We've spoken in the past about how commercial real estate (CRE) and those who own or have invested in it are in serious financial difficulty, thanks to the millions who've worked from home since the COVID-19 crisis, and their reluctance to return to a 9-to-5 office job routine. As a result, many business districts in our cities are tens of thousands of workers short of their previous volumes, with dire consequences for those who depended on those workers to make their own living - restaurants, fast food joints, food carts, service providers, and so on.
This tweet yesterday puts it in a nutshell.
A 262k sq ft building in Ohio has just sold for $2.4 million, or $9 per sq ft
Yes that's not a typo - it literally sold for $9 per sq ft
It was the former site of FedEx Custom Critical in Green, Ohio [near Akron and Cleveland]
The commercial real estate 'correction' has gone from concerning to an outright apocalypse, primarily impacting office properties in most cities across the US
$9 per square foot isn't so much a sale as a steal! ProEst estimates:
Considering the elements of design, architecture, construction, furniture, fixtures, IT implementation, and more, the average cost to build out an office is $196.49 per square foot.
In other words, at the national average cost, that office building in Ohio (click the image above for a larger view) would cost $51,480,380 to build and equip today. It's just sold for less than 5% of that amount. If that doesn't indicate a collapse in the commercial real estate market, at least in that area, I don't know what will!
I'm very grateful I have no investments in commercial real estate right now . . . not that I've ever had any; in investor terms, I'm the smallest of small fry (not even shrimp - more like plankton). Still, that's truly scary.
Peter
a substantial portion of the buildout costs (IT and furnishing offices) will be paid by the new owner of the building to equip it the way they want.
ReplyDeleteVery few building owners move in without doing quite a bit of work, and when a building is sold, the furnishings are sold separately (and any IT that was installed even a few years earlier is probably pretty obsolete)
so it's not quite as bad as you are saying, but it is bad, and the banks that hold commercial real estate are going to be unable to keep hiding the problem at some point.
David Lang
Recently a company sold their oil wells around a town near me to a small start up. The previous owners had 20 field guys and 30 people in the regional office (secretaries, admin, managers etc) plus they had 300 in the corporate hq 2 hours away
DeleteThe new owners kept the field staff but ditched the regional office people.
The office building was 8 years old and 10k in size. It sold for a dollar and came with all the furniture intact. A buddy worked for the new owner and he said the coffee supplies would have been 10years worth for the 30 people.
So yes some offices being dumped by companies that know they are unsellable
Exile1981
Along with service providers named in your post, there is also the financial deals negotiated between city/county Gov'ts and companies. "We'll give you a multi-million dollar tax break if you build your office in our city." Gov'ts don't do that without the expectation of recouping multiples of that tax break by the amount workers spend while they are in the office. I'm convinced that a lot of the impetus behind the "Return to Office" push is Gov'ts saying to said companies, "We gave you a tax break expecting to see workers here spending money. Where are the workers? If the workers don't show up, maybe we should look at renegotiating the tax breaks?" And the companies offer the workers some facile reason to Return to Office and convince the workers that they should all be happy to do so. Or alternatively use the big stick,
ReplyDeleteYou will Return to Office or else.
Like the Bond Market the Commercial building market is in EVERYBODYS company run 401K's and such.
ReplyDeleteSo, a collapse in the Commercial Building market is also a Bond failure enroute.
Intertwined and such are the major banks, insurance companies and retirement companies (often one and the same effectively).
The powers that BE will try to keep the Sunny Side UP until the elections as the sudden loss of half or more of people's retirement savings and banks collapsing would be BAD for the Democrats.
Propaganda works UNTIL it doesn't.
Got a very deep larder? Safe water, food and ability to repair your shelter that is APT to get damaged in the coming spiciness is important.
Note that this is NOT an office building or a typical warehouse - it's a former FedEx site, which means it's highly customized for a specific purpose and will need major work to use for anything else.
