This is an interesting story. With simple supply and demand, we have massive oversupply for office real estate and significantly reduced demand - prices should drop, right?
Except we have the bag holders, the landlords who retained leases and the banks who own the mortgages, they are going to fight tooth and nail to maintain the value of their assets, and they have deep pockets.
I've seen one story where the writer made the argument that this is why we've been seeing "you must return to the office" stories - big business must have line go up, line must never go down.
We'll see what happens but I sure hope there are no government bail-outs for this sector. Investment involves the risk of the asset depreciating.
> Investment involves the risk of the asset depreciating.
The problem is that investors who have been working in the business since 2010 have no idea what a real economic recession looks like bc the fed keeps on swooping in to save the day. Asa result, a lot of investors levered up their books.
The investment business is not a free market bc the downside risk is no longer present.
Think the fact that the leases are coming due over the next few years rather than all at once will prevent a bailout? Might just be a slow decline like old factories in Chicago that sat vacant for a while and then got snapped up for commercial space since they were so cheap.
That sounds like the sort of soft landing that I think everyone is hoping for. Stuff I've been reading has described landlords leaving buildings empty rather than lower prices and rent to smaller tenants, that sort of artificial propping up seems like it could precipitate a crash.
These huge landlords can leave units empty for years rather than drop prices. They need to be cut off from their near endless lines of credit that keeps distorting the commercial real estate market.
Only then will prices correct. It’s killing small businesses in the US. A modest retail business or restaurant can’t afford the $20,000 a month they want for a tiny unit.
Their control of the market is having harmful downstream effects on society.
We’ve had a slew of “we need to end remote work to support downtown businesses” pieces in the local news, but almost every time there is an article about a business closing there will be a paragraph tucked in at the bottom that their landlord had refused to negotiate on a massive rent increase.
I think the answer has to be a punitive vacancy tax: like if a commercial restaurant space is idle for 3 months, the tax rate for every property with the same commercial owner goes up every month. These properties being idle has ripple effects throughout a neighborhood which shouldn’t take years to recover.
I think a vacancy tax would be useful for the residential market as well--at least in New York, there are many luxury apartments sitting empty, because they are bought as investments and/or money-laundering efforts; the owner may never intend to live in them.
This has a negative impact on a city, both in driving up prices for the actual residents, and in distorting the texture of a neighborhood.
If you want to have multiple homes that sit unoccupied for most of the year, you should definitely pay a punitive vacancy tax.
Yes, they've used the monthly rent price as leverage in other financial decisions, so if it was to fall as supply/demand suggests it should, they're left over-exposed. So better to eat the 1x loss than lose the 5x multiple.
i think one of the problem is the value of commercial properties is directly linked to their rent. hence why so many would rather keep their property empty than negotiate down the rent as it would instantly devalue their property. they'd rather stay in their inflated bubble.
Just some food for thought. I was paying attention to this more closely earlier in the year.
Here's the stock ticker for HPP. HPP is the predominate commercial REIT for the SF Bay Area: https://www.tradingview.com/symbols/NYSE-HPP/ They're down ~75% from ATH in 2020, but up 75% since ATL six months ago.
Also, keep in mind that commercial loans get divided into short-term/long-term groupings. A long duration for a short-term loan is 3 years and a short duration for a long-term loan is 5 years. So, there's this sweet spot between 3-5 years after economically-disruptive events where underwater loans created at the peak of the market start to get called. We're a couple of months away from the three-year anniversary of shutdown.
IMHO, the next two years will be very rocky for SF as devaluations become real and start to significantly undermine city taxes, but the last six months have implied that fear was overstated and/or early in late 2022.
I’ve been walking the streets of San Francisco since day one of lockdown watching the unmitigated unidirectional closure of almost everything. And while the slow 4 year plus timeline has normalized most people to what’s happening, my long arc observation is that things are only going to get worse. The ball is about to drop now with the major revaluations lining up as high interest forces more walkways.
The impact on city revenue will be significant right when problem think SF is pulling out of things. And the city knows it. They’ve projected it clearly but no one will listen.
"But there is a difference: Big property companies can keep doing business after they default and are even considered savvy for jettisoning distressed buildings. But homeowners who stopped paying their mortgages suffered a huge hit to their credit ratings and had to find somewhere else to live."
It's worse than than that. Mere homeowners were publicly chided as being "immoral" for not paying their underwater mortgage.
The owners of capital look out for themselves. Seriously, there is more class consciousness among the obscenely wealthy, than there is among the plebes.
And it's always been this way. Just look at how the legal system is handling the current politicians who have court cases. Me and you, we'd be in jail.
