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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

#101

Post by rcme »

gorjusborg wrote: post #79
rcme wrote: post #24

Earlier quoted context omitted.

The depositors were bailed out. Also, I would say the banking sector as a whole was bailed out. Providing unlimited insurance is to SVB’s depositors allowed other banks to remain solvent, as did the Fed’s new lending programs.

> I would say the banking sector as a whole was bailed out I disagree with that characterization. The FDIC refunds depositors using money (assessments) they collect from member banks. So in essence, unless the government does something special to inject funds directly into the FDIC, the remaining FDIC member banks would likely see their assessment rates go up to cover the costs of these bank failures. From https://ww…

I don’t think “the government funds its operations via taxes” is a strong argument against this being bailout.

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

#102

Post by mywittyname »

ghaff wrote: post #62
toomuchtodo wrote: post #41

Earlier quoted context omitted.

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…

If people aren't working in cities, it remains to be seen what that does to housing demand. There are a bunch of cities that aren't great from an employment perspective and, in general, they're not a big draw for people to live there either.

Especially in cities which don't have "vibrant" downtowns; the downtowns full of Subways and McDonalds that close up at 5PM, leaving a desolate urban landscape reminiscent of zombie movies.

What's going to happen to cities with downtowns that are nothing more than a collection of office buildings and the businesses that support the people who work there?

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

#103

Post by throwway120385 »

rcme wrote: post #85
ahupp wrote: post #59

Earlier quoted context omitted.

The FDIC insurance fund is paid by banks, so ultimately depositors were "bailed out" by the broader banking industry.

I don’t really see how that’s relevant. Paying into the FDIC DIF is a legal requirement of the banks. It’s basically a tax. Somehow bankers have convinced everyone that they have impunity to mess up the financial system just because they pay a special tax. And if the FDIC is really going to offer unlimited depositor protection, they’re going to need a lot more than the 100-200B in the DIF.

What would you propose as a system to replace the FDIC?

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

#104

Post by vkou »

marcosdumay wrote: post #54
pradn wrote: post #38

Earlier quoted context omitted.

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 then your rent/sqft number goes down Yeah, that's the issue. I'm sure there's plenty of demand for commercial space on a lower rent. Commercial space is much more than offices, but those things are priced so that only high-margin artificially high-density knowledge work can afford them. Our modern cities are clearly not economically viable (proof of that is that people can't afford to live in them), so yeah, so…

> Our modern cities are clearly not economically viable (proof of that is that people can't afford to live in them)

No, that's not sufficient proof. You'd need unaffordability, and high rates of rental vacancies to prove that. Most of the unaffordable cities have near-zero vacancy rates.

"That place is too crowded now, nobody goes there anymore."

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

#105

Post by yazaddaruvala »

mynameishere wrote: post #26
throwway120385 wrote: post #13

Earlier quoted context omitted.

Yes, and my understanding is that SVB's assets, which are still productive over the long term, were sold on to pay for this "bailout." So the narrative that there was a government bailout is not really true here. The real concern I've heard is that FDIC insurance paid out to a lot of depositors who had more than the statutory limit, but what's left out is that FDIC actually sold on SVB's assets to pay those depositor…

Their assets were worth less than they owed depositors. An auction would have caused a 30 percent or so loss to many millionaires.

The SVB investors which were many millionaires, did lose 100% of their investment.

The depositors, regardless of wealth, were lied to about the safety of their funds. It was roughly fraud - it wasn't their fault - they didn't take excess risk. How is it a bailout to let them keep their money?

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

#106

Post by kibwen »

nradov wrote: post #98
kibwen wrote: post #94

Earlier quoted context omitted.

I highly encourage people to read that NYT link, the diagrams are excellent. That said, the article also shows how you address the problem of no natural light: you punch a hole through the center of the building (and in New York City's case, this permits the developer to "move" that lost floorspace into newly-built units on top of the building). Far from a trivial solution, but also far from impossible.

That "solution" is literally impossible for most office buildings where the core is structural and contains most of the building machinery. For those it's cheaper to demolish and rebuild.

The article shows an example of a building where one structural column had to be moved in order to accommodate the hole, and where the hole itself is off-center in order to disturb as few structural elements as possible. Indeed, every building converted in this way will probably need its own bespoke solution (e.g. if the elevator shaft is dead-center, you might cut two smaller holes on either side), but even then it seems like it would be hard for it to be more expensive than starting over from scratch.

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

#107

Post by tehjoker »

kibwen wrote: post #99
ajmurmann wrote: post #76

Earlier quoted context omitted.

I worked in a suburban office park before the pandemic. My commute to the office park wasn't substantially shorter than when I commuted to a downtown office and the office park was a lot more depressing. When I worked downtown, my coworkers would regularly explore new restaurants during lunch, have 1-on-1s over ice cream etc. The other benefit was that downtown had better public transit. Getting from one random place…

> I wish we could solve zoning and permitting and just build our cities up. Lest people think that building up necessarily means skyscrapers, it doesn't. You can build a six-story building without any of the extreme engineering or exotic materials that skyscrapers require. Paris, Barcelona, and Amsterdam all manage high levels of density where the average resident will be living in a building of approximately six sto…

I don't get why people don't like skyscrapers. They're cool. I am from NYC, so maybe I'm used to it. My understanding is the major reason they aren't build as much outside of Manhattan is because the bedrock in Manhattan supports heavy structures.

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

#108

Post by nradov »

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.

It's not a regulatory issue. The issue is loan covenants negotiated between private lenders and borrowers. No one forced them to agree to those terms, and they are free to renegotiate at any time.

But cities that want to retain vibrant downtowns should consider imposing some sort of vacancy tax on commercial real estate. That would give landlords an incentive to lease their space out at a lower rate rather than waiting for a more lucrative tenant to come along.

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

#109

Post by sahila »

bobthepanda wrote: post #44
JauntTrooper wrote: post #40

Earlier quoted context omitted.

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.

If the bank is not looking at whether the space is vacant or not, why would they look closely at what the rental price is if payments are being made?

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

#110

Post by yazaddaruvala »

rcme wrote: post #24
yeetcode wrote: post #10

Earlier quoted context omitted.

But SVB didn't get bailed out though? At least not the investors. Only the depositors were given their money back.

The depositors were bailed out. Also, I would say the banking sector as a whole was bailed out. Providing unlimited insurance is to SVB’s depositors allowed other banks to remain solvent, as did the Fed’s new lending programs.

The depositors, were lied to about the safety of their funds. It was roughly fraud - it wasn't their fault - they didn't take excess risk.

How is it a bailout to let them keep their money? At best its an "internal banking restructuring in favor of the depositors".

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