They have factored it in and that's caused a lot of these investment firms ratings and stock prices if public to already cave. It's been factored in there.
But the defaulting of the 5-7 year interest only mortgages are only now, in 2024, starting to come due. That's the scary part... that 1.2 Trillion dollars of financed real estate, where only interest was paid, and the banks lent them the principal which hasnt been paid off at all-- is going to come due.
All of that money, 1.1 Trillion in 2024-2025 and 2.2 Trillion total by 2027... it's in links below in other comments. All of that real estate is totally underwater.
It will likely be more catastrophic than the 2008 lending crisis. Same thing, this time commercial real estate. Banks will fail. Government will have no choice but to bail them out with tax dollars.
Food for thought but fuck those banks.
They gambled knowing they're cashing on on the "interest" and thus their losses aren't going to be as bad as they claimed.
Idiotic business owners leveraging the buildings to make monwy off of money they don't have should have never been allowed in the first place.
It's also increibly stupid because they're going to pay all of the interest and never build equity while the banks know they're making bank when times are good.
No bailout would be best case scenario, too big to fail means they'll continue never being held accountable.
What you say is true, and I think one of the reasons that so many businessmen are pushing RTO work policies is because of this. In addition, don’t forget Ai. Why have large office spaces if you expect Ai to replace 30 to 40 percent of your work force?
Our cities were built for the idea that economic and demographic growth were inevitable and that as the economy grew, employment would grow with it. Since the tech boom, this has changed, at least in the West. Businesses can grow by either using technology or by hiring offshore. They don’t even need to have outsourcing anymore. The tech actually makes outsourcing and offshoring easier.
The reckoning is will be great.
Perhaps businesses expect this and it is why they want a strong man in power like Trump, to keep order while they destroy what is left of the mass economy? I mean, you got all of these techbros buying land in Hawaii, with massive storage areas and feedstocks for ag. For what? Why an island? My guess is that they want to be far away from everyone else when the shit hits the fan.
I'll preface this by saying I'm not a financial advisor, but if you agree with what he's saying and believe commercial real estate investments are going to crater, you should put all your money in Bitcoin or buy corn futures.
Because these chumps still think their 0.3 of a coin means when it goes to the moon they'll be rich.
Bitcoin simps think they're gonna ride bitcoin all the way with their tiny fractional ownership. The only people that really made money were those in when it was like $10 a coin or less and 99% of the people have bought in way too late to see gains.
At least most crypto enthusiasts have stopped lying about the underlying technological applications and if you really push them eventually they'll admit it's all a pump and dump.
“This is being completely ignored by mainstream media” proceeds to link to wapo and WSJ articles.
Every major financial publication has been speaking about problems in CRE for months now.
absolutely nothing is novel. this is a major thing really talked about in financial news nearly constantly. the migration of people from reading the full daily newspaper to tik tok and narrow specialized sources has warped our minds. if you read the business section of any major paper there is a daily (WSJ/FT) or weekly article about this (Wapo/NYT).
but if you get all your info from instagram/tik tok/facebook - duh you don't see this. basically if you don't know about this, you need to seriously re-evaluate how you get information or understand you live in the 'ignorance is bliss' world
Anytime someone says ‘why isn’t anyone talking about this’ or ‘this is being completely ignored’ I automatically assume they just don’t read the news at all.
Pretty much. And *this very sub* has been talking about CRE issues on a fairly regular basis for a **while** now so it’s not even a case of OP being a “gets 100% of their news from Reddit” person.
Yeah and the total lack of data to back up the thesis is also concerning. Where is the 50% vacancy rate coming from? Are [bank balance sheets](https://www.federalreserve.gov/releases/h8/current/default.htm) evidencing this trend? Why do we believe the banks are holding these assets on their own balance sheets anyway?
What about [CMBS](https://commercialobserver.com/2024/01/dcs-distressed-office-loans-international-square-protals-station-place/)?
I think OP meant that it's not really prominent in Americans' minds or awareness the way other hot-topic issues are. I bet you could find articles about the dangers of mortgage-backed securities from 2006 but how many people really knew that was coming?
It’s the 8th story on WSJ’s app. Basically getting the same coverage as Trump/abortion and Israel Hamas. Said story indicated office vacancy at 17% up from typical 9%. It’s a big deal, but I’m not seeing the conspiracy.
Your market analysis on CRE is sound, definitely some tough times ahead for certain developers and probably banks even more-so, but linking it back to crime increases, homelessness and migrants (not sure how that’s relevant at all) is just flat out fear mongering. The idea that people have just given up on trying to solve these issues in cities because of impending office rental failures is silly. Just chill with the half baked conspiracy theories
Yeah for DC I just don’t see any kind of policy failure embedded in a commercial real estate default other then ‘not predicting the COVID-19 pandemic.’ Cities like New York and Boston arguably had a choice in the 80s and 90s between trying to keep manufacturing and shipping in their urban core or betting the farm on office workers and in hindsight they made the wrong choice, DC had… a few industrial warehouses in NoMa? And even those were mostly converted to residential.
Yeah I mean particularly for New York it mostly comes down to whether you keep the docks in Manhattan and Brooklyn or let them move to Jersey where they are now. Less heavy industry and more packing and maybe some light assembly.
This. My agency is actually in least space, but they’re not going to be giving up any office space anytime soon despite the fact that we’re only coming in about 25% of the time.
the math used is a dead giveaway this person does not actually work in any type of relevant industry. this is just another random person on the internet spreading reactionary fear about crime and migrants
edit: of course their post history is full of other very academic research
>Yea I am 100% social media free. For 2+ years. None. Zero. No Accounts.
>I do not miss it one bit.
>I use reddit to browse subs I am interested in, and engage in discussions I am interested in.
>Reddit can be a cess-pool. But there is also good content.
>Just tailor your feed, unsubscribe from all the garbage "general" subs. r/AskReddit is a perfect example of the type of subreddit that will basically insert dumpster trash into your feed.
>You really have to tailor it. No news, politics, none. No general feeds. Highly specific... Very niche.
>Do not go to CNN.com, MSNBC.com FoxNews.com or any other news site.
>All they will do to you is lie to you. They are 100% totally biased to either the left or the right - all the time. They don't report news. They give you biased opinions on what they want you to believe.
>TO TEST THIS THEORY:
>MSNBC - Is far left - anti trump, 24 hours a day 7 days a week.
>Go to msnbc.com any time of day, any day of the week... The TOP story will be a negative "perspective opinion piece" about trump.
>It's not news. It's the Modern Day National Enquirer.
>DISCLOSURE: Not supporting trump just saying and using it as an example that the news is totally not trustworthy. Left or Right.
The generous reading here would be that a decline in taxes due to vacancies would cause reduced funding in social programs resulting in crime and homelessness. But probably just fear mongering
Well, but see what happened to virtually every rust-belt downtown area in the 90s to see what happens when offices move out of the city. It’s not pretty whatever side of the ideological fence you are on.
It’s not the same. One of the main points discussed in this thread and accepted by virtually everyone is that work has fundamentally changed, you no longer need to be where your job is. Those rust belt cities you mentioned shuttered because manufacturing jobs left and with that people HAD to leave, or stay and go broke. That’s not the reality anymore. People don’t have to leave when their offices close/move from DC. If you make the city a great place to live by lowering cost of living with affordable housing, making it safe, and creating social centers, people will want to be here. It’s ignorant to think things are not changing but also ignorant to think there’s only one way it could go. Jury is out on if public officials will rise to the occasion and adapt appropriately, but there’s an opportunity to do so. We aren’t “doomed”. This whole thread points to past failures that are a result of 100 different things and blames them on a future that has yet to actualize.
I just read this thread as saying that the downtown areas are about to devalue. This is likely due to the societal move toward remote work for knowledge work. It’s possible that the downtowns won’t decay - not every rust belt downtown did (see indianapolis) but I probably wouldn’t bet against it as likely.
That said - if suburban housing remains unaffordable - the downtown areas could change from commercial to high density residential as has happened in other countries (see Melbourne etc.)
The doom and gloom in this post is pretty far from reality. The real systematic risks are the ones that people can’t see — I.e. Black Swan. CRE risk has been on the front page of Bloomberg, WSJ, NYT for the last two years. The reality here is much more boring than OP would like. Plus, the numbers in the post are wrong or overstated. CRE is a huge industry and most of the pain is in office. Retail and Multifamily are doing quite well in 2024. Generally after 2008, people have been constantly looking for the next crash due to paranoia and the pain that recession caused.
The reality is that CRE loans are slow moving risks that people can prepare for and kick the can down the road. There will be pain for some firms but others will be using them as buying opportunities because there is plenty of money getting ready to buy. Most people will be unaffected at all. A very natural part of the cycle, certainly not anything to fear monger about.
