Commercial property deals in the US are starting to pick up at deep discounts

https://www.bloomberg.com/news/features/2024-02-14/real-estate-lenders-confront-falling-us-commercial-property-prices

by paulpauper • 2 years ago

122 202 2 years ago

ackbar03• 2 years ago

Archive doesn't seem to work for me for bloomberg articles anymore, I dunno why. I can only access ones archived by others

dredmorbius2• 2 years ago

Are you seeing reCAPTCHA loops, or some other issue?

If the former, switch to a DNS provider other than Cloudflare, if at all possible.

Nursie3• 2 years ago

Interesting, but predictable.

The clamouring for "return to the office" was always a minority voice, and it seemed to be two major classes of people doing the clamouring - old fashioned managers who didn't believe staff could produce while at home, and those who made their living from forced commutes - a broad class of building owners and ancillary business owners such as meal providers.

The ancillary businesses I have sympathy for, but that activity is at least partly displaced to more local businesses, which I see as a net gain. More vibrant communities vs declining city centres - yes please!

But the building owners are screwed because it's not just the wage slave that's realised they don't need to commute (they may have always known), but the business owner too. A business owner who can look at the huge amount of cash leaking out of the business for their office lease and realise that line item can be crossed out completely, or markedly reduced to a headquarters with much smaller facilities. Sure, it's not 100% of them, but enough to make a big difference.

So I'm not surprised we're seeing a crash in the office-provision sector. I haven't set foot in one since 2020 and I don't intend that to change!

dboreham3• 2 years ago

1999 here.

nox1014• 2 years ago

I'm probably wrong, but I feel like in the style of city that urban advocates like "No Just Bikes" advocate for, there would be lots more "ancillary business owners such as meal providers" because the cities would be designed to be walkable and so instead of driving 3-4 miles to the nearest big box car lot you'd walk 1/2 a mile to your local "pedestrian and bicycle only shopping street" with a bunch of small shops, restaurants, and cafes.

Most of "car infested suburbia" is void of "ancillary business owners" because it's just miles and miles of tract homes

Nursie3• 2 years ago

Most of "car infested suburbia" is void of "ancillary business owners" because it's just miles and miles of tract homes

This is a planning and zoning decision really. It sounds like you're describing the US.

In the UK for instance, things are often a lot more mixed up. There are lots of small towns and small cities which have acted as feeder or dormitory towns for London. These all have their town centres which are likely seeing a boost from workers who are in the town a lot more of the week now.

And here in Perth (Australia) where I'm not really even in a suburb (we went a bit rural), it's only a mile to my nearest cafe, very easy to do on a bike or scooter. Each of the suburbs proper tend to have one or two areas set aside for retail and food service, small malls or strip-malls or even just a cafe and a pharmacist tucked away somewhere. Plus a decent(ish) network of bike paths. It's very car friendly here compared to the UK but there is still stuff accessible without 100% needing a car.

By the way - I'm all for the 15 minute city idea, it sounds great. Seems to me that implies more local centres, more dispersion of ancillary businesses and services out into the suburbs etc. High-density doesn't have to be the only option for that sort of plan if people are actually spending their days in their suburbs, IMHO.

refurb3• 2 years ago

This reads like designing a city for 20-something singles whose highest priorities are nightlife and dining.

What about the rest of us?

gedy2• 2 years ago

Most of "car infested suburbia" is void of "ancillary business owners" because it's just miles and miles of tract homes

Well because until recently, you couldn't work there in suburbia.

It feels like the "suburban office campus" fell out of vogue in like the 60s-70s

andrewflnr2• 2 years ago

Can any of these be turned into residences? I'm sure there's zoning and similar nonsense, but in the real world there's also problems like having enough water hookups.

nerdponx2• 2 years ago

How about temporary housing for immigrants and refugees?

andrewflnr2• 2 years ago

Heck, I'm a bachelor, I'd take temporary-style housing, as long as we decide who's cleaning the bathrooms. But governments are pretty skittish about "reducing standards" for housing (or anything they could be so interpreted), so not only would I be even more pessimistic about such an arrangement being allowed, but there are pretty good reasons for that skittishness so I would be extremely careful about pushing against it.

harambae• 2 years ago

Yes that’s already happening here in Boston

https://www.foxnews.com/us/trendy-boston-waterfront-district...

etchalon• 2 years ago

I think the problem is that, even if you could convert them, it's a massive investment to do so. And money is real expensive these days.

