A close relative of mine is a top real estate appraiser based in San Francisco, and she's terrified about what happens in Q2 2021, when leases will start terminating en masse. She's had a call with the St. Louis Fed, as they're trying to get an idea of what this will look like. She thinks it will be a bloodbath, and deal a death blow to corporate real estate (and other capital markets by extension).
The other week I was on real estate sites and I saw a bunch of "apartments" in SOMA that just looked like offices with some hastily slapped on anemities, as if there was some "wink wink nudge nudge" going on and they had to call the place an "apartment" for some city ordinance but everyone knew it was an office.
However, I realized it was exactly the opposite. These people were taking their office spaces and desperately chopping them up and getting up to code so they could be leased as apartments.
Especially good if the converted office space also provides a good work from home environment. Everyone is working from home and those that can are scrambling to expand their houses to suit a new lifestyle.
Is there data supporting the conclusion that lack of housing is what causes homelessness? I always thought that it was more of a failure of the social safety net.
Really? Living in a country with a safety net, it looks pretty damn positive to me, you get unemployment checks while you're unemployed which makes it much easier to take your time to find a good next job.
Unemployment varies greatly state by state and rarely keeps up with the reality of the cost of living.
On top of this, it only applies if you lose your job due to "lay-offs". I've been laid off four times in my life, all 3 times the companies claimed they were not lay-offs and fought my claim. 2 times I was denied.
The third time I received unemployment benefits for 5 months. I received $4,000 in benefits then my former employer won an appeal, and my claim was deemed "fraud". I had to pay $8,500 back ($4,000 + $4,500 in "fraud fees").
If you are fired for "cause", "screw you, have a nice day".
8 months ago 10% of my company's engineering department (screw you, cloud passage) was fired "for cause" and replaced with cheap Belarusian contractors. This time I didn't even bother for unemployment, I didn't want to risk having to pay it back + 100% fines. I also do not get covid stimulus, and have had to sell my 401k to keep from being homeless.
America has no social net whatsoever. I do not qualify for unemployment, food stamps, or anything else even though I have been working my ass off and paying taxes for 25 years.
This is infuriating :( Hope you weather the storm and end up in a better spot soon.
But, this is one of my concerns too. I equate money with time and if, as a law-abiding citizen, I work diligently for a couple of decades and pay my taxes, when circumstances change – I should be assured some sort of a safety net. Otherwise, what is the point of wasting time working to pay taxes? Is this the hard reality that we cannot rely on governments taking care of us and need to come up with more individualistic backup plans in such circumstances? Does paying all of your taxes and being a model law-abiding citizen make you a sucker?
Not to mention you have to make enough money to qualify for unemployment. My wife was once denied because in the window of time they use to calculate unemployment her pay was too low. They told her that in order to qualify for unemployment, she had to get a job and make more money, and then lose that job and reapply.
Also, when it comes to the stimulus programs, if you made too much $$ then you don't qualify. Even if I had qualified for unemployment, I wouldn't have qualified for the extra $300/week and the $1200 stimulus plans.
The only thing really keeping us afloat is we fled the USA and move to my wife's town where she owns a home and there's a low cost of living. Luckily I was raised with the philosophy that if I cannot afford to buy a thing in cash, I cannot afford to buy that thing, so I have never had any debt.
Yes, but I have a feeling that's what the GP refers to when they say "trapped forever". I don't feel like our system traps you at all, so I was wondering why the GP feels that people get trapped.
Haha no worries! I have not been on unemployment, so I'm afraid I can't comment on that. As someone else mentioned it does vary a bit state by state, so there could be something there.
But that doesn't happen as you say. What people do is just take 2 year sabatical at the expenses of all the taxes while they go Thailand, etc. That is what happens with most of the unemployment checks.
In Spain is very common to take 2 year sabatical while enjoying the welfare. Most of them go away and sign online through proxies or use family members to do that.
Well yes, for many of the young working class - rent is eating up over 2/3rd of their paychecks.
We are being scammed by the Bourgeoisie with inherited wealth.
This explains our situation well imo:
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"So where did our land system come from?
Weirdly enough, the land system that we have today has its origins in a problem specific to medieval kings, which is ‘how do I fund military campaigns and defence, without paying to keep a standing army?’
And it was William the Conqueror who perfected the answer. It was a piece of paper. And on that piece of paper was basically an agreement between the Crown and a noble, saying ‘if you provide men for military campaigns when I ask, in exchange I will grant you a monopoly over your own private fiefdom, where you can levy as high taxes as people can bear to pay’.
So effectively — rent is the original tax, paid via lords to the King.
In fact the word ‘feudal’ derives from the latin word feudalis — for ‘fee’. In other words, rent. So the whole system of government by which the Normans ruled over the Anglo Saxons was based on rent.
If you’re a King, there’s only really three groups of people you’re scared of: other kings, your family, and your nobles. So over time landowners managed to engineer a set of concessions, whereby increasingly taxes were levied directly on people and business, leaving them (the lords) as the owners of a monopoly right to extract privatised land tax.