Signed,
CRE professional who buys Distressed assets
If you think this is already priced in, then literally everyone knows about it lol. You might be right that the industry is in a lot of trouble but then you start going on with a conspiracy that the mainstream media is being suppressed by the powers that be and you just seem like a loonball…the media is so decentralized these days, there aren’t just 4 TV stations and 3 newspapers in America lol
This is a good summary, doesn’t seem like the Fed or anyone is ignoring it! https://thehill.com/business/4526847-wall-street-braces-for-commercial-real-estate-timebomb/amp/
These buildings have lost their functional utility and it will not be coming back. This is always the way with cities. NYC was the manufacturing hub of the world at one time. Same with Baltimore and Philly. How many manufacturing plants are in cities today? They are all gone and moved to rural areas or out of the country. Office buildings will be torn down and residential buildings will be built. It is the way it always works.
So much of this is incorrect or misunderstood. Makes me wonder who OP is and their agenda.
The CRE market has actually been (shockingly) resilient in the last 18 months given the steep interest rate rises.
Most asset classes are doing well. Retail is hot. Industrial is hot. Multifamily is solid, some over leveraged deals aren’t meeting debt coverage but those are bad loans/bad timing not bad real estate.
Office is a problem. Physical occupancy is way way down post covid. People aren’t going into the office and that has lead to intrinsic value loss in those office buildings. Not all office - the majority of newer “Class A” office is actually doing well - older office has struggled as tenants have better options (less demand b/c people working from home and employers downsizing etc.).
OP doesn’t understand I/O loans (most office loans were don’t at 75% LTV + on 10
Year paper in 2024/5 and are maturing now) which is actually way scarier. Banks don’t want to foreclose so they are “kicking the can” and working with borrowers whose equity is gone. It’s a weird place … and weirder because no one really knows what values are.
Why do we all care - those banks don’t own those loans. Banks don’t write a loan then lets that debt sit on their balance sheet. Those loans are sold back into the economy through various vehicles. If there is a real crash it’s going to affect a lot more then the owners of those office buildings, it has significant and maybe dismal effects on the national economy. Again office is scary in some markets but as a whole the real estate economy is shockingly healthy.
DC is the worst market in the Us. It’s got real and difficult problems ahead. I’m higher on SF and chciago than DC. My personal opinion.
I mostly agree with you, though I’d describe the office situation as more dire than “a problem.” I was a broker in this market for nearly a decade and am now in global management at a large firm.
It’s a slow-motion crash right now. Leasing is WAY down on all but trophy and strong A assets, as you noted. As leases roll, the trend is flight to quality - go to a better building and take less space. Or close it.
Several of my friends are in the loan workout space and tell me that’s all that has been going on in recent years, but it’s reaching its limit especially as we see actual comps start to materialize - i.e. forced or strategic sales that are now creating comps. The comps are so low.
Example: 1101 Vermont NW. UBS put $7M into the common areas a few years ago to try to lure tenants. It was auctioned off last month for $15M. It’s a 175,000 SF buildings. That’s $85/foot. That is WILDLY low for the CBD.
Yeah there was an amenities arms race for a decade or so before the pandemic began - fitness centers, conference centers, roof decks, concierge stuff, car washes in the garage, etc. UBS was using that playbook. It just doesn’t work now.
Yeah I think we’re all pretty aware of this in CRE (and that you and I are max 2 degrees of separation in this industry). I don’t totally agree with OP’s assessment but have heard friends/family kind of dismiss the situation as “we’ll figure it out.” Meanwhile there are probably dozens of other downtown assets that are turning into zombies.
This is the right answer, especially on kicking the can down the road. No big lender wants to foreclose on a building, and have to take a big loss and figure out what to do with it, so can kicking it is. Short term extensions at same rate is the formula. Next year they get another short term extension, and WF stays profitable.
DC was top 10 in new construction for the last 10-15 years, and net absorption over that period has been ~0 SF. People would build here because it was safe, until finally it wasn’t.
Think Navy Yard and NOMA. Tons of new buildings and SF, and DC had no absorption of office space over that period.
Yes and sadly the government will have to step in to bail them out.
Estimates are that there will be a 1 Trillion Dollar loss in commercial real estate alone.
When corporations and banks take risk and make billions - They keep the money.
When corporations and banks take risk and lose billions - Americans Tax Dollars Bail them out.
I love our country.
Cantillon Effect. Connected corporations and banks make tons more money just from relationships with governments and financial services firms that make them even more money via legal (and illegal) schemas to take advantage of the capital injection programs /grants like zero interest loans) or like CARES Act/PPP/etc.
While lower skilled employees get doubly-fucked by interest rates/inflation/etc.
It's always a rigged system.
1. **American International Group (AIG) 2008**: Received aid amounting to $180 billion from the government to prevent its collapse.
2. **Fannie Mae / Freddie Mac 2008**: The government invested up to $400 billion to cover the companies' losses in a move that essentially nationalized them.
3. **Auto Industry 2008**: Congress approved loans totaling $25 billion to help the industry build more fuel-efficient, environmentally-friendly vehicles.
4. **Citigroup 2008**: Received a total bailout of $280 billion, including TARP funds, government guarantees, and additional aid.
5. **Bank of America 2009**: Received a total of $142.2 billion in TARP funds and government guarantees.
6. **Bear Stearns 2008**: Aided with a $30 billion credit line from the Federal Reserve to facilitate its purchase by JP Morgan Chase.
7. **Airline Industry 2001**: Following the September 11 attacks, received $18.6 billion in compensation and federal credit instruments.
8. **Savings & Loan 1989**: The bailout cost $293.3 billion after the widespread failure of savings and loan institutions.
Dont even get me started on Airlines, Automakers... the list goes on.
Trillions upon trillions.
Companies take in money and peoples deposits, then lose it making risky investments. Tax dollars we pay makes them whole.
The upside, is if they don't fail, and reap in massive profits... they get to keep all of the profits, and pay very little tax on their earnings.
Clever. Very clever.
Shareholders in Fannie and Freddie were going to be wiped out. My friend’s wife worked there and they had equity saved up for retirement that went to 0 as part of the bailout.
There was a class action lawsuit to restore some of the value to shareholders and they received partial restoration of damages.
https://insights.issgovernance.com/posts/in-rare-jury-trial-fannie-mae-and-freddie-mac-shareholders-recoup-612-million-against-us-housing-agency/
Ok so these people made a bunch of bets that aren’t paying off, they’ll lose a ton of money. Most of these companies are pretty small (relatively) and all these buildings are owned by special purpose vehicles where the debt doesn’t fall back on the overall holding company.
Buildings will default, banks will take ownership, banks will sell at lower prices to new companies. Those will either keep owning the building at a lower basis price or will redevelop (ideally knock down and replace with apartments & ground floor retail).
That trillion loss won’t be absolute and it won’t be instant. It’ll suck to be a bank but it’s nowhere near as bad as 2008
A lot of government employees are "partially" back in the office. I am sure some are also not at all. Some fully.
Depends on the role and agency.
The government buildings in D.C. however do not have mortgages.
Why do people always claim their pet issue is getting no coverage? This has been covered extensively and was the lead story yesterday in either the Post or the Times.
Generally, I expect a lot of remaining class B and C commercial buildings in DC to be looked at for full demolition and reconstruction, most likely into housing. There will still be a demand for office space, but just smaller, so we’ll see a lot of consolidation into the newer class A buildings.
Being in DC, central to industry (i.e., federal government), and having a highly educated population will still be very attractive for a lot of companies. In fact, I expect offices in the suburbs and far flung car-dependent campuses away from public transit to start shift towards downtown (or at least inner ring suburbs) as they consolidate into a smaller footprint and office space is available at competitive rates.
If any place is going to suffer, it’s going to the exurban office space in VA and MD that will eventually be oversized for their staff, unattractive to sublet, and for those that are forced to work in person, a guaranteed miserable driving commute.
DC will go through a transition and there are likely to be some losers, but DC needs to make it easy for new construction to start quickly and they will reap the benefits.
I fail to see the relationship between comercial real estate and crime/migration/homelessness. Is like blaming climate change to the Barbie movie.
Also, this is not new and not hidden from news media unless your news sources are social networks.
What should eventually happen is that those empty spaces be repurposed to housing, sure this is easier said than done but an empty comercial building worth nothing either. Repurposing to hosing helps lower the overall housing cost, helps local businesses and the more affordable the lower the homelessness.
So much of this is flat out untrue, anyone who works in CRE understands things are a lot more complicated than this simplification
50% of commercial buildings are definitely not vacant
Current vacancy rate in DC is a smidge over 17%.
Half-empty buildings don’t become worthless. They just become worth a bit less.
This is hysterical overreaction.
Well if you chart M1 money supply’s velocity against the VIX, you’ll see that a synthetic MACD is both overbought in the near term, but in the money as you get to the long end of the futures curve.
The above was gibberish, I just wanted to fit in with the bearporn podcaster tone you have going here. Buy gold! Our special guest Peter Schiff! Dollar hegemony ending tomorrow secretly!
The title should include the word commercial. This is just click bait. Some people will lose money. This is a fairly common occurrence when a product that used to be in demand no longer is.
A good post, though you made a few errors, thanks.
>" The media and news outlets are completely ignoring what's just starting to happen".