So first the buildings have to lose so much value that the math works.

Nursie3• 2 years ago

The specific buildings mentioned? I have no idea.

It is possible in some though, this is an example from London - https://en.wikipedia.org/wiki/Centre_Point

I worked for one of the last companies out in ... I think it was 2014. Three years to refurb and now it's one of London's ghost towers - full of apartments bought by overseas investors, standing largely empty.

(Or in this case, from reports in about 2018, standing empty because it turns out that very few people actually want to pay 1.8 million pounds for a one bedroom flat, even in London. It's quite fitting as apparently the block spent nearly a decade empty after construction too.)

readthenotes12• 2 years ago

There have been many articles in the last few months about conversions. The regulations make it extremely expensive to turn in office into a home. There was an article last fall where someone backed out of doing that for a tower in San Francisco because in addition to the standard regulations there was also requirement that some of the units be set aside for low rent and that made the conversion economically unfeasible even for the biggest optimist

7thaccount• 2 years ago

Is San Francisco not a special case though?

joobus• 2 years ago

They can, with enough money. The problem is that these will need to be sold at an even steeper discount so that throwing enough money at the renovation makes sense. That means whoever currently holds the loan will eat a huge loss, whether there is a conversion to residential or not.

calvinmorrison• 2 years ago

What was i told... the market is always a gamble? Or should we once again bail out smart "investors" on the backs of hard workering Americans tax dollars?

jillesvangurp• 2 years ago

The key issue is the extend and pretend thing that is preventing fore closures on these buildings and is artificially inflating the price per square meter for office real estate. This artificial price is about as high as it is for apartment buildings. The problem of course is that this is an artificial price in a market where nobody in their right mind is going to pay those prices. The real price will have to come down for things to start moving. That will happen eventually as these buildings stay empty but it might take a while.

Once foreclosures start happening and building owners default, the debt holders end up taking ownership of property that just isn't worth as much has housing real estate anymore. It then becomes a problem for them because empty offices still cost money. They can sell the building at a steep discount or do something else with it.

It's the the price difference between office and housing prices that might make it economical to convert buildings. The issue with that of course is that housing real estate prices are also under pressure as people are no longer as eager to live close to their now empty office buildings. So, it's still a risky investment and whoever ends up owning the building would need to finance that somehow. And there are those pesky zoning rules that outright prevent this in a lot of places.

Those rules are no accident of course. Banks have an interest in keeping housing prices artificially high as well. If those prices come down, they have another debt bubble to worry about.

keiferski4• 2 years ago

Only speaking from my personal travel experiences, not any hard data, but: I feel like this issue is nearly non-existent in places with mixed use zoning. If the office values go down in a place with equal amounts of housing, they are repurposed as new apartments. The problem is when the office architecture isn’t interchangeable with apartment architecture, which usually happens because certain areas are zoned as office-only.

zbrozek• 2 years ago

Some local councils around here want to make it a condition of approval that the first floor of mixed-use must remain commercial. Developers want it to be flexible because they can't predict future need. Constraints cost! Euclidean zoning is an unspeakably expensive economic blunder.

epistasis7• 2 years ago

Urban Planning has to be one of the worst professions in the existence of humanity. We were all better off without urban planners, and everything they advocate for and enforce makes the world worse.

Animats2• 2 years ago

Using the first floor of mixed-use buildings being commercial is a huge flop in the SF bay area. Drive down El Camino on the SF peninsula. Look at all those ground floor vacancies, low-end tenants, and oversized "leasing offices" to fill up space.

eastbound• 2 years ago

That’s a good point; An urban ecologist once told me the most environmental-friendly city is made of 6-floor buildings (like Paris):

- Ground floor: Shops,

- 1st and sometimes 2nd floor: Offices, lawyers, doctors, companies,

- 3-6th: Housing.

It was environmentally friendly because the density allows people to drop the car and go shopping and work with 15 minutes of their home.

thuuuomas• 2 years ago

I love to live within smelling distance of the urban slaughterhouse. I love not knowing what chemicals may be wafting out of tanks buried, forgotten beneath my brownfield luxury condo.

makeitdouble5• 2 years ago

There might be many issues with the gap in construction standards for offices and housings.

A very dumb one: windows are required for houses, where offices can get away with huge open spaces holding a central hub of indoor areas. It's still possible to convert to houses, but that makes for ridiculously small liveable areas compared to the whole floor surface.

