Posted on 06/17/2023 3:52:18 AM PDT by FarCenter
TOKYO -- Office demand has fallen around the world as more people work from home and businesses accelerate job cuts to cope with slow growth. At the end of March, vacancy rates hit the highest levels since the global financial crisis of 2008 in 10 of 17 major cities.
It is not just office space that has seen weak demand but hotels and other commercial facilities are also facing declines in operating rates. This raises concern about the likelihood of financial instability caused by soured real estate loans.
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The vacancy rate in the San Francisco area neared 20% at the end of March, according to CBRE, a commercial real estate service provider. The market has been buoyed by IT companies, such as Salesforce and Twitter (now X Corp), but demand has been on the decline since autumn 2022 as many IT companies slashed workforce amid slow growth.
The office market is in the doldrums outside the U.S. as well. The ratio of vacancies to available rental space in Hong Kong has risen above 15% to a record high, as mainland Chinese companies cut back on office space and U.S. and European businesses moved to Singapore and other places. The vacancy rate in Tokyo is lower than elsewhere but is nearing 5%, a level seen as the threshold between expansion and contraction.
Worldwide, the office vacancy rate came to 12.9% at the end of March, a touch below the 13.1% posted in the 2009-2010 period following the global financial crisis, according to CBRE. With less foot traffic in city centers, shopping malls, hotels and other commercial facilities have all posted declines in operating rates.
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The outstanding balance of loans extended by U.S. commercial banks to owners of office and other commercial facilities has reached nearly $3 trillion, 70% of which are from small and midsize lenders. Midsize banks, awash in cash created by monetary easing, poured the money into commercial real estate. The growing collateral value of property also whetted their appetite.
But excessive real estate lending could drive banks to the wall. Prices of U.S. commercial properties fell 15.3% in April from a year earlier, the largest drop since September 2009, according to U.S. research company Green Street. Many properties have become less profitable as tenants moved out, while it has become costlier for businesses to raise new funds.
When it is difficult for real estate owners to refinance debt, they have to sell holdings, further driving down the prices and collateral value of properties and making it harder for lenders to recover their loans. This could become a major management issue and make banks more reluctant to offer new loans -- a scenario regulators fear the most, as it would hamper the economy.
I don’t need any. Thanks.
lower rent
everybody wins
except slumlords
Indeed.
I was hoping the Office of Emperor would become available and they would pay me to take it.
I was hoping the Office of Emperor would become available and they would pay me to take it.
Im sure in America they will fill them with the homeless on our dime
The availability of financing, the availability especially of government guaranteed financing, is key to understanding the market and even affects supply and demand.
We have the Fed raising and lowering interest rates usually to accommodate a spendthrift Congress and the Congress in turn contriving subsidies or guarantees of financing to overcome the market effects of raised interest rates originally caused by government spending and borrowing.
When the commercial real estate market crashes as a knock on effect of government missed placed policies, government, as socialism always does, will inevitably contrive new programs to undo the damage it has done to the commercial real estate industry. The remedies in their turn will ultimately further derange that market.
You can mostly thank 5G, Zoom, and the cloud for this. I put my money in undeveloped real estate but it’s just like the stock market. You watch it too closely and you get panicked, but over time it keeps going up. Not the best or fastest returns, but not much risk either.
Commercial and Industrial real estate has been in decline for a long time, the banks are idiots to have parked that much of their money into them IMHO.
Walk around your local malls, some are still busy, in key places, but others are running about 30% vacancy or higher. Amazon put a stake through their hearts and it’ll only be getting worse for them, also IMHO.
I have no idea how this economy is getting propped up. Massive inflation, commercial property vacancy, soaring interest rates. No slowdown evident. Doesn’t make any sense.
Government should incentivize developers to convert vacant buildings into housing for Biden voters.
https://nypost.com/2023/05/16/nyc-business-officials-scour-property-lists-to-house-migrants/
Deep State is doing just that.
An economy based on debt requires churning of debt, but that portion of the economy produces nothing -- except more debt.
Looking further at a rather silly article, one sees the problem in an interesting "word."
From the article: "With less foot traffic in city centers, shopping malls, hotels and other commercial facilities have all posted declines in operating rates."
Human beings, individual economic entities, are "foot traffic." As human beings do not come to, work at or use commercial things -- not human beings -- the things, whether they be office space or retail space -- lose value. Duh.
For all the chitchat about numbers and the "economy," it all comes down to HUMAN economy. People consume things. People make things. When too many people are only "foot traffic" to the lending class, and the focus is not on producing products for others who then also produce, the reason for "commercial" real estate simply burdened with debt from "excessive real estate lending" withers.
Monetize everything, saddle with debt beyond the ability to produce to pay debt service, and the house of cards teeters, ready to fall.
I don't know where you are, but industrial real estate has been one of the hottest sectors of the market over the last decade.
In some areas where I do business, lease rates on warehouse space are higher than what you'd pay for office space.
Construction for both business space and housing is out of control. This time, speculators have been building high priced condos everywhere, while the media moans, “There is no *affordable* housing.
The high priced condos remain empty, but their prices do not drop one red cent. And there is little or no profit to be made in building *affordable* housing, even if you can find a city that allows it, which you probably can’t, and can overcome the profound and motivated NIMBY vote in opposition.
Face it, who wants instant slums in their neighborhood?
Business space is more nebulous, but space owners are again, not willing to drop their prices any time soon. So those properties also remain empty.
Didn’t know this was happening elsewhere to, but it makes complete sense.
Short term there will be some pain from the change but long term, think of the savings in cost, less fuel consumed, etc etc. Its so much more efficient to be able to work from your home.
Selective statistics! He doesn’t mention the 25% rise the year before and that the index is higher than pre-COVID.
“Commercial and Industrial real estate has been in decline for a long time”
Two declines in a generally upward trend. 2008 and 2020. And both followed a sharp rise.
https://www.greenstreet.com/insights/CPPI
It does when you look at the massive increase in credit spending.
The brick wall is coming...
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