Let the office real estate industry crash and burn, so that developers lobby for the zoning to build more housing instead of more offices. The worst thing we can do right now is bail out commercial real estate investors who bet on the construction of cities with 10x more cubicles than apartments.
Markets as optimization tools only work if people are made to suffer their losses when they occur; bailouts subvert the process and pervert the outcomes.
What'd be really fantastic is to just have "zoning" that keeps truly noxious uses (slaughterhouses, say) separated. Offices, housing, light commercial operating during daytime hours... it's not really that big a deal if it's mixed up a lot more than it is now. In many ways, it'd be preferable, so that people didn't need to go so far to do things.
> Markets as optimization tools only work if people are made to suffer their losses when they occur; bailouts subvert the process and pervert the outcomes.
This is such an important aspect of optimization that is often forgotten. Small crashes have to happen and as much pain as they cause, they are nothing compared to what will get heaved if they turn systemic. They have an important function of keeping the players honest and up to date about their risk models. In a world where nobody is allowed to fail, risk taking will balloon monotonically until the entire system fails. This is basically axiomatic.
Real estate investments are again seen as a risk free asset class, where the only way is up. You know things are bad when we have landlords clutching their pearls about having a negative year of returns. This is nuts. The pain is important. It reminds everyone about the left tails and that they should de-lever carefully now, before things get amplified into a systemic crash where controlled de-levering becomes impossible.
Big non-residential buildings are hard to just convert to residential. They tend to stay as commercial. At least that's my observation in my 'hood.
The Lucky supermarket is becoming a Whole Foods. The Orchard Supply Hardware was a Goodwill for a while, and now it's going to be a Costco. The Rite Aid became a dim sum palace. A Chinese restaurant became a Sprouts grocery store.
None of them became homes. Why not? I can only guess, not being in that business.
It remains to be seen where city populations end up if convenient commute to an office and hangout with workmates in the city are no longer factors that play into living in a city for many.
I’m not a commercial real estate guy, but…please be careful about wishing a “crash” on any sector of the economy. Whether you live in the US or not, commercial real estate investments are widely held—not just “those stinkin’ bilyunares.” A commercial real estate default would kill many urban centers and that only makes things worse for urban residents-rich or poor.
Here is a relevant stat: 150 million Americans own some type of investment in REIT’s. Even if you don’t believe the number, I betting that the order of magnitude is correct.
> Markets as optimization tools only work if people are made to suffer their losses when they occur; bailouts subvert the process and pervert the outcomes.
Their losses become our losses when the failures create systemic risk of a banking and financial collapse.
A total lockup of the US financial system would mean that companies with a yearly business cycle wouldn't be able to make monthly payroll and ATMs would stop working.
You can't isolate the pain down only to the bad actors, everyone suffers.
If wall street builds a shitty nuclear reactor and it melts down in the middle of Manhattan, there really is no option for "well just let it fail" because the fallout will cover the area. It works the same way with finance. Once the whole system is at risk then the government has to act in order to save it.
What needs to happen is regulation up front. Once the financial system is melting down then the system has to be rescued.
What we could alternatively do is at least jail the executives and remove the liability protections of working from within a corporate structure. But the idea to just let everything fail is how you destroy the US financial system.
And we actually tried that back in 2008 when the Bush Administration let Lehman fail. That was bad enough that it would up with Paulson down on one knee begging Nancy Pelosi to not play politics and to rescue the financial system.
Turns out plundering significant amounts of revenue from patrons to only offer the most bare minimum, lowest effort infrastructure has left everyone jaded and having no qualms leaving their leases...
My last job had a terrible office, $30k a month in rent. The building required we use all their contractors and designers for everything, no surprise it was the brother and sister of the building owner. Any change in layout had to be run past an approval process that was slow. Even the services were overall disgusting, damaged ceiling tiles, AC didn't operate properly (e.g. rooms that only had intakes thus you couldn't close the door without hurting airflow).
Landlords have been a menace for most businesses over the last 30 years as the expectation has become 'easy money'. Gordon Ramsey highlighted it best, the busier your restaurant gets the higher the rent keeps going. They scout your business and charge you just enough for you not to move...