So what you’re left with is a set of power relations in society: an enforced system of servitude and control. As the economist Henry George pointed out, it is essentially a diluted version of slavery.
“Ownership of land always gives ownership of people… Place one hundred people on an island from which there is no escape. Make one of them the absolute owner of the others — or the absolute owner of the soil. It will make no difference — either to owner or to the others — which one you choose. Either way, one individual will be the absolute master of the other ninety-nine.”
Fast forward a few hundred years, to post-civil-war America and that’s exactly what played out. The plantation owners could no longer own slaves, so what they said is ‘Ok, I’ll pay you, say, $2 dollars a day’ — but by the way, I own the land, and the rent is… $2 a day.’’. Which, incidentally, led to the invention of a clever invention called a ‘chattel house’ which was a kind of kit house that gave families of plantation workers the ability to relocate to try to escape exploitative landlords."
Fast forward again to today, and land is still the fundamental mechanism of racial inequity. To be blunt, all across the UK and the US, there are tenants with black and brown skin paying rent to landlords and mortgage lenders with white skin. Or commuting for hours. Or both.
I imagine all of you have seen the speech made a couple of weeks ago by a young American writer called Kimberly Jones — if you haven’t, do — it’s absolutely the most eloquent piece of public speaking I’ve seen in a long time (https://www.youtube.com/watch?v=llci8MVh8J4). In it she uses this incredible image of getting white people to imagine what it feels like to play “four hundred rounds of Monopoly” with the game rigged against you, enforced by violence. There’s an interesting backstory here, that you may know, which is that the game of monopoly was first invented by a woman called Elizabeth Magie — and originally called ‘The Landlords Game’ and it was created so that… basically one day someone could make exactly the speech that Kimberly Jones just did.
So, broadly speaking — and I’m simplifying here — there were two positions in this power diagram. Tenant and landlord.
And over time that piece of paper became a tradable asset, as well as an inheritable one: so you can literally buy the right to extract taxes from people. And it’s amazing to me that we don’t find that more weird than we do — it’s right there hidden in plain sight in the language we use: landlord.
But such an extreme overclass/underclass diagram is politically hard to sustain. So, over time we saw the slow emergence of a middle position, which is for those who could get together just enough money to buy their own freedom from rent. Again, that’s why we have the word ‘Freehold’; it’s not free as in ‘no cost’ it’s free as in, ‘liberty’."
"There are many kinds of monopoly, from utilities to pharmaceutical patents, but the greatest – the ‘mother of all monopolies’ as Churchill described it – is land. Land rents are a weird leftover of the medieval feudal system: a privatised location tax that is suffocating every Westernised economy today."
"It is worth remembering that there is no political argument —Left, Liberal or Right — that even attempts to justify economic rent-seeking on the basis of principle. You will not find one in any book. Adam Smith was against it, Karl Marx was against it, Keynes was against it, Friedman was against it. Even Ayn Rand was against it. Economic rent-seeking survives only in the dark, by obfuscation, distraction, corruption and perverse incentives. It endures only because it has not been part our political language for the last century, and in the tussle of everyday life, we are all susceptible to quietly putting our own short-term convenience ahead of our principles if we can get away with it (then justifying it to ourselves later)."
Buying property to rent doesn't seem like a good way to make money every time I've run the numbers. The only way it makes sense is if capital gains ratchets up the property prices significantly.
Multi-Dwelling-Units. I'd never buy a single unit property to rent, as there's just too much risk tied up in a single tenant, but I'm very happy with my mixed 3 residential + commercial space in a small town.
> Buying property to rent doesn't seem like a good way to make money
Landlordism is one of the oldest games. It is true that you do need quite a bit of capital in order to 'start'. This is the reason why many big corporations like Blackstone have gotten into the game. In the UK, landlordism is a common way to 'becoming a millionaire'.
After the '08 financial crash, the UK government even pledged to underwrite mortgages, making the game of starting a Monopoly-like property empire in the UK risk free for elites. Sheikh Khalifa is a big fan. [1]
> The only way it makes sense is if capital gains ratchets up the property prices significantly.
That's exactly what corporates do. It's the slow corporate fininancialization of the housing market [2].
"Between 2011 and 2017, some of the world’s largest private-equity groups and hedge funds, as well as other large investors, spent a combined $36 billion on more than 200,000 homes in ailing markets across the country. In one Atlanta zip code, they bought almost 90 percent of the 7,500 homes sold between January 2011 and June 2012; today, institutional investors own at least one in five single-family rentals in some parts of the metro area" [3]
+
"Scaling up portfolios consisting of thousands or tens of thousands of rental homes has made it possible for Wall Street firms to roll out financial instruments suited to “a rentership society”. Securitisation allows big investors to borrow against the value of the properties, to buy more properties and pay off old debt, and acts as a loan that tenants pay back with their rent checks.
Wall Street is no stranger to the housing business in America. But their involvement as landlords of single-family homes is new, and so are the financial instruments they have developed." [4]
On the one hand, this is a fascinating perspective. On the other it's clearly historically incorrect. The Bible already talks about land ownership, and at least by the time of the Talmud they had rental and sharecropping, long before feudalism.