Then plumbing, evacuation paths etc. can all be solved by throwing money at the problem, but that significantly raises the profitability line.

harha2• 2 years ago

Or fixing the problem of bad regulation - you can always uplift living standards when money is cheap, right now there's a chance to operate more efficiently, rather than create more debt.

One idea would be to convert spaces to something competing with airbnb, with the added value of being near offices.

dboreham3• 2 years ago

Charlie Munger enters the room (with no windows)..

AnthonyMouse12• 2 years ago

It's still possible to convert to houses, but that makes for ridiculously small liveable areas compared to the whole floor surface.

This is only a problem if it's prohibited by zoning. Otherwise it just gets reflected in the price.

Houses in the suburbs often contain a large amount of space with no windows, i.e. a basement the size of the entire first floor, and no one objects because it can be used for storage or a media room that doesn't want windows because of glare. In a multi-tenant building you also have the option to put shared facilities there, or rent the interior section of the floor to small shops while still converting the exterior to housing. But only if you don't have bad laws prohibiting such things.

sandworm1013• 2 years ago

Bedrooms must have windows. That isnt "very dumb". That is based on centuries of knowledge. It is fire code. It is for comfort. It is for health. Some think it anachronistic only because few alive today have ever lived without it. But forgetting the reasons behind a rule does not make that rule unnecessary. And a rule isnt dumb simply because it decreases profit margins. All rules do.

esoterica• 2 years ago

Big office buildings have very deep plates which make them very difficult to convert to sensible apartment layouts. You can have windowless conference rooms but you can't have windowless apartments.

Scoundreller2• 2 years ago

I’m probably a weirdo, but a bedroom without windows feels like a great way to get the best sleep in an urban environment. Low noise, no light pollution. Kinda a dream really.

impossiblefork2• 2 years ago

I don't think it has anything to do with either that or with WFH.

Rather, the increase in interest rates necessitate a general reduction in price on both commercial and other property. WFH means that commercial property will be affected more, but it's something general.

Interest rates have gone from <1% to 5.5%, and if that's sustained there must either be such an increase in rents, which people would not be able to pay, or there must be a reduction in the price of commercial and rental property corresponding to the remainder.

j7ake• 2 years ago

In this case, are deep discounts in residential property next?

chollida1• 2 years ago

THis is a nice thought but rarely happens regardless of zoning.

Office buildings floor plates and residential floor plates aren't really compatable.

Office buildings have most of their floor plates not around windows, where are residential needs some light.

Also water, and sewer need to be retrofitted.

The one building that was a successful conversion that I know of cut out the center of the building to create a light corridor down the center of the building.

The Odd lots podcast had a recent episode on this and the guest said that converting office to residential is often more expensive than rebuilding.

So you've got a good though but its rarely practical in the larger city style office buildings.

Perhaps smaller density 6 story buildings would be easier to do?

danaris2• 2 years ago

There is an actual solution, at least for buildings that are large enough:

Make the whole building mixed-use. Ring the outside with apartments, and keep the inside commercial. Make the whole thing a little community in itself.

Just fill the whole center of it with cafés, bodegas, computer repair shops—the kinds of small, locally-owned shops you get in a (healthy) small town or a pre-modern-zoning city area.

mguerville• 2 years ago

In Europe a lot of old buildings do this conversion easily, it's really more a problem with modern construction (and hence most American buildings) where the entire design is extremely skewed towards one use case vs the other

Someone• 2 years ago

Office buildings have most of their floor plates not around windows

That’s not the case everywhere. In ‘Europe’ (I don’t know what set of countries this applies to), workers must be able to get sufficient natural daylight.

https://www.kingspan.com/ie/en/knowledge-articles/what-is-en...:

“To comply with the minimum recommendations for indoor spaces lit with windows or curtain walling, over 50% of the space must achieve 300 lux for more than half the daylight hours in the year. In addition, to prevent particularly gloomy areas being created within a room, a backstop value of 100 lux has to be met across the entire space for the same period.

If rooflights are used to provide daylight into the space, then the requirements are more demanding with a value of 300 lux required for the whole of the relevant space for at least half of the daylight hours.”