Financial bail outs are one thing, but corporate lawbreaking is treated different by the courts, however, I think things are starting to change. Elon is going to cause a shift change and corporate America is a little worried.
Suppose there was death penalty for this type of behaviour. If you default of $100M of debt you are executed, no limited liability shroud, no bankruptcy, no backsies, no do-overs -- just cold steel. Your head in a bucket, and your family destitute in the streets.
This type of behaviour would cease to exist almost immediately.
A bit of this is like things being described in unlike manner, a bit is fundamentally different situations (needs and relative scale.) A person needs at least one home, and rarely has more than one. If they shed one because they can't afford the mortgage—whether or not that is a good financial decision—they still need a new one.
A commercial landlord that sheds their Nth property still has N-1, and can continue working as a commercial landlord without a problem.
Also, a homeowner that does a deed in lieu, short sale, been foreclosed on, etc., on a home loan has probably had forgiven or defaulted on a lot greater share of either their income/revenue or total debt than a commercial landlord that sheds the Nth property for similar reasons.
But generally, not dragging out an unmanageable loan and cutting the bleeding via short sale or deed in lieu where practical is considered prudent for individual borrowers with home loans.
Does it hurt your credit? Sure. But that's a temporary thing, and wirth shedding the drag on your finances for in many cases.
If you own 100 houses and you lose one you still have 99 houses. If you sold it at a loss because it was costing you too much to keep then you made a smart decision.
I distinctly remember stories on NPR during the crisis that browbeat homeowners who did this or thinking about doing this, claiming it was “unethical”. It’s the same story with companies that ask for loyalty then lay off with pleas towards efficiency. It’s always business, whenever someone plays towards my emotions in financial deals I want to shake them.
> 17% of all homeowners in the 2008 mortgage crisis walked away strategically
That is a quite misleading restatement of the facts. 2 of 144 million homes in the US were foreclosed in 2008, and 17% of those were deemed "strategic". That's 0.2% of homes.
> I distinctly remember stories on NPR during the crisis that browbeat homeowners who did this or thinking about doing this, claiming it was “unethical”.
Whatever one thinks of the rest of the book, everyone should internalize the part of Graeber’s Debt in which he explains that connecting moral duty to personal debt under impersonal capitalism (if not, perhaps, to debt owed someone you know) is grade-A bullshit.
It’s just business. Make the move that is best for you, period. Sometimes that’s default! It’s probably nice for lenders if people believe there’s some moral duty attached, but that moral duty is only ever gonna go one way, so don’t fall for it. They’re not doing you a favor. It’s business. They make profit because there’s risk.
> It’s probably nice for lenders if people believe there’s some moral duty attached
And this leads to immoral decisions on the part of lenders/creditors/debt collectors, the most obnoxious of this is hospitals etc., leaning on (if not extremely heavily implying legal responsibility to) families of people who have passed away to assume responsibility for their medical debt, because their loved one wouldn't have wanted to shirk it, or some such bullshit.
> But there is a difference: Big property companies can keep doing business after they default and are even considered savvy for jettisoning distressed buildings. But homeowners who stopped paying their mortgages suffered a huge hit to their credit ratings
If the terms of a contract say I can hand over the property to the bank and walk away liability free, then I shouldn't take any kind of reputational hit (credit rating) for doing so.
It's kinda sad that lawmakers and courts haven't done anything to rectify that.
I'd bet a lot more people would be willing to go into offices if they... had offices. Surely not everyone as there are other reasons not to want to go in to an office.
But a private room with a door and not having to hear/see/sit next to colleagues within arms reach would be a huge benefit. Open floor plans were just a race to the bottom ... well the bottom got hit now offices are empty. You can't just force folks to come in and accept the awful conditions because people will just say no now.
Readit News
Except we have the bag holders, the landlords who retained leases and the banks who own the mortgages, they are going to fight tooth and nail to maintain the value of their assets, and they have deep pockets.
I've seen one story where the writer made the argument that this is why we've been seeing "you must return to the office" stories - big business must have line go up, line must never go down.
We'll see what happens but I sure hope there are no government bail-outs for this sector. Investment involves the risk of the asset depreciating.
The problem is that investors who have been working in the business since 2010 have no idea what a real economic recession looks like bc the fed keeps on swooping in to save the day. Asa result, a lot of investors levered up their books.
The investment business is not a free market bc the downside risk is no longer present.
Only then will prices correct. It’s killing small businesses in the US. A modest retail business or restaurant can’t afford the $20,000 a month they want for a tiny unit.
Their control of the market is having harmful downstream effects on society.