ReplyDeleteAlso, apparently it used to be easy on/ easy off of Interstate 77 but traffic changes have made it much more difficult, which is why FedEx left.
While this property did sell cheap, there are specific local reasons for that.
Don't forget that real estate is the ultimate local purchase and it can be heavily influenced by local conditions, such as in this case.
I wonder if the local government screwed FedEx and potential buyers know it. The winning buyer apparently has no plans yet for the building.
For more information: https://news.yahoo.com/know-sale-former-fedex-building-111222153.html?ref=upstract.com
The everything bubble. The prior RE bubble was not allowed to re-price, though we did see many deals like the one above.
ReplyDeleteIt was a squeeze and a recap but not a reprice and consolidation driven by demand and other real-world conditions.
A lot of paper wealth was destroyed while the usual suspects were able to aggregate a lot of dirt and quality physical assets at steep discount to replacement cost - which historically is a sound metric of downside protection particularly with the long horizon investors in the ponzi stack like insurance and pensions.
Instead the entire market moved further into financialization and capital structuring with zirp capital which not only shifts the concept of risk premiums into laughably thin metrics but also amplifies the already problematic surplus of capital relative to opportunities which inflates paper values (artificially depresses cap rates / risk pricing) and spurs over-supply based on financial speculation.
The same thing happened in corporate debt which is why the global bond market is even more precarious. And how corporate capital which should have been lean during such a downturn was in fact inverted by the zirp such that debt could be acquired to buy back equity (stocks), fund expansions divorced from fundamentals, and produce a corporate “boom” based entirely on speculative growth which just happened to need a lot of office space (and expensive urban apartments) which was the reach around to justify lavish office construction and “urban renewal” which dovetailed with the obama grift of fed money and the multitude of local tax and regulatory grift as well.
After the last fake crash instead of “blood in the streets” there was 10x cash/liquid capital-in-wait to acquire and re-cap everything.
A market collapse or even correction that does not draw down liquid capital but instead *somehow* produces a capital surplus and a mark-to-market discount is an odd sort of condition that while brutal for some is really just a lot of lube for an even greater bubble.
Now we see massive drawdowns in office space requirements, industrial decline, retail decline, and high end residential decline while we watch “stocks” go to the moon.
The policy and greed of the biggest ponzi in human history is playing out in parallel with some alternate reality narrative much in the same way we are meant to believe in “voting” and the potato in chief runs “america” sans borders.
Everything is cross-collateralized now. The entire marketplace is so leveraged, re-hypothecated, derivative, and subsidized by top down central bank printing and policy there is simply no way to unwind the “bad deals” from the “good” or re-price risk because there is simply no room in the stack for anything but moar capital, more fiat, more debt and thus why the borders are wide open so that human capital (the real collateral) can also be artificially pumped.
Having worked for decades where psychopaths, liars, midwits and middlemen and every jerkoff aspiring millionaire next door with an air bnb ADU in his back yard strip mining social capital and goodwill and the future of his grandkids for moar stuff I pray that God will bring the hammer and let the empire of lies finally fall.
That we all spend so much time on our own little fiat empires of paper wealth, our “investments” and home equity and 401ks while we watch the essence of who we are evaporate without so much as an inkling of how that is all related is why we will one day all feel the pain of reality. I hope it was all worth it.
Meh.
ReplyDeleteThere are entire Rust Belt towns for sale for $1.
Real estate is a physical item, but whether it's an asset or a liability depends on the market at that location.
As ever was.
This is just naked capitalism, working as designed.
In the words of Adam Smith, "Well, Duh!"
I live within a mile of this facility. Here's the story about Fedex moving out in a local paper.
ReplyDeletehttps://www.beaconjournal.com/story/news/local/2023/09/13/fedex-custom-critical-moving-green-operations-to-richfield/70841533007/
I'm not involved in local politics but rumor has it that the city was playing some shenanigans with Fedex and they took their ball and went away.
