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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

#121

Post by polygotdomain »

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…

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

At a high level commercial real estate valuation cares about the cash flows for the entire building (usually over 10 years) and a discount rate to get to a number on what the building is worth. When we see empty space, we think it's not making money, but all landlords assume that a space will be empty at some point and for some amount of time, so that's already baked into those cashflows.

Without getting into the specifics, you'll generally push out your assumptions on leasing that empty space rather than drop your price on cost of the space. Pushing out assumptions typically means taking a slight hit because the cashflows you were already expecting are just hitting the books a little later. Dropping the cost of the space generally decreases market value, so that makes all of the space in your building cheaper which has a much more significant impact on the cash flow for the entire building, rather than just one space.

The other significant factor is that landlords typically have significant upfront costs in base building improvements and free rent credits that they give to tenants. This means that there's a certain amount of time, generally a few years, where the landlord has paid out more money to the tenant than they've received. Landlords need to be confident that the tenant is going to be paying rent beyond that break even point, or else they've lost money in addition to losing out the ability to rent it to another tenant and any legal fees associated with evicting a tenant.

Between how valuations are structured and needing to hit that breakeven point with a new tenant, there are relatively few incentives for landlords to just "lease the space".

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

#122

Post by gorjusborg »

rcme wrote: post #101
gorjusborg wrote: post #79

Earlier quoted context omitted.

> 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.

I'm not sure you understood what I'm saying.

My point is that the FDIC refunding more than 250k wasn't a bailout of the banks because FDIC insured banks are the ones who fund the FDIC.

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

#123

Post by klyrs »

ryanwaggoner wrote: post #112
klyrs wrote: post #81

Earlier quoted context omitted.

> 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.

Like I said; I'm not sure about all jurisdictions but it's true where I live:

https://www.canada.ca/en/revenue-agency/services/tax/busines...

New York: https://www.tax.ny.gov/pit/letters/rental-loss.htm

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

#124

Post by ajmurmann »

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…

Another thing that seems to be missing from many people's mental model is that building up doesn't mean you need to destroy green spaces. In fact building up gives you more ability to create green spaces between the buildings.

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

#125

Post by gorjusborg »

gorjusborg wrote: post #122
rcme wrote: post #101

Earlier quoted context omitted.

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

I'm not sure you understood what I'm saying. My point is that the FDIC refunding more than 250k wasn't a bailout of the banks because FDIC insured banks are the ones who fund the FDIC.

The main point to take away is that healthy banks are on the hook for paying depositors through assessments charged by the FDIC.

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

#126

Post by ajmurmann »

netjiro wrote: post #117
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 ... 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.

I think the problem isn't that we don't know what effective policies would look like, but a political one.

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

#127

Post by nradov »

voisin wrote: post #35

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…

This is exactly why we need to eliminate all defined benefit pension plans and switch workers to defined contribution plans such as 401(k). Traditional pension plans are just too risky because the managers often make bad decisions. Defined contribution plans invested in low-cost target date mutual funds are much safer.

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

#128

Post by ryanwaggoner »

klyrs wrote: post #123
ryanwaggoner wrote: post #112

Earlier quoted context omitted.

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

Like I said; I'm not sure about all jurisdictions but it's true where I live: https://www.canada.ca/en/revenue-agency/services/tax/busines... New York: https://www.tax.ny.gov/pit/letters/rental-loss.htm

No, you can deduct actual expenses, or uncollectible rent. This does not include theoretical rents that you would have received had the property been rented. No part of your deductible expenses is contingent on the market rent, or the last rent you charged.

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

#129

Post by ajmurmann »

kibwen wrote: post #115
tehjoker wrote: post #107

Earlier quoted context omitted.

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 pr…

That is definitely true. On the other hand, we also aren't fully accounting for the cost of sprawl. All infrastructure gets much more expensive with sprawl and that cost is usually equalized over an entire metro area with the urban core incurring very little infrastructure cost per person while the suburbs frequently come out negative on contributing tax$ - infrastructure cost. Carbon emissions which are higher with low-density are another cost that's not priced in. It makes it really hard to find the equilibrium point if we aren't pricing everything in.

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

#130

Post by solumunus »

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...

That’s simplistic thinking. The majority of those businesses would not have been able to pay staff and there would have been many redundant “average guys on the street”.
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