A $557B Drop in Office Values Eclipses a Revival of Cities
bloomberg.com
bloomberg.com
[1] https://hbr.org/2024/07/u-s-commercial-real-estate-is-headed...
[2] https://www.nytimes.com/2024/06/06/business/office-building-...
Regardless of why it’s like this, I think I would prefer for the commercial real estate industry to die in a fire and return to system where prices are set according to supply and demand. Assuming that it wouldn’t cause a Great Depression, but it probably would.
[1] https://www.loopnet.com/learn/why-extend-and-pretend-may-be-...
Thus accepting reduced rent means the owners must immediately cut a check to the bank or negotiate with the bank to change the terms of the loan. Except the bank doesn't own the loan, it's been sold to investors as cmbs, and the language on the cmbs requires a high threshold (80% or more) to approve an alteration. So that's functionally impossible.
Additionally, you can often add unpaid rent on to the end of the loan and extend the terms. If you expect valuations to rise over time, not being able to rent units at the value you promised the bank (and perhaps that value was inflated to make it easier to get the mortgage) is often much more easily dealt with by extending the loan rather than writing the bank a check to recollateralize.
Until somebody in the chain goes bankrupt and a bankruptcy court rewrites the terms.
A lot of this was low interest rates. Appreciation on the building, especially given artificial scarcity from captured zoning boards, meant you could make more than the interest on the loan just through increases in the price of the building without even renting it out. So they were asking crazy rents because if they could actually get someone to pay that it's pure profit and if not they're still making money.
Now interest rates are higher and that doesn't work so well so the result should be a drastic decline in rental prices, but people are holding out in the hope that the fed is going to drop rates to zero again. Which would be stupid.
> Assuming that it wouldn’t cause a Great Depression, but it probably would.
Nah, we just "fixed it" the wrong way in 2008. We lowered interest rates so people would borrow money (bank loans create new money) and reinflated the housing bubble. But a bubble is bad.
So what you do is you let it pop. This causes deflation, which is generally bad. But uh, maybe not actually so bad right now. And if there was too much deflation, that's all too easy to fix -- it intrinsically allows you to print money and send out stimulus checks, because in that case inflation to counteract the deflation is what you want. And since you don't need to buy a house to get a stimulus check, that stabilizes the overall economy instead of re-overheating the housing market like we did last time.
The Fed was worried about everybody else getting wiped out in a deflationary spiral.
The Fed is never in any danger of defaulting. If you want to transfer money it owes you to another bank, they're just changing the numbers in their computer. If you want it as cash, they're the thing that prints the cash. The only reason it can't just create an unlimited amount of money to use for whatever the government wants is that creating money causes inflation.
The unwillingness to own the decline in value is also one of the reasons viable shop fronts stay empty: The terms of the commercial loan are tied very strongly to value imputed by rent, even un-earned. if you list it cheaper, it's worth less than you said when you borrowed against it.
My point of divergence is that to the extent everyone has superannuation, company pension, non-government future retirement investment, some of it will be tied up in LPT. The Canadian government pension fund, My university sector pension fund here in Australia, the UK pension fund, they all have a component of this, and they have exposure to this worldwide. Thus, the "whining" is not really confined to just commercial real estate industry: My future self is looking at my net worth wondering how long it takes to come back from the write down.
But, write it down we must do.
The positive side of this is that real estate costs are a component of all other costs. So if real estate prices come down, so should all other prices. If your net worth is nominally 35% lower but now everything costs 35% less, what have you lost?
Not only that, artificial scarcity inhibits real growth. So the sooner you do the write down the sooner the real value of your net worth can reach the hypothetical value it has now.
And even "saving the banks" doesn't mean saving the bank management or stockholders. It means preserving the depositors, and often it means preserving the institution. We don't need to save any more than that.
And, to avoid moral hazard, we shouldn't save any more than that.
Where did Bloomberg come up with this idea of an “East Loop” in Chicago? There’s no such thing as the East Loop. There’s West Loop (west of the loop), South Loop, and then you’ve got the actual Loop, which is the CBD. East Loop would be in the middle of Lake Michigan, and real estate prices have never been very high there.
There is the New Eastside, which surrounds Lakeshore East, but it’s part of the Loop.
I do think the massive homeless problem in my economy (Australia) should drive to doing this conversion, but everything I read about it over the last 2-3 years said it was nothing like as simple as people thought.
I begin to think knocking them down like we see footage of in China may be the best option. Or, paying socialised costs to convert into public housing but at a significant premium compared to green field.
Realistically the option is to find a price that attracts commercial use, or tear a lot of these down and build suitable homes in their place.
I’m actually not convinced though that there’s as much point in drastically expanding the amount of downtown housing stock, while simultaneously deprecating the idea of actually going to an office. While 20-somethings are excited about city nightlife, that’s probably the only demographic which really cares about living right downtown if they don’t have a job downtown.