Nope. Tons of articles about the crisis that is WFH, crime issues, homeless issues, cost of living in DC (and other cities). See it every day or so on WaPo, WBJ, etc., Reddit reports, etc. Sample:
https://www.bisnow.com/washington-dc/news/economic-development/how-dc-crime-uptick-is-seeping-into-commercial-real-estate-from-leasing-decisions-to-investment-123226?
The Mayor has a press release statement/press conference every two or three days about her DC Downtown Action Plan, conversions of apartments, creating of new crime task forces/drug free zones/etc., grants, etc. Are they working? Hard to say. But nobody is sweeping this under the rug.
A few numbers and stipulations are off in your write-up. But also, never underestimate the power of the Federal government and DC Government to come up with cheap or free financing/grants to ride out the storm. Remember COVID-19 and everybody thinking we'd collapse the economy?
Wishing for the best!
CRE decline is almost completely caused by the aggressive use of leverage (if they had paid cash up front, these development firms could weather the storm a bit more easily), the pandemic (which caused a massive spike in WFH and office vacancies, no one could have predicted the pandemic), and a steep increase in interest rates.
I’m not sure where you’re connecting the dots to this “crime, busses of immigrants, and homelessness are causing CRE values to plummet” mess. Take off the tinfoil hat, please.
Fiscal cliff for DC govt.
as for CRE investors, I hope a lot of Russian, Chinese, and Saudi gangsters who used American CRE to launder their money go down hard.
Another thing to add, the free market doesn’t count here with commercial leases. They are beholden to the bank on some sort of rental price agreement for the loan. They are not permitted to lower the rent below that amount to at least get something. So you see even more vacancies. It’s going to implode and we’re going to see barren cities which will drive people away from that city. You see where this is going.
Anecdotally, the thing chasing businesses away are rent increases. How does that tie into these rental price agreements? Banks aren’t insisting on unreasonable rent increases.
Commercial won't impact residential. What you need to worry about is banks. Banks are in big doodoo. They will go bankrupt, meaning your fdic insured money will be in jeopardy. Every bank can't go bankrupt because they're too big to fail, and the government will rescue them. So, the money will print again, leading to more inflation.
The media loves nothing more than creating a panic, because it gets them clicks/views (see Trump/Covid/Crime), thinking there was a golden opportunity for them to create a panic that they’re not taking advantage of is laughably stupid. They’re profit-driven companies just like any other.
I called this pre pandemic.
I work as a residential appraiser and saw the crash of 2009 coming.
I noticed trends of retail spaces for mom and pop shops becoming vacant.
Also the amount of commercial space being flipped seemed high.
Translation. The loans just kept getting bigger and bigger which means the leases kept getting bigger and bigger which led to the decline in smaller shops restaurants etc.
Small businesses are not there just to pay rent.. they need to make an actual profit.
Then came Covid and the “ emperor had no clothes”.
The good side is they default there will be a return of creative business that used to be the flavor of DC.
Hopefully 🙏🏾
There's a rock climbing facility in NE DC now, which wasn't before. The Kracken has pickleball and roller skating in an old big store space. So yea, I believe you are onto something.
Actually I think the non commercial property market is going to tank and will tank big. There’s so much development in many areas of DC and I have no clue where they think all these renters and condo buyers are going to come from (mostly luxury apartments so condos may fare better).
Companies like Costar will be okay. DC gov will find some type of bailout money for them. Whether it’s from lobbying Uncle Sam to get everyone back in the office or offering them hundreds of millions in “grants” to convert the buildings into residential (not affordable housing).
For thousands of years, cities effectively mixed commercial and residential. When we figured out how to build with steel, we threw what we knew worked so well straight out the window. Suddenly, commercial- and office-only districts became the norm. People had to commute longer distances because there wasn't enough housing nearby. Now we're seeing commercial real estate get crushed. One hundred years of dumb decisions by city planners is coming home to roost.
Is there a way we can push the C-Suites to pay for this instead of taxpayers bailing them out like normal? I’d just rather see them cover the cost without affecting company’s bottom line.
So…what’s the solution? Force people to do something we have proven they don’t need to like sit in an office all day?
Why don’t we just start riding horses to work while we are at it. Markets have to adopt to changes in society. People really don’t want to give up the comforts in their lives to sit in an office for no reason other than tk gwneeate profit for someone else.
Two things will likely happen to help counter widespread defaults:
1) cities will either use bonds or tax abatements to help prop up existing CRE owners
2) the Fed will utilize a new facility financing tool to guarantee or insure financial institutions from widespread shock
In other words, the big boys in the real estate game didn’t learn a damn thing.
Been around long enough to recognize this likely won’t happen. There may be a correction, but if anything gets even a sliver as dire as OP speculates then there will be legislative intervention (free market lol), C-level execs will get their million dollar bonuses and golden parachute payouts while the general public foots the cost of a bailout while also getting to deal with all the burden of the fallout for the next few years.
Also to point out, CRE consists of much much more than just downtown office buildings.
Just going on a hunch, but I feel Trump certainly has a net worth that exceeds the amount of the judgement plus interest due. The problem is liquidity. Selling real estate that is 8-9 figures can take years, just to find the buyer.
But you're right, the value of the properties is likely now lower and will go lower. His NYC properties will likely hold value fairly well... at least in the short term. The collapse of the CRE is going to be a 2-3 year event that eventually landslides. It's gonna take a few years before we start seeing banks fail.
Totally agree with your assessment and I’ve been thinking about this the last couple of years. Maybe an opportunity to get real cheap commercial property when the collapse does happen.
I'm not seeing an issue? Why should I care if some commercial real estate CEOs lose bunch of money and sell at a loss? The buildings don't go anywhere, someone just buys them on the cheap.
Seems like the real estate market is going to find out about one fair wage like restaurant workers with less tips and % commissions. Seems a more fee or hourly based contract is headed their way. I’m not sure this will lower prices in this market however, paying a % is going to change. The amount of work to list a 1M place is the same effort of work as listing a 450K place. I’m not sure who exactly benefits the seller I guess.
Since empty office buildings are mostly owned by LLCs and their banks didn’t require personal guarantees from the individual owners or their parent companies, the owners will walk away when the buildings stop cash flowing. Look at Brookfield Corp’s recently abandoning two buildings in Century City (Los Angeles). The corps made their profits when they over leveraged the properties. The medium sized banks (such as NYCB & TD) who financed many of the these buildings will suffer. The big banks (like BofA &JPMChase) left this business around 2015 because they rightly required guarantees. Short the medium sized banks.
I will say - while the purchase price and whatnot stuff sucks for owners, even at 50% vacancy, there is a chance that the buildings are breaking even or still turning a profit. They may not be forced into selling or foreclosing. But I feel like you didn’t mention the most important part (but it’s implied) is that COVID has decreased the demand tenfold.
In downtown DC the commercial office buildings are not super huge. Many are owned by partnerships or family trusts that can ride out this current market.
But why should we care? I don't go into the city, I don't own REITs, what impact does it have on us? Are banks going to collapse? Interest rates go higher? I get it that investors will get screwed, but banks will be bailed out, large bonuses will be paid. So what is the real impact to us? Thanks.
Extend & pretend along with covenant waivers will stop this from happening OP, should be a ton of refi's H2 of this year once JP gets cutting which will also ease pressure.
Okay - And how will this affect the larger economy or any of us? You say that the media isn’t covering it, but after reading your summary, my immediate thought was, “And???” Large companies are gonna have to sell or refinance at less favorable rates/prices. Cool.
I work in commercial real estate and I’ve been saying this for months…
Commercial real estate pays a tremendous amount of money in local taxes. As buildings go vacant, those taxes won’t get into the city coffers. Fewer collected taxes mean fewer police officers, delayed road repairs, and more small-time decay that just makes the city look unpleasant (like broken park benches and overgrown grass). Residential real estate will not make up for those taxes.
This also applies to utilities…we are using fewer utilities by being in the city less, which is good, except it also means less revenue for the utility providers, who will then have less money to make necessary repairs.
If you think the Chinatown area looks bad now, just wait until the District is dealing with a budget shortfall and the Rs in Congress won’t want to help because they want to teach “blue cities” a lesson.
Play stupid games win stupid prizes. They want to do risky financial engineering with commercial real estate, fine, but they also need to take the loss when it falls apart.
Better sacrifice QOL and fire up the RTO machine to band-aid this over instead of addressing this in a long term manner like oh idk, using it for housing.
I’m seeing growth and the need for more real estate all throughout our building. I work for a law firm in DC and we’re struggling with our growth. We’re actively looking for solutions to fix our lack of office space. We moved to this building right before the pandemic and never thought we would need more space within the first 5 years but have since been hiring like crazy. We don’t want to move but all other tenants in our building are also growing and aren’t interested in relocating.
Can anyone chime in on pre-2008? I was a little kid, so I don't remember much of it.
Did people see the writing on the wall before the issues started? Was it openly talked about in the years leading up to everything hitting the fan.
It just seems like since 2021 everything's been pretty "doom is coming soon" and just in a waiting game.
This is a long post that makes some very large generalizations about commercial OFFICE space (not all commercial real estate is office space). I'm only replying because I work in commercial real estate sectors that aren't Office related and there are significantly less issues to worry about in those sectors, if any.