I wouldn’t mind living in FiDi if it were in a brand new loft/studio apartment at an affordable price.
All my SF life I’ve tried to stay in the real residential neighborhoods, the ones tourists don’t know exist. Would be nice to change it up without being rent gouged.
I mean, Terminus House was essentially turned into a large project where people were dumped, an approach that has shown similarly disastrous results in the US for decades. That's quite different from turning office space into desirable apartments.
In what way? In Harlow, government took a hands off approach on zoning and oversight and let the free market figure out housing for the country's poorest.
It all seems very similar to me. I'm sure at the start they also thought they were turning defunct office space into desirable apartments too.
The article linked by the comment I replied to stated this:
> Smith is one of hundreds of residents placed at Terminus House in Harlow by councils in and around London, often many miles from everything and everybody they once knew.
I'm not familiar with the specifics of UK subsidized housing, but it sure sounds like the residents were placed in this building by government.
Yeah, you're not and totally misunderstanding how that works.
Councils used to be the biggest house builders in the UK.
Then the neoliberals decided that was silly and the free-market could sort it. So they banned councils from building houses in the 80s. House builds plummeted from 300k per year to 30k per year. Plus they forced the council to get rid of their affordable housing by letting people buy their council house from the council.
So now, when poor people who are guaranteed a house need one, the council have to buy a slot from the free market (and obviously need to go for cheap).
Now the UK has a housing crisis.
Yay, free market.
Basically, the opposite of what you think. The council didn't 'choose' to put people there, they were forced to by the market and disasterous neo-liberal policies.
What hn_throwaway_99 means is: If the policy was "Homeless people rent a house of their choice and the state pays the rent" or "homeless people get cash to spend as they see fit" it wouldn't matter if there were low minimum standards and shitty houses on the market, as they would be rejected by everyone looking for housing - including homeless people.
In contrast if the policy is "Government pays the rent on the cheapest houses on the market, for homeless people" or "government has a fixed budget and must house as many homeless people as possible" then the legal minimum standard is crucial, because that's what you'll likely be giving to homeless people.
For councils to build houses and build them to a reasonable standard would, as you say, be another option.
As others have noted, this is not the opposite of what I think, or what I argued. I'm saying at the end of the day (without making any comment on neoliberal policies) poor people were dumped into, and importantly, concentrated into this building. There is no 'free market' involved here when the residents had no choice. This is very different from converting office space to apartments and putting those out to rent for individuals.
I think you're arguing at cross-purposes. Terminus House is social housing (no-one's arguing that it's not, and that it's not bad), what they're describing in SF is different as it's commercial, and certainly at least medium-grade private housing.
Whether or not the free market has caused the use of private companies to provide project style social housing on the fringes of cities (short answer: of course it has) is somewhat irrelevant compared with converting city-centre commercial property into private accommodation.
>> sounds like the residents were placed in this building by government
> council didn't 'choose' to put people there
Again, your response isn't to the point being made really - no-ones really arguing against your point. Just because they didn't have any real alternative doesn't invalidate the point that they did it.
Can anyone buy some land and build whatever they want on it, like massive apartment buildings? If the answer is no, how can you claim there is a free market? I think the problem is clearly on the heavy regulations, licensing and zoning that keep companies from building.
> Can anyone buy some land and build whatever they want on it, like massive apartment buildings?
They probably can, but The Market™ may give better ROI to (e.g.) condominiums so who'd want to do it?
With apartments you have to do things like put up with tenants and such, and who wants to do that? With condos you sell the units, create a condo corporation, and then walk away with your money once it's constructed and never think about it again.
Why build rental units for poor people when you can sell to oligarchs who want an asset to park their money in?
> Why build rental units for poor people when you can sell to oligarchs who want an asset to park their money in?
As with everything else in a capilistic economy: because there is profit to be made.
Same as we have very expensive top-of-the-line smartphones and very cheap but functional ones, a truly free market housing economy would provide cheap housing for the poor. The reason why we don't see that happening is because of all the regulations that increase the cost of building, making such companies inviable.
Poor people would benefit the most from truly free markets, if we care about them we should be asking for less government intervention, not more.
> As with everything else in a capilistic economy: because there is profit to be made.
As someone who lives in Toronto, Canada where there's a lot of condo construction, and little-to-no purpose-built rental construction, the "capitalist economy" has decided that rentals are generally not worth it.
At least when it comes to builders: plenty of people are buying condos and renting them out instead of living in them, but apartment blocks seem to be not worth the effort.
I think you are missing the point: if there is "little-to-no purpose-built rental construction" I guarantee it's because of laws and regulations preventing companies from fulfilling demand. Think whether people or companies can purchase any land and build whatever they want on it. No they can, local governments must zone it as residential, and then they usually have strict restrictions on how many units can be built on each area, licenses, permissions, building codes...
You are right to complain about this issue, but don't blame free markets, because they are not free: government intervention prevent the necessary competition for the market to work and fulfill demand.