Yes these specialized buildings are an asset class of their own.
DeleteThe build-to-suit, corporate hq, R&D and other hybrid types have a steep exposure to functional obsolescence should the original user go away.
Public-private deals and municipalities that gibe bennies and breaks often get stuck. There are legions of amazon properties that would be similarly problematic should that behemoth roll back.
The costs to reposition and remedy the structural elements to face a general market user can be prohibitive as can the cost to carry until a comparable user might take it over. Its an asset managers worst nightmare. Which is why the rents in these deals are structured above market and the return expectations should be similarly elevated to account for this scenario. But of course when capital is flush and cities get a hard-on for “jobs” and taxes, those fundamentals get squeezed.
While the low psf value in this deal likely reflects the out-of-market physical and functional position of this particular building it still reflects the over-arching reality which is that there is a significant portion of commercial RE across all categories that are similarly impaired for a variety of reasons indicative of the macro-economic fundamentals.
These impairments gave yet to be priced and digested.
And as others have mentioned, the exposure is primarily to institutional investors that rely upon a certain return as well as a low appetite for absolute loses.
While the institutional market has the ability to throttle these losses and delay reality being reflected in the bottom line at some point it breaks down and the cascade event peels the curtain.
Then the second and third order problems emerge. Like major pensions and insurers breaking the floor of their current pay obligations, municipalities losing tax revenue, offsite infrastructure obligations associated with these projects failing etc.
I get the resistance to the constant stream of ZH doom porn, but this is absolutely coming unless you believe the phantom economic data of the State and ignore your lying eyes.
There is always “money to be made” even in collapse ie “capitalism” or whatever we call it, but that is a far cry from the entire purpose of an economy which is to serve its people and reflect the reality of their values and desires for living their way of life but of course thats not who we are so…
Question!
ReplyDeleteWhy do I want to go downtown, risk my safety travelling in the subway - and I don't mean catching COVID, being deliberately jostled(?) by huge teenagers while holding a pole/strap trying to maintain my balance. Why do I, upon exiting and walking up the stairs have to watch another person being knocked down the stairs and relieved of their possessions. Why, when walking to the office do I have to fear for my life watching people being beseiged by the drug-addled beggars. All of this taking place with the police leaning against the near-by walls not wishing to interfere lest some judge slap their wrists and humiliate them in open court.
I think I'd much prefer to work from my home, purchase the necessary dry goods through Amazon, and have my groceries picked out by someone else and delivered.
Go to work, no thank you, not on your nellie.
Been working from home for 4 years now and plan on finishing what little is left of my career doing so. It wasn't my idea but as far as I am concerned the people who made this decision can live with the consequences. The savings in gas alone from not commuting constitutes a raise. Jeans and T shirts or sweats are the uniformn of the day, and I make reasonable meals in my own kitchen. I also noticed that my annual bout of severe cold/bronchitis/flu has dissapeared. Coworkers aren't friends, they're just coworkers and this situation has really proved that out because I don't miss anyone at all at a corporation I've basically been with for my adult life.
ReplyDeleteAs far as I'm concerned we should start tearing down commercial real estate and putting in trees and parks. The entire organization and design of our society needs a rethink.
You may think you don't own any commercial real estate, but your banks, the holder of pension funds, your IRA, etc all have such holdings and thus will effect you directly.
ReplyDeleteJokes on you, I've known like a lot of Xers that we'd never have a "retirement" so I don't have those kind of investments. Merely tangible items and tools, I'm dying in the saddle like most of my ancestors.
DeleteAesop reference your quote:
ReplyDelete"Meh.
There are entire Rust Belt towns for sale for $1."
How well did that work out for the families and businesses that USED to Live there AND while you're at it STILL Live there?
Flint Michigan springs to mind, a real gem of potential there.
If you havent learned already, there is no point in engaging with the meh.
Delete