Fire Sale?
WSJ article today: "Commercial Landlords Grapple With Big Surge in Hedge Costs"
Thoughts on the article? Are some over-leveraged owners going to be forced to sell, increasing supply while lowering prices? I'm not a RE expert, so wanted to get your opinions.
Add on the fact that Office is likely to suffer a beat down (Esp. non-class A), are we starting to see the very beginning of a material downturn in Commercial RE?
Will Industrial follow due to a possible over-build related to the eComm boom from COVID? (people thinking the demand was here to stay for this RE class whereas it very well could've been demand pull-forward?)
I think that your thoughts are a growing consensus. The biggest ripples will definitely be coming from office, and in general from individuals who are over leveraged. The more conservative owners will see valuation hits in their portfolio, but likely will make off okay, and maybe even better in the long run with being able to swoop up cheaper properties
Agree on most points but industrial will be fine, or at least in Canada it will be. Our major markets are still 1% vacancy and new supply is barely outstripping absorption. Way too much cushion right now.
This is the case in many markets in the US as well, and supply is starting to come down from highs. Many markets are still sub-3% vacant.
I agree with your take. My only caveat is that there's still A LOT of money out there on the sidelines waiting to pounce. That should temper any price decreases, at least in the short/medium-term for asset classes other than maybe office.
I hear you but I think there is much less than we actually think. There always appears to be much more liquidity than there really is once deleveraging starts to happen.
Agreed. Had a comment on the whole PE dry powder subject the other day. You all probably know this already... but "Dry powder" isn't LP cash sitting in the bank. Not to mention, debt markets are key and if debt is hard to come by, you either make all-equity bids or you don't make a bid...
All depends on how much fear is out there. If there's a true recession and the fundamentals erode, then yeah all of that liquidity is going to get scared and there will be a bloodbath. However, if fundamentals remain strong and it's more just a repricing to where the financing makes sense then we'll see very limited price adjustments compared to where we are today. It still may feel like a bloodbath and people will get caught skinny dipping, but it won't across the board.
As the article states, there will be many forced sellers. With current debt markets and the liquidity crunch, there will be very few bids and properties will trade at substantial discounts to recent pricing.
As Milton Friedman said, lags for monetary policy are "long and variable."
I think the lag is shorter than it is long at this point, and it will be reflected in 2023 sales prices.
Spoke to a contact who is CFO for a small REPE shop....their valuations of their own Class A downtown office product are "pennies on the dollar" and they anticipate giving the keys back on some stuff. Seems to be a story that is popping up here and there.
And to all the uninformed journos and NPCs out there....no, you cannot easily turn an office building into an apartment building while still maintaining any semblance of a reasonable profit motive. Sure, if you want to burn several hundred dollars per square foot on re-plumbing/re-wiring/connecting utilties/boxing out apartments in some downtown tower, and want to do it out of the goodness of your heart for the benefit of mankind, than by all means do so. But you aren't going to be getting much of a return.
^ Sorry for the snark. I'm sick of this narrative...I have my doubts that it could ever be a sustainable or useful solution to the glut of underwater/underutilized office assets.
Yeah it's so frustrating. Sure maybe that 1920 historic with 18k sf rectangle plates might work (low basis and easier conversion), but that 1987 1M footer has no prayer (unless you want to give it to me for free and I get nice incentives from the city).
Amen bro. Without some public incentive or subsidy, these deals will not make sense the vast majority of the time.
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