Also consider financing. Buying a home for owner-occupancy is often subsidized while purchase for an investment property (rental) is not. I don't think this is wrong, but certainly the incentives shape the market.
> No they can, local governments must zone it as residential, and then they usually have strict restrictions on how many units can be built on each area, licenses, permissions, building codes...
Which are exactly the same for condo or apartment.
The reasons are economic AFAICT:
> For a long time, the economics of constructing a rental made little sense compared to a condo. Condo builders get a significant portion of their financing directly from future unit owners, who give hefty deposits to secure their spot and therefore assume some of the risk. Rental landlords, on the other hand, need to front the majority of the equity, assuming all the risk themselves. When a condo building is complete and all the units have been sold and paid for, the developers quickly reap the returns on their investment and move on. For a rental building, the returns take many, many years longer.
Toronto has had vacancy rates <2% for decades, so it's not like rental demand wasn't there. In fact prices peaked just before the pandemic and are now falling because the Airbnb folks are switching to long-term rentals. The price of condos is dropping as well since plenty of people are just selling their Airbnb units and flooding the market to certain extent.
A good number of rental buildings are actually being constructed in partnership with insurance and pension funds, as they need long term cash flows and baby boomers aren't getting any younger.
Might be a real fight with the zoning agencies and other "interested" groups to get it done. I expect any attempt to convert office space will run afoul of requirements to set aside a portion for rent controlled units and that alone could end many conversions.
Before anyone has a hissy, while a good sounding idea it can raise costs for remaining units and price other people completely out of the market again and greatly delay a project as each group wants its pound of flesh. So the very same reason there is a lack of housing will rear its ugly head in this case as well
Looking at an office tower and a residential tower being built side by side by my window. I would never live in a converted office building.
The resi tower has concrete separations between floors and if you are lucky, between flats on the same floor. Office buildings don’t have any real separation between floors as you are supposed to walk on accessible fake floors and have fake ceilings too.
The sound insulation between flats on a converted office building must be nil.
> The sound insulation between flats on a converted office building must be nil.
A lot of the older buildings in SF just have 2x4 walls separating the apartments, with fiberglass insulation. It's not very good at insulating sound either.
If the office conversions are done properly they will be better at sound insulation than much of the existing housing stock in SF.
The real question is, why bother renting in SF when any of the surrounding cities are cheaper? Most of the reasons to live in SF (restaurants, nightlife, cultural events) are shut down indefinitely, and commute distance isn't relevant if you are working from home. Renters can get a lot more for their money in the East Bay or the Peninsula.
> The real question is, why bother renting in SF when any of the surrounding cities are cheaper?
Because the pandemic-related shutdowns are temporary (though of course there will be lasting effects), and rents are 30% off their highs, with many landlords throwing free months and other incentives at people to get them to rent.
Sure, if you need/want to save some money over the span of the next 8-12 months, moving out might be a good idea, but if you want to live in the city, you're going to move back eventually, and moving itself isn't free. I think that's a thing that people seem to be missing: posts like yours seem to suggest that the only or main reason people live in SF is because their jobs are there and they want a short commute. That's... just not the case for many, many people.
I think there are valid arguments for leaving, valid arguments for staying, and valid arguments for moving in. But it depends on each person's individual situation and wants and needs.
Concrete separation also acts as fire barriers, which is very important in areas where people will be cooking stuff. Office buildings don’t typically have stoves with open flame everywhere.
Most apartment buildings in the Bay Area are made of wood with 2x4 wall framing and sheetrock, except for a relatively small number of high rise buildings. We haven't really had a fire problem.
I would assume that office buildings aren't set up with gas lines running all over them, so likely these retrofits will include electric ranges and stoves.
There's still a fire danger, of course, with any kind of cooking, but at least there shouldn't be open flames all over the place.
Is mass the only way? The building I worked in had problems due to us transmitting a lot of noise up concrete columns, and it was solved by isolating the source from the columns. Rubber feet were used to separate the noisey equipment from the floor.
So couldn’t you isolate the noise with false ceilings and walls that are constructed to minimise transmissions?
Both is best, but typically a 6" deep wall with offset 2x4 studs, insulation in the wall, resilient channel, 5/8" drywall (which is also fire resistant usually, with fiberglass in the core) and the right caulk and electrical install will stop all but very loud low rumbles.
The key is the installation and design of the system, though. Miss one vent, electrical cutout, or gap (or even using the wrong length of screws) makes all that material useless.
Usually fire code mandates a 2 hour fire rating for each unit, so you end up with two parallel air gapped 2×4 walls that have sufficient sheetrock on the one side facing the unit the wall was built for to get that 2 hour fire rating.
I've seen one of the offices where I work while it had the ceiling removed for renovations. There were probably 4 feet of space between the ceiling and the floor above. I've also seen the same thing in my apartment and there was about 1 foot of space. I don't think noise will be an insurmountable problem.