I am an investor via CrowdStreet in one of the office buildings in south-ish area (Campbell) of silicon valley. Here is a market update I got today-
Silicon Valley’s office vacancy rate increased again in Q4 2022 to 19.0%, up from 18.6% in Q3. The end of 2022 marks the 12th consecutive
quarter where the overall vacancy rate has risen. Campbell’s vacancy rate for in Q4 was 30.0% with negative 278,167 of overall absorption.
Silicon Valley’s average asking rent increased slightly in Q4 2022, rising to $5.36 psf on a monthly full-service basis, a $0.02 increase
from the previous quarter and a $0.04 increase year-over-year. Campbell’s average asking rent was $4.18. Given the current lack of demand
for office space as well as upcoming economic uncertainty, there is little expectation that significant rent increases would occur in the
near term. Transaction volume fell sharply in Q4 2022, posting just 778,712 sf of gross absorption, a 76% decrease compared to the previous
quarter. Demand for new office space fell on the news of large-scale tech-sector layoffs this quarter that will likely persist through 2023.
The Valley measured 2.6 msf of net occupancy losses in 2022, the largest amount since 2001 and marks the third year of negative net
absorption
I just moved my office from Campbell to DTSJ right near Diridon. Campbell might be the worst "city" I've ever encountered. Was only located there because I could not afford SJ rents but now I am like so many other fleeing to quality.
Banker 1: Ok, over leveraging on real estate was a bad idea, clearly they can go belly up.
Banker 2: Well, let's not get ahead of ourselves. Home mortgages, yes, but a business would never default on their real estate, where would people work from?
Banker 1: That's genius, here's 100 billion dollars, go buy some swaps.
Is there any evidence that banks are now over-levered on swaps? I thought the general consensus was Dodd-Frank made collateral requirements higher, and banking “boring” again.
If a developer goes under you don’t have the same systemic risk of deposits/ consumers losing their shirts as you do when a bank goes under.
This is already happening near the shop I work at. Four office buildings and a giant courtyard are basically completely empty and abandoned. The adjacent parking structure is as well and has been for a long time but the old corporate logos from companies that pulled out three years ago are still hanging in some places.
the conglomerate landlord has doubled down on some sort of bizarre Potemkin village strategy to ensure investors dont pull out. muzak in the courtyard is turned up to blaring at all hours of the day, a cleaning staff roams around a few times a week as well but with no trash, they just sit at the tables and check their phones for a few hours. Security guards are staffing the buildings but the doors are always locked. The office for the parking garage is completely empty, no chairs at the desks or anything.
The music, cleaning, and security are to keep homeless people out. It has nothing to do with investors. The investors who care are well aware of occupancy rates and lease revenue.
Businesses and restaurants keep closing because corporate landlords keep raising rent by huge amounts. In this climate they keep raising rent. It’s absurd and a lot of the corporations have zero community ties to the area other than collecting rent from afar.
Defaults are good. Let them take a bath. Writing down the loss is the only practical way to get the asking rents down. Asking rents in SF are up 55% in real dollars over the past 20 years, but vacancy stands at an all-time high as well. It doesn't make any sense and some process is needed to destabilize this equilibrium.
I know it eventually happens, but it seems like a lot of commercial landlords would rather have excessive vacancies than lower the rent to attract new tenants or keep existing tenants. Is there some kind of tax reason for it?
In NYC, occupancy of office buildings seems to be stabilizing at 30-40% below pre-COVID levels. However, many of the buildings refinanced during the zero rates period from ~'18-'22.
Going to be interesting to see what happens when that debt rolls off and needs to be refinanced.
Some note-worthy points from Crain's coverage (1).
- Compared to 2019, the average New York office worker is spending $4,661 less on meals, shopping and entertainment near their workplace, the researchers found. That dropoff is the highest of any city included in the study, outpacing Los Angeles ($4,200), Washington, D.C. ($4,051), and Atlanta ($3,938), among others.
- New York workers are spending about 33% fewer days in the office now than in 2019, according to the study. That ranks fifth among the studied cities, with Washington seeing the highest in-office decline, at 37%.
