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The world’s empty office buildings have become a debt time bomb

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Re: The world’s empty office buildings have become a debt time bomb

#31

Post by wnolens »

rcme wrote: post #22
hn_throwaway_99 wrote: post #19

I remember an article not to long ago (like past 2 years or so) talking about how all these retail storefronts in Greenwich Village and SoHo in NY were closing because the rents became insane, and apparently (for a reason I don't fully understand) landlords felt it better to have spaces remain vacant than to lower rents. I know redeveloping commercial buildings into residential is very expensive and difficult, but if…

I think the reason they preferred the vacancies is that the value of the property is related to the rent price, so if they lowered the rent they’d have to lower the book value of the asset as well.

Right, and so lower collateral for other loans. This is apparently rampant in NYC. It's wild that incentives exist to make vacancy profitable. But there's a LOT of vacant storefronts and apparently vacant apartments (though it's hard to get this data..)

Re: The world’s empty office buildings have become a debt time bomb

#32

Post by [deleted] »

orange_joe wrote: post #14

In my opinion this isn’t a consequence of the pandemic, but rather an inevitable outcome from the uneven pattern of building that vastly favored commercial real estate and prevented new housing. Even without teleworking, it was likely that jobs shifted toward suburban office parks as they had in the 80s to 2000s. People want to live close to work, and without sufficient housing in cities, commercial real estate in bi…

[deleted]

Re: The world’s empty office buildings have become a debt time bomb

#33

Post by bobthepanda »

bashinator wrote: post #30
rcme wrote: post #22

Earlier quoted context omitted.

I think the reason they preferred the vacancies is that the value of the property is related to the rent price, so if they lowered the rent they’d have to lower the book value of the asset as well.

Sounds like a regulatory failure; an unoccupied building shouldn't be able to retain book value.

At one point there were suddenly dozens of new bank branches a year because that was the only kind of business that could afford the rent. So the banks ended up propping up the values of their loans.

There were subway ads touting how convenient Chase was with 3k locations in Manhattan alone.

Re: The world’s empty office buildings have become a debt time bomb

#34

Post by refulgentis »

candiddevmike wrote: post #27
refulgentis wrote: post #17

Earlier quoted context omitted.

That doesn't really hold water. Its an argument that creates a bailout of whoever we want, as long as they're within 6 degrees of SVB. [^1] A huge rhetoric win, a loss for understanding. [^1]: https://en.wikipedia.org/wiki/Six_Degrees_of_Kevin_Bacon

If startups couldn't make payroll, what do you think would happen here?

Does asking this advance the discussion, or is it a passive-aggressive way to continue signalling you believe “seized the bank and sold it, keeping deposits whole” means “SoftBank bailout”?

Re: The world’s empty office buildings have become a debt time bomb

#35

Post by voisin »

For those cheering on the demise of office landlords, please keep in mind the astonishing number of public and private pension plans invested in these assets. The impact will not be limited to just the landlords and will be nothing short of catastrophic to downtowns (which we’ve just spent the last 30 years trying to rejuvenate after being hollowed out by white flight to the suburbs), the character of our cities, our municipal budgets, and our economy.

Re: The world’s empty office buildings have become a debt time bomb

#36

Post by bobthepanda »

badcppdev wrote: post #20
soared wrote: post #12

What ever happened to that SF office lease time bomb last (or this) year?

To stretch the analogy there are large bombs going off and damaging the profits of the lenders who financed various loans. These will continue. US banks weight in at $2T. The Commercial Real Estate market weighs in at 20T although only a portion of that is office buildings in cities.

To put this in perspective, retail has been in free-fall for decades in the United States, yet as of 2018 the US had something like 23 sq ft of retail per capita when countries like Japan, UK, Germany, France etc. average around 4.

It takes eons to clear out nonperforming real estate inventory. Just ask the Rust Belt.

Re: The world’s empty office buildings have become a debt time bomb

#37

Post by skizm »

SV_BubbleTime wrote: post #23
orange_joe wrote: post #14

In my opinion this isn’t a consequence of the pandemic, but rather an inevitable outcome from the uneven pattern of building that vastly favored commercial real estate and prevented new housing. Even without teleworking, it was likely that jobs shifted toward suburban office parks as they had in the 80s to 2000s. People want to live close to work, and without sufficient housing in cities, commercial real estate in bi…

> actually a good thing Those words in that word rarely give me confidence in an idea.

Same vibes as when someone describes anything as "perfectly good". It always sets off alarm bells.

Re: The world’s empty office buildings have become a debt time bomb

#38

Post by pradn »

orange_joe wrote: post #14

In my opinion this isn’t a consequence of the pandemic, but rather an inevitable outcome from the uneven pattern of building that vastly favored commercial real estate and prevented new housing. Even without teleworking, it was likely that jobs shifted toward suburban office parks as they had in the 80s to 2000s. People want to live close to work, and without sufficient housing in cities, commercial real estate in bi…

It's quite hard to turn modern office builds into housing. Recently-built offices have huge floors, so natural light can't penetrate into the interior. Those spaces are fine as meeting rooms, but won't suffice for living in.[1] It's possible to make apartments with no natural light, but most people don't want to live in those. If they're low in rent, maybe they'd be attractive enough. But then your rent/sqft number goes down, and so your valuation, and your building is in the red with the banks. "Just turn it to housing" isn't an easy answer.

There's still great demand for premium office space, but your average office building is going to suffer.[2]

[1] https://www.nytimes.com/interactive/2023/03/11/upshot/office...

[2] https://www.curbed.com/2023/04/270-park-avenue-jpmorgan-chas...

Re: The world’s empty office buildings have become a debt time bomb

#39

Post by kristov »

lumost wrote: post #7
latchkey wrote: post #4

Earlier quoted context omitted.

Bailout by whom? Banks? They are already struggling, you even mention SVB. The government? Sure... print more money.

economically, printing more money isn't inherently wrong. Money was destroyed by default. Printing money to counterbalance this ... works. In principle, this is why communist regimes can get away with ordering organizations to do X, for Y. The problem is that if you do this every time, you are effectively entrenching the current power structures of society. This isn't a bad thing if those power structures are good -…

A chunk of the money created was by lenders, to charge borrowers for the risk of default. If you print more money then you remove the incentive to assess risk. I don't know if this is good or bad, but economics says risk assessment is how capital gets allocated to "good things". Here "good things" I guess means less wasted space in a city center.

Re: The world’s empty office buildings have become a debt time bomb

#40

Post by JauntTrooper »

rcme wrote: post #22
hn_throwaway_99 wrote: post #19

I remember an article not to long ago (like past 2 years or so) talking about how all these retail storefronts in Greenwich Village and SoHo in NY were closing because the rents became insane, and apparently (for a reason I don't fully understand) landlords felt it better to have spaces remain vacant than to lower rents. I know redeveloping commercial buildings into residential is very expensive and difficult, but if…

I think the reason they preferred the vacancies is that the value of the property is related to the rent price, so if they lowered the rent they’d have to lower the book value of the asset as well.

I've heard that theory but it still doesn't quite make sense to me.

Investors know that book values are usually stale. They're rarely used as a primary justification for valuation except in industries where mark-to-market is common like financial institutions.

Real estate investors tend to focus on Net Operating Income, which a vacant property won't generate, and Net Asset Values, which are based on market values. Sophisticated investors and lenders aren't going to be fooled into investing in it based on some historical or hypothetical value. Cash flow is important.

If rental properties really were sitting vacant because managers were hoping to preserve book value through an accounting gimmick, I would think property manager that focused on actual cash generation yield would drive them out of business.

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