Fred Hickey on troubles in commercial real estate

As we all know by now, March brought a new banking crisis, as many banks have huge losses lurking on their balance sheets...  Silicon Valley Bank, Signature Bank and Credit Suisse all collapsed, and depositors were rescued using various means in order to forestall panic...  These regional banks also have huge exposure to the reeling commercial real estate (CRE) market, where vacancies are already nearing 2009 recession levels thanks to overbuilding and the remote work trend - even before a recession hits.  An estimated $1.5 trillion in CRE debt comes due over the next three years.  It's not just banks that are in trouble.  Insurance companies and pension funds have experienced large portfolio losses and some will have trouble meeting obligations.

~ Fred Hickey, The High-Tech Strategist, April 3, 2023

Chris Walen on the commercial real estate bust

On the commercial side, because of such uncertainty as to what some of these assets are worth, a lot of the big buyers have stepped back and said, "ok, wait, we're going to see what happens."  So, for example, look at some of the marks that the banks are talking about.  Look at what Bank of America's talking about on their commercial loan exposures.  They basically have cut them in half.  And I think that's the appropriate posture for the banks to take.  If they get the money back later, great, they can take a gain.  But I think for now, when you're talking about urban commercial properties, especially older properties, you've got to be very very cautious.  If you read The Real Deal, which is one of my favorite reads, they're cataloguing all of these restructurings and foreclosures and everything else, and it's because these assets are underutilized.  Walk around New York City.  We have lots of tourists, but he buildings are empty.  We still have a really significant underutilization of office buildings in New York, most of the major cities around the country, including the South.  You would think Texas and the rest of the South would be different; they're not.  Atlanta.  It's astounding, but all of these cities are dealing with a sudden change in the use case for commercial properties that nobody anticipated.  It's like we wound the clock back a hundred years, we've taken Henry Ford and kidnapped him, right?  So we don't have this car-centric, commuter-centric model for cities anymore.  People realize that they can work at home.

~ Christopher Whalen, interview, Forward Guidance, 2:45 mark, October 17, 2023

Michael Lewitt on commercial real estate loans coming due

Even more concerning is what will happen as commercial real estate loans mature and have to be refinanced at much higher rates.  Chris White at Loop Capital noted this morning that there are $147 billion of real estate loans coming due over the next 12-24 months with an average coupon of 4.3% while the current prime rate is 8%.  Rates may decline by the time these loans come due but will certainly remain at least 200-300 basis points higher than the original loans.  Many projects that penciled out in ZIRP are not economic anymore.  Many experts are forecasting loss rates of as high as 40% on commercial real estate based not merely on higher interest rates but lower utilization rates of urban (and even suburban) office buildings.  Commercial real estate was a major participant in the ZIRP/QE bubble and is now experiencing a painful and expensive adjustment as that bubble deflates.  A city like San Francisco, for example, is directly in the bullseye of higher rates, a tech bust, and the physical destruction of the urban environment.

~ Michael Lewitt, "Chasing Our Tails," The Credit Strategist, March 27, 2023

Grant's on New York City, telecommuting and out-migration of wealthy taxpayers

Covid-19 dealt New York an especially cruel blow, and what with the lockdown and riots and looting and curfews and the absence of baseball and the virtual cessation of commerce (a tentative reopening began Monday), the city had come to look like a ghost town.  Nobody doubts, or should doubt, its resiliency, but not even the great fire of 1776, or the draft riots of 1863, or the almost-bankruptcy of 1975 carried with them the threat of a crippling, perhaps permanent, out-migration of the kind of wealthy taxpayer who can telecommute - and who gave that alternative lifestyle a proof-of-concept test over the past three months by not taking the subway to work.  Some seem to prefer it.

[...]

Perhaps the emerging new freedom to work remotely will cut short the co-dependency of high-earning citizens and their big-spending state and local governments.

~ Grant's Interest Rate Observer, "Only a painted moon," June 12, 2020

CB Insights: Is WeWork too big to fail?

WeWork currently manages more than more than 5.2M square feet of commercial real estate in New York City alone. This puts the company in a unique bargaining position. Although it may not be healthy for the economics of the business, it’s hard to imagine that WeWork would be allowed to rapidly fail without some external help, according to the New York Times’ Andrew Ross Sorkin.

With so much space under its management, if WeWork were to fail, its sudden departure could cause commercial real estate prices in key markets such as London and New York to plunge. This would be more problematic for investors and other interested parties — like the government — than helping prop up the company.

~ CB Insights, "WeWork's $47 Billion Dream: The Lavishly Funded Startup That Could Disrupt Commercial Real Estate," 2019

Howard Davidowitz sees continued problems for CRE and community banks in the US

In the end, what do you do with the retail space? This is going to be a huge question for retailers in the next ten years. That's why Wal-Mart is starting to build smaller stores. That's why Wal-Mart is building more overseas than they're building here.

[Commercial real estate landlords] already have occupancy problems, rent problems and everything else right now. I don't think commercial real estate problems are fixed by any means. That's why we're going to close hundreds of community banks going forward.

~Howard Davidowitz, chairman, Davidowitz and Associates, Bloomberg.com interview, December 31st, 2010

Howard Davidowitz on the coming transformation of the American retail marketplace

With the explosion of online sales, what happens to all of these retail malls and the tons of shopping centers that are marginal? I think there are huge questions going forward about size of stores, location of stores, distribution facilities. Huge changes are going to be taking place in the next five years as people continue to shop online.

~Howard Davidowitz, chairman, Davidowitz and Associates, Bloomberg.com interview, December 31st, 2010

Sam Zell on commercial real estate

I'm sure there's going to be some casualties, particularly in what I would call ex-urban, the glass-block commodity office building. I don't think there is going to be any casualties in Manhattan, I don't think there's going to be any casualties in any of the first-class office space around the country. The commercial real estate market is going to do terrific no matter what the economy does, short of a depression.

~ Sam Zell, "Zell sees commercial real estate investing surging," Bloomberg, May 1, 2008

Jim Grant on commercial real estate

Rarely has commercial real estate yielded so little or appealed to so many as it does today. For that matter, rarely has it been priced so as to yield less than the cost of financing it.

~ Jim Grant, Grant’s Interest Rate Observer, February 9, 2007

Christopher Haley: Underweight REITs

REIT valuations are not factoring in a more significant slowdown of the economy.

~ Christopher Haley, analyst at Wachovia, which has an overall investment rating for the industry of "underweight," "REITs See Biggest Drop Since 1998 as U.S. Rout Grows," Bloomberg.com, October 25, 2007