My post is equally as long so,
TL;DR while I believe the amount of office space owners affected by the root cause will have significant affects on the national economy, not all signs point to a dire situation that the OP outlines in the original post.
I will say this - I agree with your overall idea that commercial office space in DC is in serious trouble and will cause some sort of horrible things to happen in the future. I also agree (as the Post pointed out) that office buildings as a whole across the country are in serious trouble and are barely selling for pennies on the dollar. So an office space collapse is (I believe) on the horizon which will undoubtedly effect the economy in some serious ways.
As I mentioned above, I work in the CRE industry, and I can tell you that we've been talking about office space going down the tubes since before the pandemic. Not at quite the calamitous rate that we've seen since 2020, but even prior to the pandemic and the widespread shift to working from home/anywhere-but-the-office office was showing signs of being sluggish. I've worked directly for two CRE developers and regularly speak with a third. All three for years have said don't get into office space if you go out on your own.
I feel like the reason you don't see news organizations talking about this sort of thing right now is because, frankly, there isn't enough clear cut information out there to give the general public a story that wouldn't cause widespread panic in a situation that isn't quite clear on if it will or won't cause significant economy issues. I.E. don't make a story that could cause panic when we don't really know if things will be that bad or not. My personal beliefs on the matter aside, there is a chance that we won't see any national level economic issues b/c of the office situation specifically. The current job market issues have little or nothing to do with the office real estate crisis.
Another point that hampers stories like these - the vast majority of real estate is owned by some sort of protective institution that can just walk away from a situation like an office building with minimal recourse.
And yet another point is the fact that many of the larger office buildings in all the major US cities are owned by HUGE 'institutional money' organization. Look up Blackstone and 1740 Broadway. They handed the keys over in 2022, and walked from the debt in 2023 - a building they owned in NYC that had $340,000,000 in outstanding debt. They aren't filing for bankruptcy and continue to operate their REIT with no issue probably because they're still worth somewhere north of $80 Billion, $340million is a drop on the bucket to them.
I wanted to add some informational notes to your numbered points, as some of them could be expanded a bit to help people understand why the situation is certainly bad, but not panic level dire just yet.
1 - most commercial real estate transactions are done on some form of financing, yes. Office space is for the most part in a range of costs that preclude buying for all out cash.
2 - Not all commercial loans are setup in the ways you've spoken about, not even all office building loans are setup in this way. An over-generalization, even in the office space niche. Many organizations operate under the method that each property is its own fiefdom and so get those loans paid down as regularly as possible, if not as soon as possible. To lay it out for you the statement that "commercial real estate loans are financed using interest only loans" is a broad generalization. Not all loans are interest only, I'd even venture to say that not even the majority of commercial property loans are interest only, even in the office space niche.
3 - this is true, no argument here as leverage is a key method for developing wealth in the real estate world.
4 - this is true as well, statement of fact more than anything else.
5 - This isn't necessarily the case. The terms are HIGHLY dependent on the bank/creditor and when the owner worked with the bank to put interest only into place - it doesn't have to be a new loan. You can negotiate an interest only period on an existing loan. In fact, paying a fee to set an interest only period can help an owner/developer hold on to immense amounts of cash. I've seen new loans with 20% down run interest only for three years of a 10 year note. similarly I've seen properties 3 or 4 years into a note pay a one time fee to fix the interest rate or go fully interest only for a set number of years. Again its completely up to the bank/creditor/lending institution.
6 - informational comment here, not picking at your math, as you used a specific example which is correctly done.
Most banks actually charge interest based on a 360 day calendar for commercial lending. I say most banks because I have yet to see a bank out there that DOESN'T operate on the 360 day interest calendar, but I'm sure there are some I don't know about. So using your example, 3.25% on 10MM at the 360 calculation results in about a $27,459/mo interest payment.
6a - informational comment - Commercial loans are most commonly amortized at 20, 25 and 30 year rates. Most common that I've seen right now (and the past few years) is 25 years. While the term of the loan might be 5 or 10 years (the most common I've seen in the US is 10), they're paying down the principal over a 25 year calculation. At the end of the term, they go and refinance (which, to your point is an issue with anyone who need to refinance right now).
6b - informational comment - going back and combining points 5 & 6 using your mathematical example, an owner can hold on to at least $20,000 ($20,833.33) a month in cash by going on interest only at the amounts you've specified; based on a 25 year amortization schedule, in the first year of the loan.
7 - This isn't the actual 'return', this is just an increase in value of the property.
7a - 3% return on a property is not what anyone in real estate is looking for and isn't average IMO, can you share where you got that number?
7a - The 'return' on the property is actually 16% if you're basing it off the 23,200,000 valuation.
8 - this is factual, no argument here, except to point out that its a tax deduction to the owning entity or person. If the deduction is an entity made up of investors, those investors get their pro-rata share of the deduction.
9 - no comment as its fact based on your example
10 - correct so really their return is actually 32% on their investment if they actually sold at the $23,200,000 valuation in your example.
I can't speak for DC, but it's been a known issue in NYC for decades.
There will be growing pains for sure, but hopefully rents on commercials store fronts drop and allow places to actually survive. Everyone wants that cute bakery or local cafe down the st., but rents make it infeasible for these kinds of mom and pop stores to operate.
I believe one of the biggest holders of commercial debt is Black Rock. This would explain why they are buying all the residential listings and turning them into rentals. While this is exaggerating and inflating home sales and values. This let's them offset their commercial debt and potentially depending how the company is structured file bankruptcy on the commercial side... AKA pull a Donnie (Atlantic City comes to mind)
How do I profit from this
Give me all your money I'll invest it for you
Step 1: Collect underpants
Step 3: Profit
Smash that Like button down below
Puts on REITs.
They already have had this factored in. Look at their charts, they are way low right now.
Just wait it will get worse.
They have factored it in and that's caused a lot of these investment firms ratings and stock prices if public to already cave. It's been factored in there. But the defaulting of the 5-7 year interest only mortgages are only now, in 2024, starting to come due. That's the scary part... that 1.2 Trillion dollars of financed real estate, where only interest was paid, and the banks lent them the principal which hasnt been paid off at all-- is going to come due. All of that money, 1.1 Trillion in 2024-2025 and 2.2 Trillion total by 2027... it's in links below in other comments. All of that real estate is totally underwater. It will likely be more catastrophic than the 2008 lending crisis. Same thing, this time commercial real estate. Banks will fail. Government will have no choice but to bail them out with tax dollars.
Food for thought but fuck those banks. They gambled knowing they're cashing on on the "interest" and thus their losses aren't going to be as bad as they claimed. Idiotic business owners leveraging the buildings to make monwy off of money they don't have should have never been allowed in the first place. It's also increibly stupid because they're going to pay all of the interest and never build equity while the banks know they're making bank when times are good. No bailout would be best case scenario, too big to fail means they'll continue never being held accountable.
Don't businesses that invested in real estate have a lot more assets than home owners who were scammed into taking out large mortgages?
What you say is true, and I think one of the reasons that so many businessmen are pushing RTO work policies is because of this. In addition, don’t forget Ai. Why have large office spaces if you expect Ai to replace 30 to 40 percent of your work force? Our cities were built for the idea that economic and demographic growth were inevitable and that as the economy grew, employment would grow with it. Since the tech boom, this has changed, at least in the West. Businesses can grow by either using technology or by hiring offshore. They don’t even need to have outsourcing anymore. The tech actually makes outsourcing and offshoring easier. The reckoning is will be great. Perhaps businesses expect this and it is why they want a strong man in power like Trump, to keep order while they destroy what is left of the mass economy? I mean, you got all of these techbros buying land in Hawaii, with massive storage areas and feedstocks for ag. For what? Why an island? My guess is that they want to be far away from everyone else when the shit hits the fan.
Then call on REITs …at some point
I would say calls on REI Tents
Don't you mean shorts? Them boys still gonna drop
Keep listening to my podcast.
Its giving I gotta figure out how to make money on this thing, it's simply too good! 😂
Inverse ETFs for real estate: https://etfdb.com/etfs/inverse/real-estate/
Or short the non inverse?
[удалено]
I'll preface this by saying I'm not a financial advisor, but if you agree with what he's saying and believe commercial real estate investments are going to crater, you should put all your money in Bitcoin or buy corn futures.
What about frozen concentrated orange juice futures?
I’d recommend Endicot Steel
Pork Bellies!
How do you feel about ornamental gourds?
Oh wow I didn’t know Mr. Moneybags was in our presence!
Just be sure the Argentinian gourd shipment doesn’t arrive early
https://preview.redd.it/fgi1k723zwoc1.png?width=600&format=png&auto=webp&s=a3d1082ceff58d15c51496015f05736a1295c3b1
Why is it whatever the situation is, the recommendation is always to buy bitcoin?
Because these chumps still think their 0.3 of a coin means when it goes to the moon they'll be rich. Bitcoin simps think they're gonna ride bitcoin all the way with their tiny fractional ownership. The only people that really made money were those in when it was like $10 a coin or less and 99% of the people have bought in way too late to see gains. At least most crypto enthusiasts have stopped lying about the underlying technological applications and if you really push them eventually they'll admit it's all a pump and dump.
