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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

#41

Post by toomuchtodo »

pradn wrote: post #38
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 g…

But this is good. It means no new office buildings need to be built. The existing ownership and debt will simply be juggled and fought over, numbers on a spreadsheet. The buildings will still exist and be available for office needs at reduced costs (after debt takes a haircut). New urban construction can now focus solely on residential needs, and with housing unit shortages, this natural reallocation of construction effort (due to demand destruction) should be welcomed.

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

#42

Post by philwelch »

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 know redeveloping commercial buildings into residential is very expensive and difficult

At a certain point, it’s expensive and difficult enough that you’re better off demolishing and rebuilding. There was a viral thread about this the other day: https://twitter.com/rossiadam/status/1672216345901932545

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

#43

Post by bobthepanda »

wnolens wrote: post #31
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.

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..)

IIRC a big issue is also the rise of REITs and other large landlords, which unlike small time landlords have a large enough portfolio to use the losses on a vacant property to deduct taxes.

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

#44

Post by bobthepanda »

JauntTrooper wrote: post #40
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.

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. So…

It’s not the investor but about the loan. Commercial loans IIRC tie default rates to the last rent charged.

So long as the payment can be made at all, it doesn’t seem like people look that hard if the space is vacant or not. Usually only the ground floor is retail.

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

#47

Post by fragmede »

bobthepanda wrote: post #36
badcppdev wrote: post #20

Earlier quoted context omitted.

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.

But what is the retail sq ft per capita in urban cores? In the vast endless car-required suburbia that is American, that big box stores dominate, and pull up the average isn't surprising. The easiest way to visualize an acre is a Best Buy, after all. But how about if you only look at stores in Manhattan? What's the per capita SQ ft there?

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

#48

Post by NickM »

bobthepanda wrote: post #43
wnolens wrote: post #31

Earlier quoted context omitted.

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..)

IIRC a big issue is also the rise of REITs and other large landlords, which unlike small time landlords have a large enough portfolio to use the losses on a vacant property to deduct taxes.

Deducting losses doesn't make losses profitable, it just eases the sting of the loss a little bit.

If you lose $100, and you get to deduct that $100 loss, then that saves you the taxes on $100, but unless the marginal tax rate is somehow greater than 100% then you have still lost money.

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

#49

Post by p_j_w »

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.

This sounds like a house of cards itching to collapse.

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

#50

Post by closeparen »

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…

People are more worried about their downtowns for reasons like civic pride and concern for the other businesses there, but suburban office parks were in serious decline even before the pandemic. They’re just out of the way, so no one cares if they’re vacant.
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