There's a category of mixed-use development popular in South Korea called officetels[1] that started more or less exactly this way. Newer ones can be pretty nice because there's a lot more care put into the design of the residential spaces, but the older ones that you can tell are converted offices are...not great, unless you're just a big fan of foamcore dropped ceilings.
How does that work? Typical office space typically has no kitchens, offers limited restrooms (and showers are still rare), has no noise isolation for someone who wants to watch TV, listen to the music, or just snore away into the sunrise.
Outside of some makeshift co-living shelter-like concept it does not seem that convertible.
This is a good point. I explained it to my mother with an analogy to a cruise ship heading toward shore at full speed. Everyone knows this means the ship will run aground, but few appreciate that given the mass (and thus momentum) the ship would travel far inland just scraping across the ground.
The coming economic response to the pandemic has the potential to be like that, basically 10x the 2009 "great recession" and a lot of second and third order effects.
Hard to predict what to do and it's nice to hear the Fed doing their research. The TARP program in 2009 was pretty creative and managed a pretty big thwack without nearly as much pain as their could have been.
Where it ends is anyone's guess, and the worst part will be the second and third order effects it won't be super easy to predict. Things like pension/401K/Superannuation funds with high Commercial real estate exposure leading to reduced retirement income, state pension funds that suffer as big US cities see revenue plummet after the population moves, European cities with vastly worse economies - the UK with London hurts there the most - and the cyclical effect of Italian demand reducing French production, reducing French demand reducing Italian production, ad nauseam.
This will be a multi-speed problem, with some countries, cities, counties, suburbs & streets affected far more than others.
If it wasn't so tragic it would be a truly fascinating thing to watch unfold.
> Things like pension/401K/Superannuation funds with high Commercial real estate exposure leading to reduced retirement income,
An interesting second (or even third) order effect of the 2008-2009 financial meltdown was the collapse of many German state banks (Landesbanks I think they're called) which had invested massively in US-based CDCs and the like. I don't think many people would have predicted that happening in 2005-2006.
It is tragic. You’d think that drawing on all our cumulative knowledge and wisdom from the past, we could handle global crises better than we do today. But we clearly have a long ways to go.
> analogy to a cruise ship heading toward shore at full speed. Everyone knows this means the ship will run aground, but few appreciate that given the mass (and thus momentum) the ship would travel far inland just scraping across the ground.
Are you sure you aren’t basing that analogy on the movie Speed 2?
(mostly scrap yards) -- generally much less mass than a ship that is more seaworthy (a lot of early salvage happens before they get to the scrap shore, ships aren't fully loaded, look at their waterline in the videos). And most importantly much much less velocity (1/2mv^2 goes down rapidly with slower velocity). What is is truly impressive is that they estimate the mass, and know very closely what speed to get them too in order to solidly ground them without wasting a lot of energy getting them going faster than necessary.
The analogy fails to account for the captains investment in wings that makes the ship fly over land (remake offices into appartments with dirt cheap labour).
At risk of extreme naivety, why do failed real estate investments merit Fed support and attention? I thought they were just for maintaining a sound dollar and liquidity and the financial system, not charity for real estate kings.
The Federal Reserve manages both the money supply and unemployment, generally against GDP growth targets.
Real estate --- residential, commercial, and industrial --- is among the largest asset classes in the financial system, and it acts as collateral and backing of loans and other financial instruments. Those in turn affect banks and their own ability to generate loans, themselves much of the total money supply.
When market value of these assets falls dramatically, it has ramifications across the financial system. The 2007--2008 global financial crisis was the result of a prior crash in real estate valuations. Japan's Lost Decade (1991--2001) was the result of its own real estate-inflated asset bubble collapse. (https://en.wikipedia.org/wiki/Lost_Decade_(Japan)). Money available for business investment (already constraind) will further contract.
Additionally, for many people, lacking a defined benefit pension, real estate is a major component of household asset portfolios.
Whilst real estate asset inflation is highly problematic, and is not a contributor to economic growth, sudden collapse is tremendously disruptive. And very much a concern of the Fed.
Of course, special interest intervention may be another factor in decisionmaking, though there's ample reason for interest without any such.
Traditionally the Fed has bought and sold Treasury bonds on open market transactions.
Beginning with the 2008 GFC, this was expanded to buying "distressed assets" (https://blogs.wsj.com/economics/2008/11/10/fed-takes-step-in...). This was, and remains, controversial (as noted in the WSJ link), and poorly understood (I'm still not certain I grasp it well, let alone fully, myself).
My understanding is that the Fed's goal isn't profit, but of buying money into, or selling assets, and hence money out of existence. The Fed's asset-buying targets are better thought of as liquidity-injection targets (where liquidity is money created by the Fed to be injected into the economy). The Fed stabilises asset prices as a buyer of last resort, incidentally to its primary goal of both ensuring sufficient money in the economy and in creating greater ceertainty in asset values which allows banks to function.
The Fed can always buy assets or lend money, as it has the sole power (save the US Treasury) to create money without restriction. And in practice, it makes profit on these transactions (which is contributed to the US Treasury).
The distortionary effects on risk and incentives ... remains fuzzy to me.