- ....Only 9% of employees in their offices five days a week—unchanged from September 2022.
- That amounts to at least $12.4 billion a year in losses for the city
- estimated 2.7 million people who worked in Manhattan in 2019.
I had the understanding that only residential mortgages have fixed rates. Most loans do not have fixed rates, I would have thought that included commercial real estate loans.
As the late Joe Armstrong said, "let it crash". Of course, unlike large commercial landlords, neither Joe Armstrong or I have the ear of the people in charge of making that decision. Look for the bailout to come out of your tax payments sometime this year.
I imagine that huge companies still make up only a small fraction of total tenants. And that's also assuming that huge companies will (a) continue to call people back to the office and (b) succeed in making people do so.
This is harder than it sounds, impossible in some cases (commercial floorplates don’t really work for residential units in many cases). But a fine idea where it can work.
Note that commercial rents at something like 10x the cost of residential per square foot, so this represents a huge loss for developers, and therefore there is a big incentive to hold on and bet that the market will pick up again.
[+] [-] cld8483|3 years ago|reply
Markets as optimization tools only work if people are made to suffer their losses when they occur; bailouts subvert the process and pervert the outcomes.
[+] [-] davidw|3 years ago|reply
[+] [-] short_sells_poo|3 years ago|reply
This is such an important aspect of optimization that is often forgotten. Small crashes have to happen and as much pain as they cause, they are nothing compared to what will get heaved if they turn systemic. They have an important function of keeping the players honest and up to date about their risk models. In a world where nobody is allowed to fail, risk taking will balloon monotonically until the entire system fails. This is basically axiomatic.
Real estate investments are again seen as a risk free asset class, where the only way is up. You know things are bad when we have landlords clutching their pearls about having a negative year of returns. This is nuts. The pain is important. It reminds everyone about the left tails and that they should de-lever carefully now, before things get amplified into a systemic crash where controlled de-levering becomes impossible.
[+] [-] AlbertCory|3 years ago|reply
The Lucky supermarket is becoming a Whole Foods. The Orchard Supply Hardware was a Goodwill for a while, and now it's going to be a Costco. The Rite Aid became a dim sum palace. A Chinese restaurant became a Sprouts grocery store.
None of them became homes. Why not? I can only guess, not being in that business.
[+] [-] ghaff|3 years ago|reply
[+] [-] jschveibinz|3 years ago|reply
Here is a relevant stat: 150 million Americans own some type of investment in REIT’s. Even if you don’t believe the number, I betting that the order of magnitude is correct.
https://www.reit.com/data-research/research/nareit-research/...
[+] [-] passwordoops|3 years ago|reply
Which is why you know they're gonna do it. Can't let market forces get in the way of a good "campaign contribution", right ? :/
[+] [-] thwayunion|3 years ago|reply
[+] [-] 300bps|3 years ago|reply
Moral Hazard
https://en.wikipedia.org/wiki/Moral_hazard
[+] [-] lamontcg|3 years ago|reply
Their losses become our losses when the failures create systemic risk of a banking and financial collapse.
A total lockup of the US financial system would mean that companies with a yearly business cycle wouldn't be able to make monthly payroll and ATMs would stop working.
You can't isolate the pain down only to the bad actors, everyone suffers.
If wall street builds a shitty nuclear reactor and it melts down in the middle of Manhattan, there really is no option for "well just let it fail" because the fallout will cover the area. It works the same way with finance. Once the whole system is at risk then the government has to act in order to save it.
What needs to happen is regulation up front. Once the financial system is melting down then the system has to be rescued.
What we could alternatively do is at least jail the executives and remove the liability protections of working from within a corporate structure. But the idea to just let everything fail is how you destroy the US financial system.
And we actually tried that back in 2008 when the Bush Administration let Lehman fail. That was bad enough that it would up with Paulson down on one knee begging Nancy Pelosi to not play politics and to rescue the financial system.