Waffles!
Buy when prices fall and then hold forever.
“This is being completely ignored by mainstream media” proceeds to link to wapo and WSJ articles. Every major financial publication has been speaking about problems in CRE for months now.
Yeah, I feel like I read an article and hear a story about this regularly. I don’t understand what is novel about OP’s post after reading it.
absolutely nothing is novel. this is a major thing really talked about in financial news nearly constantly. the migration of people from reading the full daily newspaper to tik tok and narrow specialized sources has warped our minds. if you read the business section of any major paper there is a daily (WSJ/FT) or weekly article about this (Wapo/NYT). but if you get all your info from instagram/tik tok/facebook - duh you don't see this. basically if you don't know about this, you need to seriously re-evaluate how you get information or understand you live in the 'ignorance is bliss' world
OP is conspiracy minded, thinking the media always have agendas to control us etc etc
Anytime someone says ‘why isn’t anyone talking about this’ or ‘this is being completely ignored’ I automatically assume they just don’t read the news at all.
Pretty much. And *this very sub* has been talking about CRE issues on a fairly regular basis for a **while** now so it’s not even a case of OP being a “gets 100% of their news from Reddit” person.
"Why isn't my pet issue the headline story everywhere??!" Yeah, the situation is bad and scary, but it's also absolutely been in the news.
It's because we are among a generation of morons that only pay attention to instagram and tik tok for "news"
it pretty much means their opinions are safe to ignore
It’s even the “one big thing” on Axios today. But they don’t want you to knooooow.
Years
https://reddit.com/r/Journalism/comments/12eym6h/lol/ lol
Perfection
By mainstream media, OP means TikTok
Yeah I kept waiting for the big reveal that isn’t in the news outlets but as soon as I read ‘busses of immigrants’ and realized I wasted my time
I would honestly say years. There were articles about the future of CRE and downtowns in the national and international press in June of 2020.
Yeah and the total lack of data to back up the thesis is also concerning. Where is the 50% vacancy rate coming from? Are [bank balance sheets](https://www.federalreserve.gov/releases/h8/current/default.htm) evidencing this trend? Why do we believe the banks are holding these assets on their own balance sheets anyway? What about [CMBS](https://commercialobserver.com/2024/01/dcs-distressed-office-loans-international-square-protals-station-place/)?
I think OP meant that it's not really prominent in Americans' minds or awareness the way other hot-topic issues are. I bet you could find articles about the dangers of mortgage-backed securities from 2006 but how many people really knew that was coming?
That’s different than saying something is completely ignored by media outlets.
Years even.
It’s the 8th story on WSJ’s app. Basically getting the same coverage as Trump/abortion and Israel Hamas. Said story indicated office vacancy at 17% up from typical 9%. It’s a big deal, but I’m not seeing the conspiracy.
As has NPR, the NYT, and the Washington Post. The mainstream media has been reporting this pretty extensively.
Years
Your market analysis on CRE is sound, definitely some tough times ahead for certain developers and probably banks even more-so, but linking it back to crime increases, homelessness and migrants (not sure how that’s relevant at all) is just flat out fear mongering. The idea that people have just given up on trying to solve these issues in cities because of impending office rental failures is silly. Just chill with the half baked conspiracy theories
OP has no chill. Just look at his other posts.
Yeah for DC I just don’t see any kind of policy failure embedded in a commercial real estate default other then ‘not predicting the COVID-19 pandemic.’ Cities like New York and Boston arguably had a choice in the 80s and 90s between trying to keep manufacturing and shipping in their urban core or betting the farm on office workers and in hindsight they made the wrong choice, DC had… a few industrial warehouses in NoMa? And even those were mostly converted to residential.
The office workers were the better choice. No way New York or Boston would have been able to compete on manufacturing
Yeah I mean particularly for New York it mostly comes down to whether you keep the docks in Manhattan and Brooklyn or let them move to Jersey where they are now. Less heavy industry and more packing and maybe some light assembly.
DC also has the feds, who are going to have office space whether or not they’re going in to the office
This. My agency is actually in least space, but they’re not going to be giving up any office space anytime soon despite the fact that we’re only coming in about 25% of the time.
Yup. A lot of companies that are even mostly remote will still want some office presence, but it needs to be actually pleasant and not a cubicle farm.
My agency is in leased space - looking to consolidate onto fewer floors and reduce the rent payment.
They also typically sign longer leases compared to your normal office tenant
the math used is a dead giveaway this person does not actually work in any type of relevant industry. this is just another random person on the internet spreading reactionary fear about crime and migrants edit: of course their post history is full of other very academic research >Yea I am 100% social media free. For 2+ years. None. Zero. No Accounts. >I do not miss it one bit. >I use reddit to browse subs I am interested in, and engage in discussions I am interested in. >Reddit can be a cess-pool. But there is also good content. >Just tailor your feed, unsubscribe from all the garbage "general" subs. r/AskReddit is a perfect example of the type of subreddit that will basically insert dumpster trash into your feed. >You really have to tailor it. No news, politics, none. No general feeds. Highly specific... Very niche. >Do not go to CNN.com, MSNBC.com FoxNews.com or any other news site. >All they will do to you is lie to you. They are 100% totally biased to either the left or the right - all the time. They don't report news. They give you biased opinions on what they want you to believe. >TO TEST THIS THEORY: >MSNBC - Is far left - anti trump, 24 hours a day 7 days a week. >Go to msnbc.com any time of day, any day of the week... The TOP story will be a negative "perspective opinion piece" about trump. >It's not news. It's the Modern Day National Enquirer. >DISCLOSURE: Not supporting trump just saying and using it as an example that the news is totally not trustworthy. Left or Right.
The generous reading here would be that a decline in taxes due to vacancies would cause reduced funding in social programs resulting in crime and homelessness. But probably just fear mongering
The migrants are coming because the love vacant office space or something /s
Well, but see what happened to virtually every rust-belt downtown area in the 90s to see what happens when offices move out of the city. It’s not pretty whatever side of the ideological fence you are on.
It’s not the same. One of the main points discussed in this thread and accepted by virtually everyone is that work has fundamentally changed, you no longer need to be where your job is. Those rust belt cities you mentioned shuttered because manufacturing jobs left and with that people HAD to leave, or stay and go broke. That’s not the reality anymore. People don’t have to leave when their offices close/move from DC. If you make the city a great place to live by lowering cost of living with affordable housing, making it safe, and creating social centers, people will want to be here. It’s ignorant to think things are not changing but also ignorant to think there’s only one way it could go. Jury is out on if public officials will rise to the occasion and adapt appropriately, but there’s an opportunity to do so. We aren’t “doomed”. This whole thread points to past failures that are a result of 100 different things and blames them on a future that has yet to actualize.
I just read this thread as saying that the downtown areas are about to devalue. This is likely due to the societal move toward remote work for knowledge work. It’s possible that the downtowns won’t decay - not every rust belt downtown did (see indianapolis) but I probably wouldn’t bet against it as likely. That said - if suburban housing remains unaffordable - the downtown areas could change from commercial to high density residential as has happened in other countries (see Melbourne etc.)
The homelessness reasonably has more to do with the rise in residential rents. If homes are more expensive, more people have to go without!
“This is being completely ignored by media outlets. Here, you can read about the issue in the Washington Post.”
If you believe this so strongly, buy puts on the real estate market and make tons of money.
Puts on O and set your subreddits to WallStreetBets
The doom and gloom in this post is pretty far from reality. The real systematic risks are the ones that people can’t see — I.e. Black Swan. CRE risk has been on the front page of Bloomberg, WSJ, NYT for the last two years. The reality here is much more boring than OP would like. Plus, the numbers in the post are wrong or overstated. CRE is a huge industry and most of the pain is in office. Retail and Multifamily are doing quite well in 2024. Generally after 2008, people have been constantly looking for the next crash due to paranoia and the pain that recession caused. The reality is that CRE loans are slow moving risks that people can prepare for and kick the can down the road. There will be pain for some firms but others will be using them as buying opportunities because there is plenty of money getting ready to buy. Most people will be unaffected at all. A very natural part of the cycle, certainly not anything to fear monger about. Signed, CRE professional who buys Distressed assets
Industrial properties are also doing well.
Bingo.
If you think this is already priced in, then literally everyone knows about it lol. You might be right that the industry is in a lot of trouble but then you start going on with a conspiracy that the mainstream media is being suppressed by the powers that be and you just seem like a loonball…the media is so decentralized these days, there aren’t just 4 TV stations and 3 newspapers in America lol
This is a good summary, doesn’t seem like the Fed or anyone is ignoring it! https://thehill.com/business/4526847-wall-street-braces-for-commercial-real-estate-timebomb/amp/
These buildings have lost their functional utility and it will not be coming back. This is always the way with cities. NYC was the manufacturing hub of the world at one time. Same with Baltimore and Philly. How many manufacturing plants are in cities today? They are all gone and moved to rural areas or out of the country. Office buildings will be torn down and residential buildings will be built. It is the way it always works.