I think the answer has to be a punitive vacancy tax: like if a commercial restaurant space is idle for 3 months, the tax rate for every property with the same commercial owner goes up every month. These properties being idle has ripple effects throughout a neighborhood which shouldn’t take years to recover.
This has a negative impact on a city, both in driving up prices for the actual residents, and in distorting the texture of a neighborhood.
If you want to have multiple homes that sit unoccupied for most of the year, you should definitely pay a punitive vacancy tax.
Here's the stock ticker for HPP. HPP is the predominate commercial REIT for the SF Bay Area: https://www.tradingview.com/symbols/NYSE-HPP/ They're down ~75% from ATH in 2020, but up 75% since ATL six months ago.
Also, keep in mind that commercial loans get divided into short-term/long-term groupings. A long duration for a short-term loan is 3 years and a short duration for a long-term loan is 5 years. So, there's this sweet spot between 3-5 years after economically-disruptive events where underwater loans created at the peak of the market start to get called. We're a couple of months away from the three-year anniversary of shutdown.
IMHO, the next two years will be very rocky for SF as devaluations become real and start to significantly undermine city taxes, but the last six months have implied that fear was overstated and/or early in late 2022.
It'll be interesting to see what happens next!
The impact on city revenue will be significant right when problem think SF is pulling out of things. And the city knows it. They’ve projected it clearly but no one will listen.
ELI5: Why?
The owners of capital look out for themselves. Seriously, there is more class consciousness among the obscenely wealthy, than there is among the plebes.
Financial bail outs are one thing, but corporate lawbreaking is treated different by the courts, however, I think things are starting to change. Elon is going to cause a shift change and corporate America is a little worried.
Suppose there was death penalty for this type of behaviour. If you default of $100M of debt you are executed, no limited liability shroud, no bankruptcy, no backsies, no do-overs -- just cold steel. Your head in a bucket, and your family destitute in the streets.
This type of behaviour would cease to exist almost immediately.
A bit of this is like things being described in unlike manner, a bit is fundamentally different situations (needs and relative scale.) A person needs at least one home, and rarely has more than one. If they shed one because they can't afford the mortgage—whether or not that is a good financial decision—they still need a new one.
A commercial landlord that sheds their Nth property still has N-1, and can continue working as a commercial landlord without a problem.
Also, a homeowner that does a deed in lieu, short sale, been foreclosed on, etc., on a home loan has probably had forgiven or defaulted on a lot greater share of either their income/revenue or total debt than a commercial landlord that sheds the Nth property for similar reasons.
But generally, not dragging out an unmanageable loan and cutting the bleeding via short sale or deed in lieu where practical is considered prudent for individual borrowers with home loans.
Does it hurt your credit? Sure. But that's a temporary thing, and wirth shedding the drag on your finances for in many cases.
Homeowners who stop paying mortgages do not have access to cash, so there is no utility in doing business with them.
I distinctly remember stories on NPR during the crisis that browbeat homeowners who did this or thinking about doing this, claiming it was “unethical”. It’s the same story with companies that ask for loyalty then lay off with pleas towards efficiency. It’s always business, whenever someone plays towards my emotions in financial deals I want to shake them.
That is a quite misleading restatement of the facts. 2 of 144 million homes in the US were foreclosed in 2008, and 17% of those were deemed "strategic". That's 0.2% of homes.
Whatever one thinks of the rest of the book, everyone should internalize the part of Graeber’s Debt in which he explains that connecting moral duty to personal debt under impersonal capitalism (if not, perhaps, to debt owed someone you know) is grade-A bullshit.
It’s just business. Make the move that is best for you, period. Sometimes that’s default! It’s probably nice for lenders if people believe there’s some moral duty attached, but that moral duty is only ever gonna go one way, so don’t fall for it. They’re not doing you a favor. It’s business. They make profit because there’s risk.
And this leads to immoral decisions on the part of lenders/creditors/debt collectors, the most obnoxious of this is hospitals etc., leaning on (if not extremely heavily implying legal responsibility to) families of people who have passed away to assume responsibility for their medical debt, because their loved one wouldn't have wanted to shirk it, or some such bullshit.
If the terms of a contract say I can hand over the property to the bank and walk away liability free, then I shouldn't take any kind of reputational hit (credit rating) for doing so.
It's kinda sad that lawmakers and courts haven't done anything to rectify that.
But a private room with a door and not having to hear/see/sit next to colleagues within arms reach would be a huge benefit. Open floor plans were just a race to the bottom ... well the bottom got hit now offices are empty. You can't just force folks to come in and accept the awful conditions because people will just say no now.