impact sales strategy today, and before Covid that risk was very abstract. Very few execs would side with their underwriters over their sales team, and there's been subtle pressure on underwriters to price commercial real estate as though systemic risk isn't real.
A different case might be a condo development: Private investment (rolled over from selling another property and repaying THAT loan) and loans to buy the land, loans to build, sell 60% of the units, - and there might be enough to repay most of the loan.
In that case, since you already have most of the capital lying around, a balloon payment lets you use other cash but you’re not worried about a large payment.
Seems like a lot of commercial real estate is structured as a balloon loan to people who may not be able to make the lump sum payment, which is probably where the underwriting failure lies. Refinancing is a tool a savvy borrower can use as rates go down, but it’s not a strict expectation that you do that if you get a balloon loan, even on short term loans.
Before the US government got involved, the typical real estate loan was a 5 or 10 year balloon loan that had to be refinanced at the end of the loan period. Large part of them were interest only. So that's exactly the way it used to work.
That blew up during the Great Depression. Then the government stepped in and started subsidizing loans which is where we're at now, the mortgage market in the US is very different than in say Canada or Europe.
I used to have one, but remortgaged to repayment ten years ago.
It's quite common to see "buy to let" mortgages as interest only rather than repayment, where the owner is concerned with cashflow rather than the asset itself.
It’s because the bag holders of these assets (ie, REITs, ibanks, hedge funds, foreign ibanks and investors) are at risk. Ultimately, the US government and to a certain degree state and local governments have guaranteed a large portion of these assets.
These investors need to pump their numbers (ie, occupancy rates, leases, …) in order to keep the con going. Often the building managers will dangle “free” upgrades in the faces of these corporate real estate managers to keep the leases active in exchange for guaranteed occupancy rates.
I hate this country sometimes. Shit like this is why we will never have a sustainable economy
The real estate guys want the building full to maximize rent income, but the company owners want to minimize rent expense. They are min-maxing against one another.
Companies RTO because:
a) they are run by people who don't get remote work
b) they do something that involves being physically present
c) layoff-by-RTO
d) it's possible the government incentivizes RTO, but this is a short-term trick at best. RTO is unpopular with workers and most capital are invested in companies, not office buildings. All of those companies have a natural interest in minimizing rent.