There’s just no going back, and commercial real estate has a whooping coming for it. No one likes to hold a loser in their portfolio. Wealthy, well-connected people who are invested in commercial real estate have a perverse incentive to hype up their investment before they can dump it as soon as they can. Only then will they speak with clarity about how the industry is doomed. No amount of bailouts or subsidies will save it. There will still be a need for office space, but it will be more limited AND the offices that do remain will need to be upgraded to suit their new role as an awesome, high tech, inspiring place for occasional company meetups.
> There’s just no going back, and commercial real estate has a whooping coming for it.
And I don't care. They can rot. Really.
But if they drag everyone else down with them... god help us all. Can they? Could they, for instance, destablize the stock market, or cause a cascade of bank runs? Is it a matter of choice on their part, or will they also be helpless to stop this supposing they even want to stop it?
I too laugh at my enemies as I see them sink down into the quicksand, but first I check if they've grabbed onto my ankle.
For anyone reading this, I'm not being rhetorical. I do not understand the economics of this well enough to know if they're going to blow up the world on the rest of us. Are they?
Probably not, by itself, but I'm worried that the same interest rate forces that are breaking the commercial real estate market affect the stock & corporate bond markets, and that absolutely can drag you down as well.
The CMBS market is about $1T in total asset value. It's comparable to Bitcoin. It's significantly less than the $9T in residential MBS that caused the 2008 crash. So if CMBS crash is likely to have financial effects similar to a crypto crash (of which we've had several) or the drop in value of FANGs (total CMBS market size is about the same size as Meta's market cap).
The problem is that commercial real estate's woes are caused as much by the interest rate hikes as they are by WFH - notice that CRE (outside of certain locations like SF) did fine in 2020-2021, but now has really big problems. And the interest rate hikes absolutely do affect corporate bonds and the stock market, and yet have not really been priced in. Corporate bonds exhibited a "taper tantrum" when interest rates went up to 2.25% in 2018; rates are now more than double that. Most of this is long-term debt coming due 2025-2027, but if rates do not drop before then, we could see corporate bankruptcies and unemployment that make 2008 look like nothing.
Even attempting to drag the economy down with them (not possible) would be a waste of their time, because that is ultimately futile and they know it. What they need to focus on is how to repurpose their real estate portfolios. For example, it’s not trivial to convert a skyscraper office tower to a mixed residential and retail condo building. Now multiply that by thousands of different buildings in different locales with different zoning laws and different calculus for convert vs. keep vs. demolish. A profit maximizing commercial real estate company would put most of its effort into that, after flailing and trying to maintain the previous status quo. If it doesn’t, it will go bankrupt earlier, and new ownership will push forward changes that are necessary in the new WFH reality.