[+] [-] dingusdew|3 years ago|reply
[deleted]
[+] [-] bearjaws|3 years ago|reply
My last job had a terrible office, $30k a month in rent. The building required we use all their contractors and designers for everything, no surprise it was the brother and sister of the building owner. Any change in layout had to be run past an approval process that was slow. Even the services were overall disgusting, damaged ceiling tiles, AC didn't operate properly (e.g. rooms that only had intakes thus you couldn't close the door without hurting airflow).
Landlords have been a menace for most businesses over the last 30 years as the expectation has become 'easy money'. Gordon Ramsey highlighted it best, the busier your restaurant gets the higher the rent keeps going. They scout your business and charge you just enough for you not to move...
[+] [-] pasquinelli|3 years ago|reply
[+] [-] gauravphoenix|3 years ago|reply
[+] [-] jeffbee|3 years ago|reply
[+] [-] softwaredoug|3 years ago|reply
[+] [-] foota|3 years ago|reply
Banker 2: Well, let's not get ahead of ourselves. Home mortgages, yes, but a business would never default on their real estate, where would people work from?
Banker 1: That's genius, here's 100 billion dollars, go buy some swaps.
Bankers 1 and 2: pikachu face
Scene closes, title opens, "The Bigger Short"
[+] [-] theptip|3 years ago|reply
If a developer goes under you don’t have the same systemic risk of deposits/ consumers losing their shirts as you do when a bank goes under.
[+] [-] quarterdime|3 years ago|reply
[+] [-] nimbius|3 years ago|reply
the conglomerate landlord has doubled down on some sort of bizarre Potemkin village strategy to ensure investors dont pull out. muzak in the courtyard is turned up to blaring at all hours of the day, a cleaning staff roams around a few times a week as well but with no trash, they just sit at the tables and check their phones for a few hours. Security guards are staffing the buildings but the doors are always locked. The office for the parking garage is completely empty, no chairs at the desks or anything.
[+] [-] nradov|3 years ago|reply
[+] [-] mint2|3 years ago|reply
Businesses and restaurants keep closing because corporate landlords keep raising rent by huge amounts. In this climate they keep raising rent. It’s absurd and a lot of the corporations have zero community ties to the area other than collecting rent from afar.
[+] [-] jeffbee|3 years ago|reply
[+] [-] criddell|3 years ago|reply
I know it eventually happens, but it seems like a lot of commercial landlords would rather have excessive vacancies than lower the rent to attract new tenants or keep existing tenants. Is there some kind of tax reason for it?
[+] [-] mint2|3 years ago|reply
[+] [-] rentpeek|3 years ago|reply
Going to be interesting to see what happens when that debt rolls off and needs to be refinanced.
[+] [-] somberi|3 years ago|reply
- Compared to 2019, the average New York office worker is spending $4,661 less on meals, shopping and entertainment near their workplace, the researchers found. That dropoff is the highest of any city included in the study, outpacing Los Angeles ($4,200), Washington, D.C. ($4,051), and Atlanta ($3,938), among others.
- New York workers are spending about 33% fewer days in the office now than in 2019, according to the study. That ranks fifth among the studied cities, with Washington seeing the highest in-office decline, at 37%.
- ....Only 9% of employees in their offices five days a week—unchanged from September 2022.
- That amounts to at least $12.4 billion a year in losses for the city
- estimated 2.7 million people who worked in Manhattan in 2019.
(1)https://archive.is/YNjys
[+] [-] kubota|3 years ago|reply
[+] [-] creato|3 years ago|reply
[+] [-] EarthIsHome|3 years ago|reply
[+] [-] ElfinTrousers|3 years ago|reply
[+] [-] Ancalagon|3 years ago|reply
[+] [-] moneywoes|3 years ago|reply
[+] [-] ElfinTrousers|3 years ago|reply
[+] [-] phendrenad2|3 years ago|reply
[+] [-] jeffwask|3 years ago|reply
[+] [-] LatteLazy|3 years ago|reply
[+] [-] theptip|3 years ago|reply
Note that commercial rents at something like 10x the cost of residential per square foot, so this represents a huge loss for developers, and therefore there is a big incentive to hold on and bet that the market will pick up again.