This is largely my own conceptualisation, it seems generally to agree with other explanations, and smells strongly of MMT.
Their mandate requires a stable financial system with solvent institutions and sufficient liquidity moving through the system.
By definition, solvency and liquidity at the country level depend on major asset classes maintaining some amount of value.
That baseline changes based on regulations of what can or cannot be used as collateral for different measures, what ratios institutions have to maintain, etc, but there is a floor of some sort at which point the financial system implodes and the economy collapses.
Given their powers and mandate, preventing economic collapse is of the utmost importance.
The problem with this is that no amount of efforts by CBs can cure solvency risk, and attempts to do so only exacerbate moral hazards and make those collateral valuations even more fragile since the fundamentals underlying the collateral valuations, like cashflows and trust between counterparties, will continue to decline.
Wall Street bailouts, letting corporations exfiltrate revenue to off shore tax havens, defunding the IRS, oddly specific tax loopholes, tax cuts on the wealthy, letting lobbyists write the laws. That's just from thinking about it for ten seconds.
It's known as "the Fed put". Whenever rich people have taken on too much risk the fed has been printing money to keep asset prices high so no one gets hurt. Im sure you know that the Fed is even directly buying corporate bonds now. This is paid for by main street through the inflation tax.
Nothing wrong with your question, the thing you're missing is that many of the commercial buildings are not owned outright. What is happening is similar to what happened in 2008 with residential housing, all be it the reasons for the occurrence are very different.
Probably the worst consequence from a failed commercial real estate market will be the collapse of the economy that services and depends on these spaces. Restaurants, trasport, maintenance workers and so on will inevitably fail. This will lead to loan defaults, bankruptcies and eventually this trickles down to every citizen in the community if not the country.
For a historical view of this type of collapse, look into any resource based boom to bust city or town. The sad part is those that can leave, get out long before the SHTF and it's only the middle class to poor left holding the bag. Then when the Fed steps up with a bailout the parasitic rich start showing up again to ride the recovery, lining their pockets once again.
Because the worst case scenario looks a lot like the '08 crash. These developers are highly leveraged, because property values were skyrocketing in major cities. It was a "you can't lose" situation. And now major banks are stuck holding the loans again, and these guys simply won't be able to make their payments.
The Fed does a lot of macroeconomic modeling and forecasting, so their analysts being interested in the effects of the pandemic on particular sectors of the economy doesn't sound particularly unusual (I have no insight in the the particular circumstances referenced in the parent comment of course).
After 2008 the Fed and various gov agencies are constantly on the hunt for "systemic risks" to the economy. They only really care if the failure of one section of the economy could spill over into others. Commercial real estate definitely could pose a systemic threat. I remember they were looking into bitcoin briefly at the height of the bubble but something like that is way to small of a market to rise to the level systemic risk and warrant fed attention
Though I'd dispute that the Fed cares particularly about their valuation. The Fed's dual mandates are inflation and unemployment, not balance sheet returns.
Some of the largest investors in commercial real estate are private equity and other investment funds that invest on behalf of the largest pension funds in the US. A commercial real estate blood bath could also result in a blood bath for the elderly and those who will retire in the near future. But also it could set off a chain reaction.
In terms of suffering, I'm more worried about the loss of support workers and supporting businesses over the long-term. Especially in a place like Chicago where the installed base of offices is much much larger than SF, and where portions of the future sales tax revenue has already been securitized and sold to investors.
Developers in Chicago are building as fast as they can right now. It's counterintuitive to people on the outside, but from what I read, it's because labor, material, and capital are dirt cheap. So the developers are putting up new skyscrapers and other mega-developments so they're in a good position to take advantage of the recovery.
Dozens of new residential towers have been announced, and at least a dozen are under construction, including one that's almost finished at 101 stories tall.
Exactly the same in NYC. Real estate investment is planned on 50-100 year basis. We're in for a 3-5 year blip from a utilization perspective, but on longer timeframes, now is really just a great time to add to the capital base.
You are correct, metal prices are up 3x and wood at least 2x. Building might be happening due to demand, but not because the materials are cheap. It might be possible that labor in big cities might be cheaper, but I doubt it.
I'm quite interested in what your relative thinks might be the impact of the looming property tax reform in CA; if the ballot initiative passes next month then commercial real estate will no longer be able to enjoy the prop13 caps by using pass-through entities to own the buildings, and changing the beneficial owner of the real estate holding corporation instead. Plunging rents plus escalating tax liabilities seem like a perfect financial storm.
Oh relax. They're not going to implode the buildings and nobody is going too die. Rents will fall, some bond holders will default, but at some cost point that real estate has value to someone. Rents are not going to zero.
Basically this. Lots of people leave. Lots of companies go fully remote or are wound up. Lots more people and companies get more bang for their buck in the real estate market. Some real estate businesses tank. The market finds a clearing price.
There is a mass exodus of people from HCOL cities as jobs go virtual as well as a massive amount of office downsizing.
Residential real estate may be okay in the cities receiving this exodus in the South, Midwest, Texas, Idaho, etc. but as for HCOL cities I’m just not sure. There may be enough demand to at least cushion it.
