U.S. Commercial Real Estate Is Headed Toward a Crisis

> especially with WFH showing some real staying power in the tech industry

There is also something to be said about the political environment. White-collar workers, particularly tech workers, aren't popular. Tech jobs in urban centres are on the consensus chopping block. That means the space they occupied, these offices, are obsolete--irrespective of WFH v RTO.

In my friend group, I know four non-tech office workers (as in: they aren’t personally in tech, and also don’t work at a tech company). Two are fully remote, and two are hybrid at about 80% WFH. It’s become way more common even outside of tech.

This may age badly, but imho: Long term, the meaningful work will be work that absolutely require in-person presence.

The office space sprawl of today will adjust to small-scale, experimental industry space, with a heavy emphasis on automation and custom engineering (industry v2).

Well after the collapse of today’s inflated commercial real estate.

There's a large mortgage company in my area that spent heavily on building a large campus full of amenities right before the pandemic hit. They seem to be having difficulty in filling IT positions as they always have openings posted. The relevant part is that the job postings lean heavily on the value of their campus and its amenities. Perhaps these are ghost jobs or they have high turnover. Either way, they really emphasize the value of their campus. Whoever was behind the initiative to move out of their generic suburban office buildings into a custom built campus is probably sweating bullets now.

Also, didn't the fed buy $2T of mortgage backed securities during the pandemic?

EDIT: Not quite https://fred.stlouisfed.org/series/WSHOMCB

I've heard it said that banks/property owners aren't super excited to renegotiate to something more reasonable, because having something sitting there vacant unused lets them keep the pretense about the property's value. If they start cutting rents, they risk having to report the loss in expected value, and that would be so horrible that they'd rather just let the property sit.

> none of these bankers or economists seem to get that it can also be seen as a consequence of using debt to fuel the economy

Solvency is capital-stack agnostic. The debt can make it worse. But the question of how it's financed is being ignored because it isn't particularly pertinent.

> needs to be a large pool of government-backed capital specifically for commercial to residential redevelopment and fast-track zoning approvals

There is no shortage of capital in real estate. Simplify approvals and the builders will come.

There are also serious physical constraints. Most office buildings were not designed to have the number of bathrooms that subdividing into an apartment complex would require for example.

This is definitely happening (see Calgary as a great example, converting 17-18 buildings from office to residential). Not all buildings can efficiently be converted (floor plate shape/size, etc), and some municipalities are slow to update zoning.

This may work in some situations, but unfortunately commercial building are typically very expensive to convert to residential. Think of an office tower with centralized plumbing and HVAC, with an open floor and no real interior walls. You've got to run plumbing and HVAC everywhere, add real(ish) walls, and depending on the size of the floor plate, there may not even be a good way to get light to the right places.

It's more complicated than you think. Office buildings aren't configured like apartment buildings; for example, plumbing and windows/lighting. Also, depending on the local rules, an office-to-housing conversion might require adding more parking.

All these are expensive things to do, because office buildings were built to be office buildings. It's not impossible to convert them to housing, but there aren't as many cases as you'd expect where it makes economic sense to do so.

Unfortunately perhaps for tax payers who will be on the hook for TBTF banks who lent money to useless buildings.

Crisis for municipal budgets that rely on tax revenue that in many instances are disproportionately based on office values.

Your implication being that a market crash affects no one?

Some things are like pregnancy. Complaining you’ve been waiting 9 months and 2 weeks, therefore it will be fine, is incorrect logic.

To be fair, the 2008 crash was predicted for awhile before it happened

Not saying you're right or wrong but that's not a sound basis for judgment

> I've been hearing about this since at-least 2021. How long will it take for this 'crisis' to come to fruition.

This crisis has been ongoing this year like a slow burn. Investors directly related to these assets know they are making heavy losses

But - this is a full blown crisis in a small segment of real estate of only large cities. As such, this is affecting only a small fraction of investor portfolios. Moreover, the bank lenders who engaged in CRE lending have the backing of a very active Federal Reserve - see SVB.

This is not going to have anywhere close to the kind of impact the US housing crisis had in 2008.

Sure, but thinking back to 2008, the first clear signs of trouble were in like mid 2005, I don't think that was a case of broken clocks being correct twice a day.

> I've been hearing about this since at-least 2021. How long will it take for this 'crisis' to come to fruition

Crises foreseen and dealt with can be slowly deflated. If growth stays on track that seems plausible for CRE debt.

Hard to say. A well run bank with no bad debt on its books can absorb ~0.75% losses on its total lending in a year from income, without hitting any of the regulatory limits that would start to curtail lending. From the article, the US banking system is already above that, so it is in trouble.

From that point on, it's a case of how well the banks can push the can down the road, absorbing small percentages of bad debt every year from profits, versus being forced into insolvency by the FDIC. There is a lot of leeway in this, as long as the bank still has revenue. During much of the eighties the entire US banking system was technically insolvent, but the Fed essentially just papered over it. The Italian and Japanese banking systems managed this for decades - its only an actual loss when the bank recognises it after all, so you get the zombie bank phenomenon.

There is a much better understanding since 2008 of how not to crash a banking system, so I suspect this will continue to be managed out. But if any other sector goes down, or Trump gets elected (since his policies would blow up the entire financial system if actually enacted), then all bets would of course be off.

Is RRE residential?

> Used cars got hit first because it's harder to pretend they are a good asset to hold.

We arent even down to pre post covid prices on ordinary used cars, and dont get me started on collectibles craze.