Suppafly2• 2 years ago

I think you're exaggerating how hard the retrofitting is to do. Office buildings tend to have tons of extra space for things like drop ceilings and utility chases that can be easily used to run plumbing and electrics. Natural lighting is a concern but these buildings also tend to have huge windows, that can light passively if the interior spaces that are being retrofitted in are designed correctly.

infecto7• 2 years ago

I always keep hearing this but I have rarely seen it in practice. Yes I have seen a handful of examples where a mall was transformed into apartments on the second floor. Or maybe a historic building was turned into luxury lofts but I suspect for the vast majority of buildings, its cheaper to tear it down and repurpose it.

Now, I do have an appreciation for Japan's mixed use zoning but I suspect that has as much to do with the culture of honor/not being a dick as it does with mixed use zoning. I do think things can be relaxed in the US.

gedy2• 2 years ago

I suspect that has as much to do with the culture of honor/not being a dick as it does with mixed use zoning.

Yes true, and many people gloss over the issue of lawsuits - the US has a "lawsuit happy" culture that make many things very expensive.

digdugdirk• 2 years ago

In that case, I'd like to introduce you to Houston, Texas.

The only city in the US without zoning laws, and historically known as a bastion of livability.

... If you're a car.

https://www.econlib.org/the-city-without-zoning-ready/

xenadu02• 2 years ago

Conversions are only possible one way and tend to be permanent.

Industrial -> Commercial -> Residential.

Industrial equipment is heavy and needs much more reinforcement of the floor plates and columns. You can convert an old factory to lofts but not the other way around (lofts to factory is basically rebuilding the building inside the existing shell... much cheaper to knock it down and start over).

Commercial has vastly different plumbing, electrical, and ventilation requirements. Residential wants more natural light so you tend not to get the kind of profitable open floor plates you need in commercial. And generally commercial is over-supplied with electric but vastly under-supplied with water/sewer for residential needs. Once a commercial building is converted to apartments it doesn't go back - with the exception of very small commercial like a doctor's office taking over a house or similar.

m3kw9• 2 years ago

Gonna get worse than once headsets go main stream, cheap and more comfortable

lukas099• 2 years ago

If someone wanted to take a diversified, low-cost position in office reits, what would one buy?

cm21872• 2 years ago

I don't know if REIT aggressively remark the value of their property to adverse market conditions. I would watch how much they marked down their assets otherwise you might buy at a very overinflated value.

infecto7• 2 years ago

I might be mistaken but I thought it was the inverse. REITs that trade on the public market would have pricing that reflects the market opinion regardless of how the books are marked.

The issue in general with RE is that you would be marking your books based on comps and the mark downs will lag the market. Not investment advice but sometime in the past year to now is when you would want to be investing in publicly traded REITs if you thought there was going to be a rebound.

Private funds like a Fundrise are the ones where their marks are going to be lagging the market as its purely on book value.

imakwana• 2 years ago

Interesting question, probably an ETF like NETL comes close to holding diversified positions in various commercial/office REITs:

https://www.morningstar.com/etfs/arcx/netl/portfolio

ethagknight• 2 years ago

Before you get too far down this road, remember that the REIT's slice of the ownership is second or even third to a lender, and said lender may be just about to take that property back from the equity holders, wiping out your investment.

evanelias• 2 years ago

As an alternative to a REIT, any thoughts on TIAA's Real Estate Account [1]? It seemed like a popular retirement investment choice when I worked in higher education. (IIRC it's only available in retirement accounts and only for employees of nonprofits, education sector, etc.)

If I understand correctly, they mostly invest directly in commercial real estate, and they keep their LTV ratio quite low (20%). I'm curious about how it might perform during a plummeting market for office space... perhaps it'll drop but not as badly as REITs?

[1] https://www.tiaa.org/public/retire/financial-products/annuit...

jgilias• 2 years ago

The plunging US values are being felt around the world because properties in top-tier American cities were once magnets for global investment. Offices were seen as super safe bets backed by high-quality assets with long-term leases and rising rents.

Here we go again.

xyst2• 2 years ago

This is why I suspect return to office (RTO) was pushed so hard.

The invisible hands pulling the strings behind these MBA flunkies installed at many companies are whispering in their ears. “We need to offload bad debt. Help us keep the con going just a bit longer so we can offload the toxic assets from the books to another firm or government”

saiya-jin• 2 years ago

follow the money (almost) never fails

Workaccount2• 2 years ago

I can 100% assure you that bosses and chairmen want to see their landlords get bent just as much as you do. Rent is very expensive, along with maintaining an office.