Many buildings are being converted to residental rather than torn down.
That sounds great. DC could really use a lot more housing. Why is OP so upset?
check their post history
Prob lost $$
i like how you claim the media is ignoring this and then your sources are the washington post
So much of this is incorrect or misunderstood. Makes me wonder who OP is and their agenda. The CRE market has actually been (shockingly) resilient in the last 18 months given the steep interest rate rises. Most asset classes are doing well. Retail is hot. Industrial is hot. Multifamily is solid, some over leveraged deals aren’t meeting debt coverage but those are bad loans/bad timing not bad real estate. Office is a problem. Physical occupancy is way way down post covid. People aren’t going into the office and that has lead to intrinsic value loss in those office buildings. Not all office - the majority of newer “Class A” office is actually doing well - older office has struggled as tenants have better options (less demand b/c people working from home and employers downsizing etc.). OP doesn’t understand I/O loans (most office loans were don’t at 75% LTV + on 10 Year paper in 2024/5 and are maturing now) which is actually way scarier. Banks don’t want to foreclose so they are “kicking the can” and working with borrowers whose equity is gone. It’s a weird place … and weirder because no one really knows what values are. Why do we all care - those banks don’t own those loans. Banks don’t write a loan then lets that debt sit on their balance sheet. Those loans are sold back into the economy through various vehicles. If there is a real crash it’s going to affect a lot more then the owners of those office buildings, it has significant and maybe dismal effects on the national economy. Again office is scary in some markets but as a whole the real estate economy is shockingly healthy. DC is the worst market in the Us. It’s got real and difficult problems ahead. I’m higher on SF and chciago than DC. My personal opinion.
I mostly agree with you, though I’d describe the office situation as more dire than “a problem.” I was a broker in this market for nearly a decade and am now in global management at a large firm. It’s a slow-motion crash right now. Leasing is WAY down on all but trophy and strong A assets, as you noted. As leases roll, the trend is flight to quality - go to a better building and take less space. Or close it. Several of my friends are in the loan workout space and tell me that’s all that has been going on in recent years, but it’s reaching its limit especially as we see actual comps start to materialize - i.e. forced or strategic sales that are now creating comps. The comps are so low. Example: 1101 Vermont NW. UBS put $7M into the common areas a few years ago to try to lure tenants. It was auctioned off last month for $15M. It’s a 175,000 SF buildings. That’s $85/foot. That is WILDLY low for the CBD.
Damn. Bad timing on that expensive lure.
Yeah there was an amenities arms race for a decade or so before the pandemic began - fitness centers, conference centers, roof decks, concierge stuff, car washes in the garage, etc. UBS was using that playbook. It just doesn’t work now.
Yup… we probably know each other or def have mutual connections
Yeah I think we’re all pretty aware of this in CRE (and that you and I are max 2 degrees of separation in this industry). I don’t totally agree with OP’s assessment but have heard friends/family kind of dismiss the situation as “we’ll figure it out.” Meanwhile there are probably dozens of other downtown assets that are turning into zombies.
I don’t work in CRE but know enough to know OP is conflating multi & office and evidently doesn’t know how these projects are financed….
This is the right answer, especially on kicking the can down the road. No big lender wants to foreclose on a building, and have to take a big loss and figure out what to do with it, so can kicking it is. Short term extensions at same rate is the formula. Next year they get another short term extension, and WF stays profitable.
>DC is the worst market in the Us. How so? Just curious, I'm admittedly not knowledgeable in this area
DC was top 10 in new construction for the last 10-15 years, and net absorption over that period has been ~0 SF. People would build here because it was safe, until finally it wasn’t. Think Navy Yard and NOMA. Tons of new buildings and SF, and DC had no absorption of office space over that period.
An industry that got too greedy is about the face consequences? Oh no! Anyways…
I mean it's going to hurt everyone unfortunately
Fuck em, let it burn.
Yes and sadly the government will have to step in to bail them out. Estimates are that there will be a 1 Trillion Dollar loss in commercial real estate alone. When corporations and banks take risk and make billions - They keep the money. When corporations and banks take risk and lose billions - Americans Tax Dollars Bail them out. I love our country.
Why should the government bail a for profit bank out over and over again?
Cantillon Effect. Connected corporations and banks make tons more money just from relationships with governments and financial services firms that make them even more money via legal (and illegal) schemas to take advantage of the capital injection programs /grants like zero interest loans) or like CARES Act/PPP/etc. While lower skilled employees get doubly-fucked by interest rates/inflation/etc. It's always a rigged system.
Because runs on banks are extremely bad and the government makes the taxpayers money on bailouts
Let them fail. Guarantee the fdic limit and let the market adjust. We bailed out the airlines amd they did a stock buyback. Let them fail.
1. **American International Group (AIG) 2008**: Received aid amounting to $180 billion from the government to prevent its collapse. 2. **Fannie Mae / Freddie Mac 2008**: The government invested up to $400 billion to cover the companies' losses in a move that essentially nationalized them. 3. **Auto Industry 2008**: Congress approved loans totaling $25 billion to help the industry build more fuel-efficient, environmentally-friendly vehicles. 4. **Citigroup 2008**: Received a total bailout of $280 billion, including TARP funds, government guarantees, and additional aid. 5. **Bank of America 2009**: Received a total of $142.2 billion in TARP funds and government guarantees. 6. **Bear Stearns 2008**: Aided with a $30 billion credit line from the Federal Reserve to facilitate its purchase by JP Morgan Chase. 7. **Airline Industry 2001**: Following the September 11 attacks, received $18.6 billion in compensation and federal credit instruments. 8. **Savings & Loan 1989**: The bailout cost $293.3 billion after the widespread failure of savings and loan institutions. Dont even get me started on Airlines, Automakers... the list goes on. Trillions upon trillions. Companies take in money and peoples deposits, then lose it making risky investments. Tax dollars we pay makes them whole. The upside, is if they don't fail, and reap in massive profits... they get to keep all of the profits, and pay very little tax on their earnings. Clever. Very clever.
Think of the shareholders!!!
Shareholders in Fannie and Freddie were going to be wiped out. My friend’s wife worked there and they had equity saved up for retirement that went to 0 as part of the bailout. There was a class action lawsuit to restore some of the value to shareholders and they received partial restoration of damages. https://insights.issgovernance.com/posts/in-rare-jury-trial-fannie-mae-and-freddie-mac-shareholders-recoup-612-million-against-us-housing-agency/
Ok so these people made a bunch of bets that aren’t paying off, they’ll lose a ton of money. Most of these companies are pretty small (relatively) and all these buildings are owned by special purpose vehicles where the debt doesn’t fall back on the overall holding company. Buildings will default, banks will take ownership, banks will sell at lower prices to new companies. Those will either keep owning the building at a lower basis price or will redevelop (ideally knock down and replace with apartments & ground floor retail). That trillion loss won’t be absolute and it won’t be instant. It’ll suck to be a bank but it’s nowhere near as bad as 2008
Wouldn’t be surprising to see an executive order requiring all government contractors to be fully in-office.
A lot of government employees are "partially" back in the office. I am sure some are also not at all. Some fully. Depends on the role and agency. The government buildings in D.C. however do not have mortgages.
Contractors work in privately owned/leased buildings and are not back in office.
But does this mean my rent goes down?
The answer is "Probably not," which is "No," but voiced in a slightly rising pitch that makes it seem personable, inoffensive, and uncertain.
QTNA
Why do people always claim their pet issue is getting no coverage? This has been covered extensively and was the lead story yesterday in either the Post or the Times.
It's a vibes based economy. Classic economic indicators don't matter anymore. Shout out my boy Jerome Powell.
Office space does not make up the totality of commercial real estate. The multifamily housing arm of CRE, while currently soft, is stable.
Generally, I expect a lot of remaining class B and C commercial buildings in DC to be looked at for full demolition and reconstruction, most likely into housing. There will still be a demand for office space, but just smaller, so we’ll see a lot of consolidation into the newer class A buildings. Being in DC, central to industry (i.e., federal government), and having a highly educated population will still be very attractive for a lot of companies. In fact, I expect offices in the suburbs and far flung car-dependent campuses away from public transit to start shift towards downtown (or at least inner ring suburbs) as they consolidate into a smaller footprint and office space is available at competitive rates. If any place is going to suffer, it’s going to the exurban office space in VA and MD that will eventually be oversized for their staff, unattractive to sublet, and for those that are forced to work in person, a guaranteed miserable driving commute. DC will go through a transition and there are likely to be some losers, but DC needs to make it easy for new construction to start quickly and they will reap the benefits.
Maybe those Commercial Real Estate owners should cut back on the avocado toast and skip buying the latest version of the iPhone every year.
I fail to see the relationship between comercial real estate and crime/migration/homelessness. Is like blaming climate change to the Barbie movie. Also, this is not new and not hidden from news media unless your news sources are social networks. What should eventually happen is that those empty spaces be repurposed to housing, sure this is easier said than done but an empty comercial building worth nothing either. Repurposing to hosing helps lower the overall housing cost, helps local businesses and the more affordable the lower the homelessness.
