Commercial Real Estate Catastrophe Coming?

[greggles]

Commercial real estate is looking like a ticking time bomb around the world, following profound COVID-19 related changes to the global workforce, the most obvious of which is the move to work from home.

As a point of discussion I recently came across the following news article:

Chicago Office Tower Sells at Massive Discount, Spotlighting National Plunge in Prices
Investor Igor Gabal Pays $4 Million for Half-Vacant, 12-Story Building in Loop Business District

A 12-story building in Chicago’s Loop business district has sold for $4 million in one of the most jarring examples of falling values for office properties throughout the United States.

Investor Igor Gabal bought the leasehold interest in the tower at 300 W. Adams St. in late December out of financial distress, he told CoStar News. The price is a far cry from the $51 million the property last sold for in 2012.

The amount especially stands out for an office building that is near public transit and the high-profile, 110-story Willis Tower, where Blackstone Group recently invested $500 million on an expansion of lower floors. Past owners of the Chicago landmark at 300 W. Adams have included late real estate billionaire Sam Zell and Sterling Bay before that firm became one of the city’s most prominent developers.

$51 million to $4 million in 11 or 12 years is a staggering decline in value. What happens when other similar commercial properties need to be re-financed and the debt on the property far outweighs the market value of the property? The only logical answer is a fire sale.

China has huge commercial property issues and as far as I'm aware the commercial property market in all western economies is facing similar issues to the ones being experienced in the USA.

It was property that triggered the GFC back in 2008, albeit not commercial property. However, I have concerns that history is repeating itself with minor variations and the global commercial property sector could be heading for catastrophe.

 

[Value Hunter]

Office property is just one type of commercial property. Well located shopping centers are doing fine and Industrial warehousing is doing phenomenally well. There are also other commercial property types which are doing fine. But yes office properties are in trouble.

 

[divs4ever]

Commercial real estate is looking like a ticking time bomb around the world, following profound COVID-19 related changes to the global workforce, the most obvious of which is the move to work from home.

As a point of discussion I recently came across the following news article:



$51 million to $4 million in 11 or 12 years is a staggering decline in value. What happens when other similar commercial properties need to be re-financed and the debt on the property far outweighs the market value of the property? The only logical answer is a fire sale.

China has huge commercial property issues and as far as I'm aware the commercial property market in all western economies is facing similar issues to the ones being experienced in the USA.

It was property that triggered the GFC back in 2008, albeit not commercial property. However, I have concerns that history is repeating itself with minor variations and the global commercial property sector could be heading for catastrophe.

it will be interesting to see if the unraveling of commercial office space is wide-spread around the world , or only in specific areas ( say UK , Democrat controlled states in the US )

remember it is not the ownership of the commercial property itself , as much as the leverage ( loans ) on those properties often in a complex web ,

 

[frugal.rock]

Office property is just one type of commercial property. But yes office properties are in trouble.

Some of these office properties are being converted to residential.
No idea on figures though.
Under the table deals.

 

[Value Collector]

I increased my stake in some office buildings and industrial buildings today. It’s looking pretty good to me provided you are buying as a long term hold.

 

[divs4ever]

I increased my stake in some office buildings and industrial buildings today. It’s looking pretty good to me provided you are buying as a long term hold.

industrial , i agree , am not so sure on office , i took a punt and targeted 'storage units '

converting office space into inner-city residential might be difficult depending on municipal ordinances

and with office space the short-term risk will be contagion , some areas i expect to be toxic , but which ones , i remember re-GFC some expensive locations became abandoned and were later demolished/rebuilt as 'inner-city living ' .. but but now we have a skill-shortage to add to the complexity

good luck , the big game-changer is whether various levels on government will expand their footprint or reduce head-counts in the near/mid term

 

[Dona Ferentes]

of the listed REITs

• Dexus shares are trading at a 33 per cent discount to their 30 June net asset value,
• Growthpoint Properties Australia is trading at discount of 42 per cent
• Cromwell Property Group is trading at 55 per cent discount.

There's a report out by JLL stating that office vacancy rates are at a 19 year high at 14.9 per cent, but things are somewhat nuanced. Two thirds of CBD vacancies are in 17 per cent of office buildings, and these are mainly older and often held in unlisted trusts or privately owned.

Expect to see more of these buildings withdrawn from the market, which history says is likely to occur in three ways: redevelopment into hotels; redevelopment into residential units; or demolition for redevelopment into new office stock, but this found take time.

In newer, better-quality towers, occupancy and rental growth has remained robust.