There are no bad products, only bad prices.
Meanwhile availability of mildly undesirable but still livable apartments would lower rents overall through supply and demand, which benefits everybody except landlords.
> I’m actually not convinced though that there’s as much point in drastically expanding the amount of downtown housing stock, while simultaneously deprecating the idea of actually going to an office.
The current problem is that building towers in the suburbs is prohibited by law and there isn't a lot of suitable empty land, so your options are to build housing in the city where it's allowed or not at all. Now, if you can get the suburbs rezoned for taller buildings, go right ahead, but in the meantime people are willing to take what they can get.
This sounds nice as a bumper sticker but have you actually given this much thought and concluded it is true? It seems totally incorrect to me.
Suppose you have some metal chairs. They're so poorly designed that if anyone were to actually sit in one it would immediately break in half and injure them. That doesn't mean they're worthless, it mean they're scrap metal, which is commercially valuable.
Suppose you have some industrial waste. Literally no one wants it and in fact you would have to pay someone to dispose of it for you. Therefore, it has a negative price. Negative prices are prices. The disposal company likes them very much. Their whole business is to buy this product from people for a negative amount of money.
There are no bad products, only bad prices.
only if they carve out many apartments on one floor.
Imagine living in a large apartment that occupies the entire floor (or half of it). Surely that would attract monied tenants.
We've seen this kind of living arrangement in the Blade Runner movies (J.F. Sebastian lived in some old hotel I think, and Deckard in the newer movie lived in a casino I think), but they presumably didn't have to pay rent, and they probably didn't have any heat either. They also lived alone and didn't have families complaining about it being too cold inside.
I suppose you could put up some insulated walls (if they aren't already there) and make a smaller apartment within the space where you keep the HVAC on, to keep your energy costs manageable, but then you're back to the previous issue about the cost of rent, because of the sheer amount of floorspace. If the location is desirable, it's going to be too valuable to rent out at the price of a normal apartment.
[1] https://theconversation.com/empty-office-spaces-can-be-conve...
In fact if I'm not mistaken there are a fair number of quality of life measures that are worse in cities (for one thing they exacerbate wealth inequality). While they have a lot of conveniences, most people move to them primarily because they need a job.
But if I had to commute daily. Hell no.
The reason why this has changed relatively recently is because of the monopolization of the urban core by rentseeking corporations and landlords that simply sit on empty property and price out everyone else. The people that can afford to live in the urban core therefore can't afford to raise a family.
Never heard of that ever being the case, especially if you take into account living space, which is at a premium in cities.
Recent example from a friend of mine: he's selling his 62m2, two bedroom apartment in a city of 650k to buy an absolute castle of 200m2 in the suburbs that also has a separate garage.
He's got two children, but could give each one a room even if he had five.
They can’t do that in the suburbs, because the suburbs are deliberately constructed without the infrastructure that enables cheap living in the city.
They can't do that in the suburbs because there's hardly anything for rent there and they don't have the credit score to buy anything.
My reasoning is as follows:
-Real estate per unit area is more expensive in the city - that's a given.
-Groceries are 30-50% more expensive because again - real estate is as well and that pushes up the price of everything. On top of that you have logistics to deal with, as you need that truck to reach the store somehow.
Sure, in the suburbs you have to drive everywhere and maintain your property, but there's financial flexibility in that - you don't need the newest, most gas guzzling car or to renovate the whole place every 7 years or so.
All the fathers of 4+ children that I know are in agreement that they wouldn't be able to afford having such a huge family in the city.
Whoever thought it's cheaper to live in the city must be childless.
Often? Where is it cheaper, for equivalent lifestyle, to live in a city?
Never heard of that. Cities (unless decrepit) are always very expensive compared to the alternatives.
It's a classic experiment with mice.[1] But downtowns are nowhere near the density for that to appear.
I doubt this is just dense urbanization<>low rates, it's mostly just modern urbanization where everyone wants to live in the city but governments/NIMBYs refuse to build any housing parents or retail/services businesses supporting children can afford. So costs are artificially exorbitant. Which brings down the birth rates, so immigration is increased who also want to live in cities, and need housing and want kids...etc. So there is both artificial downward pressures on birth rates in (modern) cities and naturally via the general chaos of cities.
It’s a western thing likely because we have priced out families and couples can no longer afford to have kids/the large apartments needed. Need to build more two and three bedroom apartments you can actually afford and raise a family in
But this is precisely the issue. The issue is not cities, it's housing scarcity. Housing scarcity just tends to be correlated with cities because demand there is typically high and then land owners capture the local government to constrain supply.
The problem isn't housing in cities, it's the lack of housing in and around cities. What would happen if there was enough for it to be cheap?
Part of it may be the cost, housing available, society expectations (having 3 kids is at the top of expectations). Career, starting later and perhaps too much (or too little) choice in the dating pool.