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Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

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Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#61

Post by cudgy »

jandrese wrote: post #45
xyst wrote: post #3

Seems plausible. Vacancy rates of commercial property is ~~down~~ up significantly in major cities (SF, ATX, NYC, SEA, ...). What I want to know is: is it possible to find out how many of these commercial loans contain a "non-recourse" clause?

It may be expensive, but in places like San Francisco it seems like it would be worthwhile to have those commercial spaces rebuilt as residential. The city has such a dire housing crunch that letting a building sit empty waiting for a commercial client is almost malfeasance. If the zoning is wrong that is a political issue that can be corrected. There should be a strong offices to condos push.

But will the demand be there for the new housing to live in an expensive poorly run city with fewer jobs in the commercial centers?

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#62

Post by cudgy »

jarym wrote: post #10

I'm not sure if it is the case in the US but in the UK we have similar issues around commercial real estate and there is a problem - a lot of pension funds are invested in them. If they don't recover in value then it will create a shortfall in future pensions which would be a bigger issue.

Maybe they’ll consider bailing out the pensions like they do the banks? … Nah that wouldn’t make any sense (sarcasm).

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#63

Post by cudgy »

ryanwaggoner wrote: post #30

This is ridiculous, there aren't going to be trillions in losses from intentional defaults in commercial real estate. First of all, if it's done intentionally, it's fraud. And if two people have blabbed to random Substack guy, then this would be easy to prove. Secondly, what exactly is the strategy here? Borrow a ton of money to buy buildings, then default on them and walk away? Where's the profit exactly? Third, the…

> Where's the profit exactly?

Admin fees

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#64

Post by gojomo »

malfist wrote: post #20

Why should we believe this person? It's hearsay of hearsay

Well, it's hard to verify raising private funding, as either money-in-bank or contractual-commitments for when the timing is right.

But the 1st part of this story fits recent trends in SF's commercial market, with some high-profile loan-walkaways on marquee properties.

And it fits history, where deep-pocketed investors are happy to see many kinds of asset crashes – if they've kept their "powder dry" – to snatch up valuable properties at lows.

Do you think people running this strategy want it to be widely understood?

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#65

Post by gojomo »

ryanwaggoner wrote: post #30

This is ridiculous, there aren't going to be trillions in losses from intentional defaults in commercial real estate. First of all, if it's done intentionally, it's fraud. And if two people have blabbed to random Substack guy, then this would be easy to prove. Secondly, what exactly is the strategy here? Borrow a ton of money to buy buildings, then default on them and walk away? Where's the profit exactly? Third, the…

"Trillions" may be a stretch barring larger recession & wider commercial real-estate collapse.

But it's far from impossible!

A 10% drop would be enough to deliver (2) "trillions" in losses to a ~$20T sector - & broad commercial-real-estate price indexes often show swings of 15% or more within a year. Since then end of 2021, major indexes already show a 15% drop with no hint of slowdown - and from 2007-2009, there was a broad ~40% drop.

If there's a 2008-style crash – and it seems likely much of these losses, whether strategic no-recourse defaults, or simple inability-to-pay defaults, will pass through to banks – there could be $8T in losses.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#67

Post by jandrese »

cudgy wrote: post #61
jandrese wrote: post #45

Earlier quoted context omitted.

It may be expensive, but in places like San Francisco it seems like it would be worthwhile to have those commercial spaces rebuilt as residential. The city has such a dire housing crunch that letting a building sit empty waiting for a commercial client is almost malfeasance. If the zoning is wrong that is a political issue that can be corrected. There should be a strong offices to condos push.

But will the demand be there for the new housing to live in an expensive poorly run city with fewer jobs in the commercial centers?

I am not worried about running out of demand in the Bay Area anytime soon.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#69

Post by nocoiner »

thatsnothowanyofthisworks.tiff

But back in reality, of course we all know that the commercial real estate market is by and large looking at a world of hurt. But I think by and large they’re going to muddle through. Some developers will lose their buildings, equity is definitely taking a hit and there will surely be some losses on loans. But on balance, I think the banks will be fine (and some fulcrum security holders somewhere in the capital stack will find themselves owners of, in some cases, VERY nice new buildings).

I worry less about the debt lended to finance these building than I do about the many, many pensions, retirement systems and insurance companies that rely on a structured equity return to meet their long term financing needs.

Re: Sources Tell Me Some Messed Up Stuff Is Happening in Commercial Real Estate

#70

Post by nocoiner »

sparrish wrote: post #26

Why would a bank give a "non-recourse" loan for commercial property? Doesn't make sense to me.

The loans are non-recourse to the developers, so while they might have to turn over the keys to the property at the end of the day, the bank isn’t coming after them for their other projects or personal assets.

A busted deal isn’t a happy outcome for a real estate developer, at all, and they lose whatever equity they invested on the project, but non-recourse debt protects them on the downside and they make their real money on the successful deals.

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