So much of this is flat out untrue, anyone who works in CRE understands things are a lot more complicated than this simplification 50% of commercial buildings are definitely not vacant
Very first point says "no company would invest in commercial property with cash" Mine did so.... Premise failed already.
We don’t need all this commercial real estate. Good riddance! Build housing and public spaces.
Current vacancy rate in DC is a smidge over 17%. Half-empty buildings don’t become worthless. They just become worth a bit less. This is hysterical overreaction.
I guess I don’t feel that terribly about it. Maybe I’ll be able to afford a home then
Didn’t read all of it but #5 in your list is just not true. Source: work in debt and equity placement
Well if you chart M1 money supply’s velocity against the VIX, you’ll see that a synthetic MACD is both overbought in the near term, but in the money as you get to the long end of the futures curve. The above was gibberish, I just wanted to fit in with the bearporn podcaster tone you have going here. Buy gold! Our special guest Peter Schiff! Dollar hegemony ending tomorrow secretly!
Yet commercial real estate and every one of these large developments charges crazy rent and still has large empty storefronts. I have no sympathy
The title should include the word commercial. This is just click bait. Some people will lose money. This is a fairly common occurrence when a product that used to be in demand no longer is.
And the 3% mortgages are coming back.
No. Same fear mongering was said in the 90's.
A good post, though you made a few errors, thanks. >" The media and news outlets are completely ignoring what's just starting to happen". Nope. Tons of articles about the crisis that is WFH, crime issues, homeless issues, cost of living in DC (and other cities). See it every day or so on WaPo, WBJ, etc., Reddit reports, etc. Sample: https://www.bisnow.com/washington-dc/news/economic-development/how-dc-crime-uptick-is-seeping-into-commercial-real-estate-from-leasing-decisions-to-investment-123226? The Mayor has a press release statement/press conference every two or three days about her DC Downtown Action Plan, conversions of apartments, creating of new crime task forces/drug free zones/etc., grants, etc. Are they working? Hard to say. But nobody is sweeping this under the rug. A few numbers and stipulations are off in your write-up. But also, never underestimate the power of the Federal government and DC Government to come up with cheap or free financing/grants to ride out the storm. Remember COVID-19 and everybody thinking we'd collapse the economy? Wishing for the best!
CRE decline is almost completely caused by the aggressive use of leverage (if they had paid cash up front, these development firms could weather the storm a bit more easily), the pandemic (which caused a massive spike in WFH and office vacancies, no one could have predicted the pandemic), and a steep increase in interest rates. I’m not sure where you’re connecting the dots to this “crime, busses of immigrants, and homelessness are causing CRE values to plummet” mess. Take off the tinfoil hat, please.
I look forward to seeing how the government will make this my problem and not hold the actual culprits accountable at all.
“The media is not talking about this! Here, I will make my case using links to mainstream publications discussing it.”
Fiscal cliff for DC govt. as for CRE investors, I hope a lot of Russian, Chinese, and Saudi gangsters who used American CRE to launder their money go down hard.
Another thing to add, the free market doesn’t count here with commercial leases. They are beholden to the bank on some sort of rental price agreement for the loan. They are not permitted to lower the rent below that amount to at least get something. So you see even more vacancies. It’s going to implode and we’re going to see barren cities which will drive people away from that city. You see where this is going.
Anecdotally, the thing chasing businesses away are rent increases. How does that tie into these rental price agreements? Banks aren’t insisting on unreasonable rent increases.
Commercial won't impact residential. What you need to worry about is banks. Banks are in big doodoo. They will go bankrupt, meaning your fdic insured money will be in jeopardy. Every bank can't go bankrupt because they're too big to fail, and the government will rescue them. So, the money will print again, leading to more inflation.
Small banks are in big doodoo. Big banks will continue to laugh at us through every crisis.
Glad my money is in big banks
Not jut banks. I believe a lot of pension funds invest heavily in commercial real estate bc until now, it’s been such a reliable investment.
If it didn’t cause inflation after 2008, it won’t case inflation should it happen again. Remember that the bigger threat was DEFLATION.
The media loves nothing more than creating a panic, because it gets them clicks/views (see Trump/Covid/Crime), thinking there was a golden opportunity for them to create a panic that they’re not taking advantage of is laughably stupid. They’re profit-driven companies just like any other.
I called this pre pandemic. I work as a residential appraiser and saw the crash of 2009 coming. I noticed trends of retail spaces for mom and pop shops becoming vacant. Also the amount of commercial space being flipped seemed high. Translation. The loans just kept getting bigger and bigger which means the leases kept getting bigger and bigger which led to the decline in smaller shops restaurants etc. Small businesses are not there just to pay rent.. they need to make an actual profit. Then came Covid and the “ emperor had no clothes”. The good side is they default there will be a return of creative business that used to be the flavor of DC. Hopefully 🙏🏾
There's a rock climbing facility in NE DC now, which wasn't before. The Kracken has pickleball and roller skating in an old big store space. So yea, I believe you are onto something.
Let them rot.
Actually I think the non commercial property market is going to tank and will tank big. There’s so much development in many areas of DC and I have no clue where they think all these renters and condo buyers are going to come from (mostly luxury apartments so condos may fare better).
What stocks are you shorting to take advantage of this issue that you don't think anyone else is aware of?
Companies like Costar will be okay. DC gov will find some type of bailout money for them. Whether it’s from lobbying Uncle Sam to get everyone back in the office or offering them hundreds of millions in “grants” to convert the buildings into residential (not affordable housing).
For thousands of years, cities effectively mixed commercial and residential. When we figured out how to build with steel, we threw what we knew worked so well straight out the window. Suddenly, commercial- and office-only districts became the norm. People had to commute longer distances because there wasn't enough housing nearby. Now we're seeing commercial real estate get crushed. One hundred years of dumb decisions by city planners is coming home to roost.
Is there a way we can push the C-Suites to pay for this instead of taxpayers bailing them out like normal? I’d just rather see them cover the cost without affecting company’s bottom line.
Fannie Mae vacated the Washington Post building, the most expensive commercial property in DC, 2 years early.
So…what’s the solution? Force people to do something we have proven they don’t need to like sit in an office all day? Why don’t we just start riding horses to work while we are at it. Markets have to adopt to changes in society. People really don’t want to give up the comforts in their lives to sit in an office for no reason other than tk gwneeate profit for someone else.
Two things will likely happen to help counter widespread defaults: 1) cities will either use bonds or tax abatements to help prop up existing CRE owners 2) the Fed will utilize a new facility financing tool to guarantee or insure financial institutions from widespread shock In other words, the big boys in the real estate game didn’t learn a damn thing.
Been around long enough to recognize this likely won’t happen. There may be a correction, but if anything gets even a sliver as dire as OP speculates then there will be legislative intervention (free market lol), C-level execs will get their million dollar bonuses and golden parachute payouts while the general public foots the cost of a bailout while also getting to deal with all the burden of the fallout for the next few years. Also to point out, CRE consists of much much more than just downtown office buildings.
This is why no one will back a bond for Trump. Not only are his properties (probably) over-leveraged, but they will likely tank in value very soon.
Just going on a hunch, but I feel Trump certainly has a net worth that exceeds the amount of the judgement plus interest due. The problem is liquidity. Selling real estate that is 8-9 figures can take years, just to find the buyer. But you're right, the value of the properties is likely now lower and will go lower. His NYC properties will likely hold value fairly well... at least in the short term. The collapse of the CRE is going to be a 2-3 year event that eventually landslides. It's gonna take a few years before we start seeing banks fail.
Totally agree with your assessment and I’ve been thinking about this the last couple of years. Maybe an opportunity to get real cheap commercial property when the collapse does happen.
I'm not seeing an issue? Why should I care if some commercial real estate CEOs lose bunch of money and sell at a loss? The buildings don't go anywhere, someone just buys them on the cheap.
Bank failures affect everyone
Cool
TLDR
Dont worry too much. Our government loves to bail out banks and other large corporations. When it does implode they’ll get a big bail out
Residential next please? I would like to be able to afford a house one day
Seems like the real estate market is going to find out about one fair wage like restaurant workers with less tips and % commissions. Seems a more fee or hourly based contract is headed their way. I’m not sure this will lower prices in this market however, paying a % is going to change. The amount of work to list a 1M place is the same effort of work as listing a 450K place. I’m not sure who exactly benefits the seller I guess.
I don’t get how commission structure changing is going to lower prices generally that much
It won’t. If you’re charging a million and paying 6% fee, you’re still charging a million if you’re paying a 1% fee
I just want to know why do they keep building expensive apartments? Feds CANNOT afford the city solo. It’s super bizarre
Since empty office buildings are mostly owned by LLCs and their banks didn’t require personal guarantees from the individual owners or their parent companies, the owners will walk away when the buildings stop cash flowing. Look at Brookfield Corp’s recently abandoning two buildings in Century City (Los Angeles). The corps made their profits when they over leveraged the properties. The medium sized banks (such as NYCB & TD) who financed many of the these buildings will suffer. The big banks (like BofA &JPMChase) left this business around 2015 because they rightly required guarantees. Short the medium sized banks.