 

[divs4ever]

of the listed REITs

• Dexus shares are trading at a 33 per cent discount to their 30 June net asset value,
• Growthpoint Properties Australia is trading at discount of 42 per cent
• Cromwell Property Group is trading at 55 per cent discount.

There's a report out by JLL stating that office vacancy rates are at a 19 year high at 14.9 per cent, but things are somewhat nuanced. Two thirds of CBD vacancies are in 17 per cent of office buildings, and these are mainly older and often held in unlisted trusts or privately owned.

Expect to see more of these buildings withdrawn from the market, which history says is likely to occur in three ways: redevelopment into hotels; redevelopment into residential units; or demolition for redevelopment into new office stock, but this found take time.

In newer, better-quality towers, occupancy and rental growth has remained robust.

there was already a trend for ( some ) new inner-city buildings to be multi-purpose ie. retail space on the street level floors , then , administration/office space , and residential at the higher levels , the fly in the ointment will be shoddy construction practices by some construction players

 

[moXJO]

Ai might cause a bit of havoc in the office space. White collars will be the first in the layoffs.

 

[Value Collector]

industrial , i agree , am not so sure on office , i took a punt and targeted 'storage units '

converting office space into inner-city residential might be difficult depending on municipal ordinances

and with office space the short-term risk will be contagion , some areas i expect to be toxic , but which ones , i remember re-GFC some expensive locations became abandoned and were later demolished/rebuilt as 'inner-city living ' .. but but now we have a skill-shortage to add to the complexity

good luck , the big game-changer is whether various levels on government will expand their footprint or reduce head-counts in the near/mid term

The office space I bought the other day is largely leased to government departments on very long term leases.

Good office property is going to perform well, if you own second or third tier properties, you might have trouble releasing without doing significant upgrades. No body really want to lease gloomy 70’s and 80’s buildings.

 

[divs4ever]

Ai might cause a bit of havoc in the office space. White collars will be the first in the layoffs.

time will tell there , AI might be utilized more widely elsewhere , remember it took them decades to create an AI that could beat top chess players

 

[UMike]

Commercial Real Estate Catastrophe Coming?​

I've been saying this for a couple of decades. And been wrong for a couple of decades.

 

[divs4ever]

Commercial Real Estate Catastrophe Coming?​

I've been saying this for a couple of decades. And been wrong for a couple of decades.

but are you wrong now ??

i don't get feedback from the removalists any more ( or building renovators ) but maybe it is happening and not yet being honest about it ( lest the panic spreads )

 

[UMike]

but are you wrong now ??

i don't get feedback from the removalists any more ( or building renovators ) but maybe it is happening and not yet being honest about it ( lest the panic spreads )

LOL,

Changed my ways. Bought one late 2022.
Pays good rent, Can depreciate, Share sold off to fund the acquisition (I don't like dept) didn't do much or went down.

When the next catastrophe comes I'll buy more.

 

[greggles]

Office property is just one type of commercial property. Well located shopping centers are doing fine and Industrial warehousing is doing phenomenally well. There are also other commercial property types which are doing fine. But yes office properties are in trouble.

Yes, you are correct. Not all commercial real estate is in a bad way, but office property is in a particularly bad state at the moment. In retrospect my thread title was far too broad.

I suspect that a lot of office blocks will sold off in a fire sale when it comes time for them to be re-financed and the owners discover that banks are unwilling to take the risk of lending into such a toxic sector. The new owners will probably either convert them into apartments, or other types of commercial property that have a brighter future.

 

[Belli]

Another commercial company under administration according to the ABC news web-site

Construction giant calls in administrators leaving 21 multimillion-dollar developments dangling

St Hilliers is placed into voluntary administration as work halts on its developments around Australia, including major projects in Newcastle, the Central Coast and Brisbane.

www.abc.net.au

 

[greggles]

Burnett Plaza, the tallest building in Fort Worth, Texas, has been purchased via foreclosure auction for $12.3 million just three years after it was sold for more than $137.5 million, according to the Dallas Business Journal.

Fort Worth's tallest building sells for just $12.3M at auction in stunning price drop

The tallest building in Fort Worth, Texas, has been bought by a bank for $12.3 million, three years after it sold $137.5 million. Burnett Plaza has 40 stories and is 567 feet tall.

www.foxbusiness.com

$125.2 million loss in thee years is almost unbelievable. The sector is clearly still in a very bad place.

 

[mullokintyre]

One of the advantages that industrial has over commercial property is that things like work from home don’t cut it.
You can’t take 20 tonne press or 30 tone brake shear home and work.
I have some long term held property that has been mostly occupied and rent paying.
The one issue is that businesses can go bust very quickly, but I have rarely had problems finding a replacement tennant.
Mick