Just How Bad Will Commercial Real Estate Distress Effect the Broader Economy
Reading a lot more articles of office landlords throwing in the towel and handing back keys or selling at a massive loss. Likewise, underlying loans being marketed at huge discounts. A few data points from an article I linked below:
- TA Realty sells property in Washington DC for $18.2M in January of 2024 after acquiring it for $62M in 2017
- Bethesda, MD "Clark Building" sold for just shy of $30M in January of 2024 after being bought for $133M in 2019
- Office building at 300 W Adams St. in Chicago sells for an 89% discount to initial acquisition price, $4M, after seller bought it for $38M in 2012
- JLL marketing the $308M loan backing 1740 Broadway at a 50% discount after BX defaulted on the debt in March 2022
The loss of value is staggering. Fortunately it's fairly confined to office, but does anyone expect contagion and/or distress in the banking & lending sectors due to this value loss? I don't know enough about corporate finance to know what type of provisions the big banks have for this and/or at what point CRE losses become a serious threat to their financial health.
Personally, I'm pretty worried about downtown areas in hard-hit cities like DC and San Fran. Feels like there is a snowball effect where people left the CBDs of the cities due initially to increasing remote work, and this had a negative impact on retail and paved the way for more crime / less street traffic, which in turn made having an office and/or working in person in a CBD less attractive, which further turns people away from the area, so on so forth. No idea what the solution is or how bad things get in the affected local economies.
Article: Too new to post links but you can google "BisNow, Running out of Capital and Patience Short Sales Begin to Hit the Office Market"
Based on the highest ranked content on WSO, the distress in the commercial real estate (CRE) market, particularly in the office sector, can indeed have broader implications for the economy, including the banking and lending sectors. Here are some insights:
Direct Impact on Lenders: Banks and other financial institutions that have extended loans for these properties may face significant losses if the value of the collateral (the real estate) has plummeted. This can lead to increased loan loss provisions, affecting the banks' financial health.
Secondary Effects: As property values decline and buildings are sold at a loss, this can lead to a reduction in property tax revenues for local governments, which in turn may impact public services and infrastructure investments.
Contagion Risks: While the distress seems to be confined to the office sector, there is always a risk of contagion to other sectors of the real estate market. Retail, hospitality, and even residential sectors could be affected if the economic conditions that led to the office sector's decline spread or if investor sentiment turns negative broadly.
Impact on Downtown Areas: The concerns about downtown areas in cities like DC and San Francisco are valid. A decline in office occupancy can lead to a decrease in foot traffic, which negatively impacts retail and service businesses, potentially leading to an increase in crime and a further decline in the desirability of these areas.
Potential Solutions: Solutions to these issues could involve a mix of policy interventions, private sector innovation, and market adjustments. For example, converting office buildings to other uses, such as residential or mixed-use, could help to stabilize values. Additionally, local governments may need to consider how to revitalize downtown areas to make them more attractive to businesses and residents.
Bank Provisions: Regarding the provisions big banks have for CRE losses, banks typically set aside loan loss reserves to cover potential defaults. The size and adequacy of these reserves can vary based on the bank's exposure to CRE and their assessment of the risk.
It's important to monitor these developments closely, as the situation can evolve rapidly, affecting various stakeholders in the CRE market and the broader economy.
Sources: Coronavirus scare and the impacts to the global economy, Let's Talk Recession Risks in Real Estate, Downfall of RE, Real Estate Industry in a bubble?
I don't know and I'm too lazy to think about it, but also don't forget about the effect this has on local government finances. Real estate taxes especially office make up a significant portion of tax revenue
An additional point to add outside of the CRE realm but nonetheless, still relevant.
San Francisco’s median home price has fallen 25% since beginning of 2022. Those are GFC numbers.
Down 25% according to what? Case Shiller shows it down 14%.
But how much did they run up since 2020?
median home price is back to 2018 figures. Source: https://www.zillow.com/home-values/20330/san-francisco-ca/
It's been affecting banks for over a year now, it's one of the main reasons Signature Bank failed last year. Read up on New York Community Bank, they're the ones who took over Signature. They just booked a much larger loss than initially projected due to real estate losses. It is definitely going to impact banks, mostly regional and community banks since they disproportionately fund real estate loans.
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