The idea that RTO is driven by real estate values is so detached and uninformed it's borderline juvenile conspiracy.

xyst2• 2 years ago

The magnitude of the crisis is up for debate. Treasury Secretary Janet Yellen said last week that losses in commercial real estate are a worry, but that the situation is “manageable,” a similar sentiment expressed by Fed Chair Jerome Powell in a 60 Minutes interview on Feb. 4. Others have more dire outlooks, with real estate investor Barry Sternlicht predicting $1 trillion in office losses.

Fuck man. Another ‘08 situation is building up.

wizerdrobe• 2 years ago

Unto itself, would losses in commercial real estate cross over into residential or would it require a broader market slump a la ‘08?

notaustinpowers• 2 years ago

It's convoluted, but yes, it can cross over into the residential market in a few different ways (not as similar as '08 since '08 was largely due to poor lending actions (IMHO).

- As the commercial market is a large investment arm for financial institutions, a collapse in the commercial market can cause a credit crunch (banks don't have enough money to provide loans like they used to). Making it more difficult for people to get mortgages or loans for residential property.

- As the commercial market falls, investors and developers will begin looking toward the residential market for their investments. This could lead to an increase in residential housing availability. However, I believe this would exacerbate the trend of "build-to-rent" communities as it would provide the developer/investors with consistent, predictable, monthly income.

Ultimately, a "collapse" of the commercial real estate market would severely negatively impact the residential housing market due to consolidation. If renting out office towers is no longer profitable, why not rent out entire housing communities? And since banks are crunched and may have to further restrict their mortgage and lending practices, low and middle-class people could be further locked out of homeownership.

infecto7• 2 years ago

Hard to trust a talking head investor who is just advancing his position/holdings.

rchaud• 2 years ago

Precisely. Reminds me of the well-to-do investors going on Twitter in March '23 screaming for the Fed to exempt them from the $250k FDIC limits when Silicon Valley Bank failed.

IncreasePosts2• 2 years ago

Sure, but at least remember that the position came after his beliefs on the market. He wasn't assigned a random position and then needs to sell it - this is what he believes, and he put his money where his mouth is.

dboreham3• 2 years ago

Another ‘08 situation is building up.

Have they been selling synthetic REIT stock?

AnimalMuppet• 2 years ago

How big were the losses in '08?

And, it's not just the total magnitude of the losses. Who takes them and how they take them makes a big difference. Hopefully there's nothing pseudo-bank-like waiting in the weeds (like the repo market or reverse repo or whatever it was) that can make this blow up into a bank-panic-like situation...

le-mark2• 2 years ago

There was a mania around residential real estate, adjustable rate mortgages, swaps, cdos and synthetic cdos, that all hinged on adjustable rates resetting up starting in 2007 that drove the 2008 crises. The movie “The Big Short” does a good job explaining it for us laymen imo.

mannyv• 2 years ago

Realistically speaking, the authorities are trying to contain a panic.

From what I understand banks are loaning money to commercial real estate firms and those firms are using those loans to make payments, just so they don't default - because a default would mean that banks would have to recognize those losses.

I'm not directly plugged in anymore, so obviously take that with a huge pitcher of salt.

tmaly• 2 years ago

It seems like the 08 situation was not really solved.

The bank loses were put on the taxpayer for the most part.

badcppdev• 2 years ago

The language used is funny... "deep discount" implies that the "real" or long term price is higher than the purchase price.

Would "US Commercial property market plummets" be accurate? And obviously avoided by Bloomberg? I guess the question is what percentage of the properties currently changing hands are forced sales due to financing issues?

Edit: And I've just realised that actually the Bloomberg article has a title: "The Brutal Reality of Plunging Office Values Is Here" And a url slug, "real-estate-lenders-confront-falling-us-commercial-property-prices". So apologies to Bloomberg

chiefalchemist6• 2 years ago

If only they (read: banks and local govs) had financed the construction of more residential, and less commercial the system would be more in balance.

As it is, there's a lack of residential supply, and an over supply of commercial.

That said, the Fed's addiction to cheap money and other tricks to keep the economy propped up didn't help either.And now we're in a muck and paying for their missteps.

le-mark2• 2 years ago

Lowering inflation, strong gdp, and strong jobs growth seems to indicate they’re doing something right. Or did I miss the point (I don’t watch fox)?

Commercial property deals in the US are starting to pick up at deep discounts

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