I'm in the CRE (Commercial Real Estate) finance tech world.
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.
> 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.
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?
The biggest trick the rich pulled on the wider public is getting them financially invested in the same things they are. In a democracy, what better way is there to guarantee that your losses will be socialized than giving the masses a financial interest in your losses being socialized?
> And why did those socially vital funds invest in a boom/bust industry?
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.
But that’s the point. They didn’t take a risk pursuant to their upside expectation. They exploited an implicit insurance policy that mitigates their downside with other people’s money through bailouts.
“Beat the market” on the upside, “take from everyone” on the downside. Win win!
Risk involves, well, risk. If commercial real estate is too big to fail, and provides better returns than bonds, then it seems like we've broken something.
Why are you guys talking about a bail-out? Is there any talk of that? Not as far is I know... As far as I've seen that only happens when there is a systemic/ high contagion risk...
Because real estate has a real component. Those houses exist, and will stay there, for much longer than the boom/bust cycle. Pension funds are long-term entities.
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'd be interested to see the breakdown of a pension fund; is it sustainable with "safer" investments, what sort of margin is the pension fund owner making, etc. I have no real idea.
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.
> 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.
Moral hazard.
Force bankruptcy and use any “bail out” to help the investors named above.
If your pension fund can't handle an investment potentially becoming worthless you deserve to lose all your money. If you decide to take the risk on any investment, you get the rewards when things go right but face the consequences if the investment doesn't pan out. There's no need for taxpayers to be involved in this process even if the people losing money are teachers, orphans, veterans, or grandmas.
Nothing would please me more than those gamblers-anonymous pension funds going straight to zero. I would actually pay higher taxes just to watch that shithouse burn. Bailouts need to end.
I am pretty sure they weren't going to share their profits with me had the ball landed on black. Screw them.
This is a new one. What do you think pensions are?
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?
CA purchase or lease buildings and pay for remodeling and additional plumbing required to make these permanent homeless shelters. Pack em in too. 10x10 per resident.
I also wouldn't mind if these potential dwelling spaces were priced on the open market rather than pegged to whatever imaginary number is needed to keep pension funds above water.
rarely seems to happen from my layperson's experience. bad if not straight up illegal management is given fines at worse and golden parachutes at best. equifax, wells fargo, all the monopolists running around, etc. all seem to just get away with stuff
Before the shift to remote work, these office buildings were the thing that drew businesses to cities, and that brought people to cities. Now, these office buildings will remain empty and become urban blight. Want a sneak peak at what happens next? The owners of these buildings will go bankrupt and abandon them. The city won't pay the electric bill, so they'll go dark. They'll fill up with gangs and drug dealers. The city will be too afraid to inspect them. They'll slowly fall apart and become dangerous.
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.
To be fair, downtown Los Angeles was dying 20 years ago. Even on the busiest of days, it was dead there. There's nothing at ground level like there is in other cities. And no one takes mass transit so you don't have people walking around. The other problem is that there aren't any dense neighborhoods near downtown where people want to live. So no one wants to work there either. The people that worked there drove from the valley or Pasadena or Orange county into locked basement garages in the city and then drove out at the end of the day.
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.
My understanding is that office buildings usually don't have enough plumbing or ventilation ductwork to make this reasonable to do, let alone cheaply enough to make it viable to make it into "affordable housing".
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.
‘Affordable housing’ is an overloaded term at this point. There are people who qualify for ‘affordable housing’ in NYC who are making ~$180,000 and will be paying $3,000/mo or more in rent after their ‘low-income subsidy’ is factored in.
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.)
They do have a good amount of ventilation, since they’re high occupancy, but you would need to run vents to all the units, at least, rather than large ducts to larger, more open spaces.
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.
What about new office buildings? Could it be economically viable to include a residential option? Is there anything comparable to running a bit of extra conduit, the way some newer homes are built? PVC isn't free, of course, but maybe it's a negligible extra cost compared to the rest.
It would be a service from the government to residents in buildings they acquire and modify (through private-sector construction companies). Housing should not be privatized.
At this point it doesn't matter anymore. We have whole generations of young professionals who are forced into life long debt to have a shack to live in. Your argument is like arguing against letting people have bicycles and continue walking, because cars are better. People need to escape rent feudalism first, then we can talk about other stuff.
I believe the point being made is that converting office buildings into affordable housing is more difficult and expensive than building that housing from scratch. If we want to help people escape rent feudalism first, we might consider what the most effective way to go about it could be instead.
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.
> 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?
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.
Even though you are not really worthy of a response due to your spiteful way of expressing yourself, I can assure you that most young people don't want to live in San Fransisco or New York city. The pricing-out happening the last decade is world wide. Most people just want to work, follow the rules and have a chance to a dignified life with their own home and family.
> 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.
There are not enough homes in all the Kansas Cities in the country to make that a universal solution. Instead of $1M homes in SF and $200k in KC, you end up with $800k homes everywhere.
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.
> 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."
Can you explain what the existential threat in an entire state or a small town is that requires people to live in the most expensive and desireable cities?
On properties like this, that is still possible, BUT..
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.
Turn the office buildings into whatever the market wants: lofts, warehouse, light industrial, retail, recreational space, housing, etc. The one thing we know the world doesn't want is the status quo (otherwise they wouldn't be empty), so we should not do anything that keeps it from finding its best use.
There are any number of difficult ways to give people somewhere to live that we're not doing. I would assume the reason to mention converting commercial property into residential is because the person suggesting this (usually wrongly) thinks it is easy.
Who's going to pay for the repurposing? Converting an office to residential or lab space can cost between $200-$350/sqft in west coast downtown locations.
I have a wealthy friend who has made most of his money in real estate. His rule is that he makes all the money he is going to make on the day of purchase. That is, he only purchases properties being sold for less than they will be worth in the near future. That is, his profit comes out of the pocket of the current owner. (Which could be a bank after repo or even a construction firm that didn't get paid by the previous developer.)
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.
> By the end of next year, most of those leases will be done, and nearly everyone is downsizing.
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.
I know many companies stuck with multi year leases on offices that they are no longer using anywhere close to the level as when they got those leases pre-covid. I'm expecting a lot of companies will cut back on their leasing cost by a lot as soon as they can.
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.
Large cities are probably economically unsustainable anyway. I wouldn't be surprised if mega-cities turn out to be wholly transient, with places like London and Tokyo effectively becoming museums of themselves.
Any time somethings like this happens people rejoice and hope for affordable apartments. I think you are wrong on both accounts.
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.
This sounds tough but capitalism is tough, investments go down all the time. It would be much worse if commercial real estate had no risk. Someone sold high before office buildings became obsolete.
Funds and pensions should mitigate downside risk to be successful.
In the same week that LA cleared skid row. It’s time to rethink commercial space. rezone these empty buildings for residential and let people live in them.
Multiple estimates put skid row at at least 25-39% with mental illness... you're probbably not going to be able to put those folks in standard residential housing. The other 60-70% yes... But that still leaves a substantial amount with no effective recourse
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.