Commercial will definitely be a bloodbath of epic proportions, especially in formerly hot markets.
Edit: too early for good stats but here are some cities that seem to be receiving HCOL expats as determined by the highly scientific process of observing anecdotes:
Phoenix, Santa Fe, Boise, Denver, Dallas, San Antonio, Austin, Atlanta, Cincinnati, Pittsburgh, Chicago... I’m sure that list is not exhaustive. Those are just some I have seen.
Those vary in terms of how not-HCOL they are but all of them are much less expensive than California, NYC, or the Seattle area. Much better places to live if you don’t have to live somewhere with $500k to $1.5m “starter homes” and other absurdities. Now that we are discovering that we can actually use this Internet thing, good riddance to that madness.
Housing prices are actually already trending back upward in the bay area. I don't think there will really be that much of an exodus. Your company might let you retain most of your salary post-relocation but once you change jobs you'll have far fewer prospects. Also the internet doesn't help with timezone differences.
House prices are being buoyed by insanely low rates, but if offices are downsizing CRE is toast.
As for tech hubs, they are now only economically rational if you are high up at a large FAANG or similar company that is able and willing to pay huge salaries.
Startups, bootstrappers, and labors of love are not going to happen there unless they are lavishly funded or only comprised of straight out of college folks willing to live on couches.
There's a lot of variation in that trend. Prices are up for the kinds of places you'd like to WFH indefinitely from (large detached houses in nice neighborhoods), and down for the kinds of places you wouldn't (shoebox studios downtown).
There is no evidence of exodus to other cities. There is exodus to suburban Bay Area where you can still commute 2-3 days a week and buy a 3k sq ft home. Bay Area real estate is no fire now with median price over $1mn and up 20% over last year
https://www.sfchronicle.com/business/networth/article/Bay-Ar...
How about Cape Town? Bali? Toronto? Athens? Rio? Remote work isn't even close to priced in yet and it's not the cost of living that needs to readjust - it's the salaries!
This has happened every few years in corporate real estate for the past half century (Sam Zell's biography is a good take).
Every. Single. Time. Valuations too high. Debt too high. Equity too low.
I am pretty cynical because I have read a bit too much history and seen this so many times working in investment management but...so what? Some rich people lose a ton of money...okay? Capitalism has losers. You lose.
Also, in the last crisis, a ton of people (particularly Blackstone) made a ton of money buying huge deals at the very top of the market. None of this excess came out of the market. Lots of people who borrowed tons of money were just able to take their paper to the Fed, and keep playing.
Point taken, but I don't think you're taking into account the monumental impact of COVID-19. We've never had such a large, immediate, and impactful shift to work culture.
Working remote was still a niche idea at the beginning of 2020, now it's ubiquitous. That has never happened before.
I think the shift to remote work is temporary. There will almost certainly be a relatively large crash in commercial real estate, but it will recover, probably within a year or maybe two.
A permanent shift of even 5-10% of the workforce to permanent remote (which _will_ happen; far too many people with negotiating power have realized that this is an option now) will drastically alter commercial real estate.
It doesn't seem that way. Technology is making it more and more possible, companies like Dropbox, which have never supported remote work, are even shifting over.
I'd bet within a year or maybe two tops that the vast majority of "permanent" remote companies will have reverted to be mostly or entirely on-premise again. One or two might last, but most won't.
Why do certain companies succeed as a remote company (Gitlab comes to mind) and others wouldn’t? I think you’re probably right, but I’d like to understand. Will working from home force a change in management style?
To compensate for lack of socialization in the office, I notice that companies like Gitlab organise corporate gatherings were all employees can meet in person. Open Source projects teams meet at (the fringe of) Fosdem and probably at their yearly conference a second time.
1) size
Non-linear diseconomies of scale mean that all other things held equal smaller companies are more likely to be able to pull it off than larger companies
2) first mover / selection
I’d guess that there’s a relatively small fraction of employees that can be competitively productive in an indefinite WFH scenario. Companies that were always remote first and got there before everyone else were able to pick off these outliers. Companies trying to convert to it have the luck of the draw and further as the market saturates everyone will have a harder time chasing after these few.
Agreed. Very hard to estimate that effect. With corporate real estate, it is inherently local (you cannot export an office) so the question is about the swings in vacancies.
Have some markets seen ~15% vacancies before? Yes, corporate real estate is very cyclical, no-one builds for years, and then the market adds 40-50% in a few years. But when it gets to 30-40% then you are probably looking for examples outside the US...and SF will be the worst-hit market, others should be less.
But...the world will move on, write down the value of property, assign losses, pay off remaining creditors, the world moves on...I don't think anyone could say a fault of the last ten years has been that shareholders/creditors were forced to swallow too many losses. The strength of a capitalist economy is that losses can be assigned quickly, and everyone moves on...in theory.
You're right, things will move on, and I am not (personally) all that worried. Nor are the creditors who can afford to eat a loss.
