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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

#111

Post by mywittyname »

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…

> (for a reason I don't fully understand) landlords felt it better to have spaces remain vacant than to lower rents.

Commercial tenants tend to have very long term leases, order of 10+ years. So attracting a tenant through lower rents has a dramatic effect on the long-term cashflow of a building.

Imagine the salary of your next job determined your salary for the rest of your working life. Would you prefer to stay unemployed or accept a below-market salary?

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

#112

Post by ryanwaggoner »

klyrs wrote: post #81
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…

> and apparently (for a reason I don't fully understand) landlords felt it better to have spaces remain vacant than to lower rents. As I understand it (but I'm not sure how applicable this is to any specific place), landlords can write down a loss set by either the last rent they received or the market rate in the neighborhood. If those losses are offset by gains elsewhere, they can zero their tax bill -- which, for…

This isn’t true, you can’t deduct lost rent as an expense.

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

#113

Post by onlyrealcuzzo »

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 want to live close to work, and without sufficient housing in cities, commercial real estate in big cities was very likely to suffer in the long term.

Your logic doesn't really follow.

Assume that you can't develop cities any more and growth is stifled - this isn't really happening nationally - it is in some cities - but let's assume it's happening nationally anyway.

Office values would still go up (nominally), as long as the city itself doesn't lose its ability to generate income in real terms.

Office values are going down because 1) interest rates went up, 2) the demand for office space went down (no indication this was going to happen before the pandemic). And that's really it.

The majority of high paid workers live near cities. In most cities, there isn't just one nice suburb where all the workers live. The workers are spread out all over the metro (including - mainly - in the city itself), and downtown is the only convenient place.

You can't easily just open small offices in the suburbs because its unlikely the entire team is in that suburb. They're probably spread out across the city.

You either go to the office (in the city) or you don't (less demand for office space). Or you work at a boutique company where everyone lives in some suburb randomly (outlier).

Karen From The Suburb has always wanted everyone in the company to commute to an office park in her suburb so its convenient for her. It's not going to happen now unless Karen From The Suburb becomes CEO.

We'll either RTO to offices in the city, or we'll keep working from home.

The future isn't more office parks in Calabasas and Marin and East Hampton.

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

#114

Post by yazaddaruvala »

freedude wrote: post #83
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.

Who were the depositors? SVB's depositors were primarily businesses with more than $250,000 in an account. Over 90% of depositors(google for exact percenatge) had more than 250,000 in the account. So who was the bailout for? Not the average guy on the street...

The depositors were payroll accounts.

> So who was the bailout for? Not the average guy on the street...

The "bailout" (badly named) was for the average people working at these companies. Their families that wouldn't have gotten a paycheck. The grocery stores they couldn't have bought from.

Payroll accounts should be 100% FDIC insured the same why it works in many other countries.

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

#115

Post by kibwen »

tehjoker wrote: post #107
kibwen wrote: post #99

Earlier quoted context omitted.

> 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.

As cool as skyscrapers are as achievements of engineering, they're only a good solution when land is so expensive that the cost of the land dominates the cost of the building. Skyscrapers just aren't materially cost-efficient and don't scale well; as they get taller, a larger and larger percentage of the floorspace must be sacrified in order to accommodate structural elements and elevators. And then you have other problems, like how they have to pump their own water rather than relying on ordinary water towers, or how wind and earthquake risk has to be accounted for as the height increases.

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

#116

Post by Workaccount2 »

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…

The rental value of the property determines the margin that creditors will extend to you.

If your property value dropped (with last paid rent being the proxy for this), you'd be liable to be margin called. If you're fully vested on margin in something illiquid like real estate, then it very well might be better to have a few vacant properties than be forced to liquidate to cover your margin balance.

Obviously though this has the makings of a real estate bomb, as a few forced liquidations could set off a cascade of value collapses.

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

#117

Post by netjiro »

ajmurmann wrote: post #76
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…

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 ...

Perhaps we should learn from other places that have better solutions already? E.g: Japan? Singapore? etc.

Somehow many western countries have gotten stuck in red tape and the inability to learn from other cultures.

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

#118

Post by telotortium »

tehjoker wrote: post #107
kibwen wrote: post #99

Earlier quoted context omitted.

> 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.

That might have been true in the early 1900s when skyscrapers were new, but they can build skyscrapers on any kind of soil these days.

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

#119

Post by JediWing »

freedude wrote: post #83
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.

Who were the depositors? SVB's depositors were primarily businesses with more than $250,000 in an account. Over 90% of depositors(google for exact percenatge) had more than 250,000 in the account. So who was the bailout for? Not the average guy on the street...

I for one am glad that SVB depositors were made whole and thus I was able to continue to get a paycheck.

Getting a Slack from the CEO on Saturday night saying basically "we *should* be able to pay you this week, I think" is fairly nerve wracking.

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

#120

Post by Animats »

api wrote: post #65
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…

Seems to me that we've speed run the story of why suburban sprawl exist in the first place. A car is a machine to provide negotiating leverage in real estate markets. Dense urban centers, while awesome in many ways, easily lend themselves to the development of grassroots real estate cartels made up of property owners who block new construction to profit from real estate appreciation. As this occurs people are forced…

> A car is a machine to provide negotiating leverage in real estate markets.

Now that's a good insight.

It's amusing to read the comments from commercial real estate owners. There's a huge sense of entitlement. If they're losing money, somebody else must do something to make them stop losing money. Immediately.

The commercial real estate business did this in 2006-2008, and in 1999-2000 in San Francisco. The mall industry has been shrinking for years. It's not the end of the world.

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