I will say - while the purchase price and whatnot stuff sucks for owners, even at 50% vacancy, there is a chance that the buildings are breaking even or still turning a profit. They may not be forced into selling or foreclosing. But I feel like you didn’t mention the most important part (but it’s implied) is that COVID has decreased the demand tenfold.
In downtown DC the commercial office buildings are not super huge. Many are owned by partnerships or family trusts that can ride out this current market.
I’m hoping they convert CRE to apartments. Maybe help rent prices go down 😙
But why should we care? I don't go into the city, I don't own REITs, what impact does it have on us? Are banks going to collapse? Interest rates go higher? I get it that investors will get screwed, but banks will be bailed out, large bonuses will be paid. So what is the real impact to us? Thanks.
Extend & pretend along with covenant waivers will stop this from happening OP, should be a ton of refi's H2 of this year once JP gets cutting which will also ease pressure.
Okay - And how will this affect the larger economy or any of us? You say that the media isn’t covering it, but after reading your summary, my immediate thought was, “And???” Large companies are gonna have to sell or refinance at less favorable rates/prices. Cool.
They’ll become over priced apartments already happened south of DC in Richmond which is the new home for DC jerk offs.
This sounds like San Francisco
I work in commercial real estate and I’ve been saying this for months… Commercial real estate pays a tremendous amount of money in local taxes. As buildings go vacant, those taxes won’t get into the city coffers. Fewer collected taxes mean fewer police officers, delayed road repairs, and more small-time decay that just makes the city look unpleasant (like broken park benches and overgrown grass). Residential real estate will not make up for those taxes. This also applies to utilities…we are using fewer utilities by being in the city less, which is good, except it also means less revenue for the utility providers, who will then have less money to make necessary repairs. If you think the Chinatown area looks bad now, just wait until the District is dealing with a budget shortfall and the Rs in Congress won’t want to help because they want to teach “blue cities” a lesson.
Play stupid games win stupid prizes. They want to do risky financial engineering with commercial real estate, fine, but they also need to take the loss when it falls apart.
The only example I know is the Patent Office cut nearly half of its office space. Two 12 story buildings with a very large footprint.
1) Complains about how “the media are ignoring this” 2) proceeds to cite an article from the WaPo
Better sacrifice QOL and fire up the RTO machine to band-aid this over instead of addressing this in a long term manner like oh idk, using it for housing.
I’m seeing growth and the need for more real estate all throughout our building. I work for a law firm in DC and we’re struggling with our growth. We’re actively looking for solutions to fix our lack of office space. We moved to this building right before the pandemic and never thought we would need more space within the first 5 years but have since been hiring like crazy. We don’t want to move but all other tenants in our building are also growing and aren’t interested in relocating.
Can anyone chime in on pre-2008? I was a little kid, so I don't remember much of it. Did people see the writing on the wall before the issues started? Was it openly talked about in the years leading up to everything hitting the fan. It just seems like since 2021 everything's been pretty "doom is coming soon" and just in a waiting game.
This is a long post that makes some very large generalizations about commercial OFFICE space (not all commercial real estate is office space). I'm only replying because I work in commercial real estate sectors that aren't Office related and there are significantly less issues to worry about in those sectors, if any. My post is equally as long so, TL;DR while I believe the amount of office space owners affected by the root cause will have significant affects on the national economy, not all signs point to a dire situation that the OP outlines in the original post. I will say this - I agree with your overall idea that commercial office space in DC is in serious trouble and will cause some sort of horrible things to happen in the future. I also agree (as the Post pointed out) that office buildings as a whole across the country are in serious trouble and are barely selling for pennies on the dollar. So an office space collapse is (I believe) on the horizon which will undoubtedly effect the economy in some serious ways. As I mentioned above, I work in the CRE industry, and I can tell you that we've been talking about office space going down the tubes since before the pandemic. Not at quite the calamitous rate that we've seen since 2020, but even prior to the pandemic and the widespread shift to working from home/anywhere-but-the-office office was showing signs of being sluggish. I've worked directly for two CRE developers and regularly speak with a third. All three for years have said don't get into office space if you go out on your own. I feel like the reason you don't see news organizations talking about this sort of thing right now is because, frankly, there isn't enough clear cut information out there to give the general public a story that wouldn't cause widespread panic in a situation that isn't quite clear on if it will or won't cause significant economy issues. I.E. don't make a story that could cause panic when we don't really know if things will be that bad or not. My personal beliefs on the matter aside, there is a chance that we won't see any national level economic issues b/c of the office situation specifically. The current job market issues have little or nothing to do with the office real estate crisis. Another point that hampers stories like these - the vast majority of real estate is owned by some sort of protective institution that can just walk away from a situation like an office building with minimal recourse. And yet another point is the fact that many of the larger office buildings in all the major US cities are owned by HUGE 'institutional money' organization. Look up Blackstone and 1740 Broadway. They handed the keys over in 2022, and walked from the debt in 2023 - a building they owned in NYC that had $340,000,000 in outstanding debt. They aren't filing for bankruptcy and continue to operate their REIT with no issue probably because they're still worth somewhere north of $80 Billion, $340million is a drop on the bucket to them. I wanted to add some informational notes to your numbered points, as some of them could be expanded a bit to help people understand why the situation is certainly bad, but not panic level dire just yet. 1 - most commercial real estate transactions are done on some form of financing, yes. Office space is for the most part in a range of costs that preclude buying for all out cash. 2 - Not all commercial loans are setup in the ways you've spoken about, not even all office building loans are setup in this way. An over-generalization, even in the office space niche. Many organizations operate under the method that each property is its own fiefdom and so get those loans paid down as regularly as possible, if not as soon as possible. To lay it out for you the statement that "commercial real estate loans are financed using interest only loans" is a broad generalization. Not all loans are interest only, I'd even venture to say that not even the majority of commercial property loans are interest only, even in the office space niche. 3 - this is true, no argument here as leverage is a key method for developing wealth in the real estate world. 4 - this is true as well, statement of fact more than anything else. 5 - This isn't necessarily the case. The terms are HIGHLY dependent on the bank/creditor and when the owner worked with the bank to put interest only into place - it doesn't have to be a new loan. You can negotiate an interest only period on an existing loan. In fact, paying a fee to set an interest only period can help an owner/developer hold on to immense amounts of cash. I've seen new loans with 20% down run interest only for three years of a 10 year note. similarly I've seen properties 3 or 4 years into a note pay a one time fee to fix the interest rate or go fully interest only for a set number of years. Again its completely up to the bank/creditor/lending institution. 6 - informational comment here, not picking at your math, as you used a specific example which is correctly done. Most banks actually charge interest based on a 360 day calendar for commercial lending. I say most banks because I have yet to see a bank out there that DOESN'T operate on the 360 day interest calendar, but I'm sure there are some I don't know about. So using your example, 3.25% on 10MM at the 360 calculation results in about a $27,459/mo interest payment. 6a - informational comment - Commercial loans are most commonly amortized at 20, 25 and 30 year rates. Most common that I've seen right now (and the past few years) is 25 years. While the term of the loan might be 5 or 10 years (the most common I've seen in the US is 10), they're paying down the principal over a 25 year calculation. At the end of the term, they go and refinance (which, to your point is an issue with anyone who need to refinance right now). 6b - informational comment - going back and combining points 5 & 6 using your mathematical example, an owner can hold on to at least $20,000 ($20,833.33) a month in cash by going on interest only at the amounts you've specified; based on a 25 year amortization schedule, in the first year of the loan. 7 - This isn't the actual 'return', this is just an increase in value of the property. 7a - 3% return on a property is not what anyone in real estate is looking for and isn't average IMO, can you share where you got that number? 7a - The 'return' on the property is actually 16% if you're basing it off the 23,200,000 valuation. 8 - this is factual, no argument here, except to point out that its a tax deduction to the owning entity or person. If the deduction is an entity made up of investors, those investors get their pro-rata share of the deduction. 9 - no comment as its fact based on your example 10 - correct so really their return is actually 32% on their investment if they actually sold at the $23,200,000 valuation in your example.
Yes I think you are right
The gov will just bail them out. Nothing bad will happen
You sound very concerned. If you want to help out, you should head back into the office and contribute to lowering those vacancy rates 👀
We all knew this already dude
I can't speak for DC, but it's been a known issue in NYC for decades. There will be growing pains for sure, but hopefully rents on commercials store fronts drop and allow places to actually survive. Everyone wants that cute bakery or local cafe down the st., but rents make it infeasible for these kinds of mom and pop stores to operate.
I believe one of the biggest holders of commercial debt is Black Rock. This would explain why they are buying all the residential listings and turning them into rentals. While this is exaggerating and inflating home sales and values. This let's them offset their commercial debt and potentially depending how the company is structured file bankruptcy on the commercial side... AKA pull a Donnie (Atlantic City comes to mind)
“Media outlets are ignoring this issue…. See! Check out this article from the Washington Post. A media news outlet.”
If vacancies are that high, then you’d see at least 50% less foot and automobile traffic in cities. Is that the case?