My concern is more about the ripple effects. Many low-skilled workers rely on service work, and servicing corporate real estate is a real industry (janitorial services, managerial duties, parking lot attendants, plumbers, even construction). They are already having a pretty hard time of it, and if this industry vanishes, "moving on" may mean going out on the streets. San Francisco, Los Angeles, New York, and San Diego have enough homeless already.
> I wouldn't be surprised to see established companies expand on cheap real estate and start offering closed offices to employees.
As much as I like closed offices, I think that companies that want to save money still won't offer them. The cost of closed offices isn't just more square footage; they also incur construction costs that open office space don't: walls, doors, their own heating/cooling/ventilation ducts, their own lighting and electrical wiring, etc. And an office layout with closed offices is more expensive to modify.
Warehouses is another one (in addition to coworking). I am not sure how easy it would be to rezone (some places have an industrial category that is separate from office/residential) but being able to fulfill orders out of city-centres is obviously attractive (but debt and equity would go to zero then, you could probably maintain prices with coworking but warehouse space is going to be a 90%+ loss).
Remote work is ubiquitous among jobs that can be done remotely. In reality, something like 30% of the US workforce has been remote due to COVID-19. That's not a small amount, to be sure, but that's hardly ubiquity.
It seems unlikely that a commercial real estate crash wouldn't have second-order effects on residential. After all, if none of this commercial space is getting used, there is less of a reason to be interesting in the residential housing that surrounds said commercial space.
Depends on what is meant by "commercial". If we're talking about retail and restaurants and bars, then sure, the loss of those things will make it less attractive to live in/near those locations.
But if we're talking about office buildings, and the reason for the collapse is because people don't need/want offices at all (not because those offices are moving elsewhere), then I think it'll have a much smaller effect on the residential markets.
What I think has a higher chance of hurting residential markets would be hiring moving away from HCoL areas because companies believe that most workers can be remote (and workers in LCoL areas are cheaper comp-wise). That hiring movement already seems to be happening, though SF home prices haven't changed much. There might just be a delayed response to that, though.
We're seeing a shift in demand across different sectors of the real estate market, not a destruction in demand. The market for office space is cratering, as is the market for 1BR apts/condos in dense urban cores. But most of the people who would've occupied those buildings are still working, they're just working from home. The market for SFHs (particularly large suburban ones with home offices) is exploding. I'm seeing some in Mountain View and the SF peninsula go for ~$350-500K (up to 15-18%) over asking.
This is mainly a concern for one year leases that were renewed this March/April/May, which won't be renewed in 2021. There are many companies which budgeted for a few weeks or months of work from home, now they're transitioning permanently and the office space they were using is no longer needed.
One year leases on commercial office real estate?!? That's unheard of around here (Boston). You'll be lucky if you find a commercial landlord who will rent to you for 5 years instead of the more usual 7, 10 or 20.
Sorry for my lack of semantic nuance. Most of the leasers rely on payments from their subletters to pay their leases, so the effects will translate over in either case, just with more "buffer time".
There are also a fair amount of 1-year direct commercial leases, depending on the area.
But the decision to terminate happens when the lease expires at any point after the pandemic happened, not exactly as the pandemic started. If you signed a 1-year lease in 2019Q3 and then realized that you're going to permanent WFH in 2020Q2, you let the lease expire in 2020Q3 and count yourself lucky. So the impact of this should be spread across the year following lockdowns/wfh, not all concentrated in 2021Q2.
Of leases 24 months long the average lease should be 12 months in right now (given steady state). I.e half of them expire in a year. Lets say that they realised this summer that things will be different then the effect should gradually start to show almost immediately.
I think that was GP’s point. We have a few one-year leases on small spaces, but most of ours are 5 year leases, usually with renewal options, sometimes with break options (for $$) at 3 years.
Yes, and we are seeing it, but there are many leases continuing until Q2 2021 (and beyond). The past few months have seen a slow and gradual decline, but a fair number of leases are still being paid and are locked in. Q2 2021 is when that decline accelerates and drops off a cliff.
I think the data from the article on subleasing really supports this. The absolute explosion of all this unused office space available for sublease means there are already loads of companies who wish they could escape their rent payments, and very few of them will probably want additional space any time soon.
Don't know squat about corporate real estate, but why would lease terminations occur en masse in Q2 2021?
I would expect that a sliding window of leases would be expiring all the time, and that the bloodbath would be slightly more gradually occurring right now.
What is normal? If companies can be as productive (or close ) without the expensive office space - would they all go back to what had been considered “normal”? I doubt it.
Same in Boston —- the office space market is a bloodbath. I have little knowledge of the commercial office space market but it’s not difficult to imagine how mass defaults in this sector could trigger a crisis.
I tell you what: if that comes to pass and I'm working remote, I'm looking forward to getting a sweet lease on a 150-200 sqft solo office with a nice view.
I looked at various online domains a few years back, and STL Fed publishes far more articles than the rest of the Federal Reserve branches. ~106k STL vs. 6--8k for others. federalreserve.gov publishes about 1/2 what stlouisfed.org does.
