But the moves threaten to upend huge swaths of the real estate market and the half-trillion dollar market for commercial mortgage-backed securities.
It's not "Busted US Retailers Use Bankruptcy to Break Leases", but more the "...by the Thousands" part. Malls are going to start becoming ghost towns, especially with no anchor stores like Penny's and the since-departed Sears.
Seriously. We either have to choose to be a market that is somewhat free or not. At this point, the government is choosing winners and losers. It is a repeat of 2008. Oh no, it is too big to fail.
Someone will come by with the investment to buy what is left. Perhaps they will run it better. Prepare better.
We're going through this with airlines and cruise companies now fighting for more money and loans from the government. Perhaps Delta grew too large to be what they are now. Maybe there are too many malls in existence. Maybe the method in which we collateralize mortgages doesn't make sense anymore.
Our economy has developed the too big to fail mindset and forgotten, largely, you can lose.
It's a news story, there doesn't have to be any underlying editorial message. Sometimes the news is just "thing happens".
The extreme example of this is a political news site that dedicates its entire site to posting anything that paints its opponents or their positions in a negative light. They can all be “thing happens” stories, but the filter alone gives it an angle.
The exception would be Bloomberg, or the Financial Times. Publications read for information to make decisions on.
And if you're a trader reading Bloomberg news, maybe factor that into your trading decisions, or something. Not every piece of news is a call for government regulation.
As has been stated, this happens, it’s what bankruptcy is for, and is not all that shocking or worth particular notice here.
These places tend to be connected to useful infrastructure like rail lines, and at least in the US, the internet kinda borrowed rail's right of way to lay fiber. Not sure how well connected malls are; they tend to be near highways so it might have a similar advantage?
If you really can't figure out one single use for cheap empty space, man, you need take a step back and just play around with your imagination a bit :)
If you decide you're going to force a shutdown and result in the unemployment of millions, you're going to have to ensure they have jobs to come back to.
But it's often not a choice between letting entire swaths of our economy collapse, and dumping absurd amounts of our tax dollars to prop up these poorly-run companies. We can give them loans with strings attached, force them to go through bankruptcy, wipe out the shareholders but preserve the structure of the company, bail them out but subject the industry to much greater regulatory scrutiny, etc.
Personally, I wish we had a straightforward way to bail out a company and have the U.S. government take ownership in the company until the stake can be safely unwound, or the too-big-to-fail company can be broken up. Theoretically, with a controlling stake and the corresponding board seats, you could force out the lousy management that didn't take adequate precautions as well.
It'd kind of be socialism-esque nationalization of industries with extra steps, but Japan has been doing a similar-style thing since the 90s, and I can't imagine it would be any worse than the relatively strings-free bailouts we've seen, or the collateral damage and runaway collapse that would occur from letting a monstrous chunk of the economy fail all at once.
Canada's CERB and CECRA have been doing wonders to keep ordinary people either afloat or employed, trickling up to small businesses all over.
(I don't mind your plan either, but it involves more per-company hand-holding than simply giving out generous unemployment and employment-support benefits)
Not saying he wouldn't have also signed the acts but the crisis was well underway by the time Obama was in the White House.
Why reward people who gambled and lost? Bust them out.
People will either buy the houses at more reasonable prices or (more likely in this case) the banks will renegotiate more reasonable terms with the original mortgage holders because they have too much supply and no buyers.
> instead of pouring money into banks and letting people suffer. Thanks, Obama.
That wasn't possible as liquidity also died. Solvent businesses couldn't give people paychecks because the banks had no cash. You had to bail the banks.
HOWEVER, what needed to happen was that the bank investors needed to get busted out. That was where Obama went wrong.
Why reward corporations and investors who gambled and lost? Bust them out.
>People will either buy the houses at more reasonable prices or (more likely in this case) the banks will renegotiate more reasonable terms with the original mortgage holders because they have too much supply and no buyers.
Other companies will buy the businesses at more reasonable prices or (more likely in this case) the banks will renegotiate more reasonable terms with the original mortgage holders because they have too much supply and no buyers.
And this was the issue with the 2008 fiasco. The government chose to save large financial institutions instead of breaking them up so the problems would be less likely to happen again. They chose to save large corporations over homeowners.
It is happening now with the pandemic response. I get the federal government wanted to dump a ton of money into the economy through PPP, but man, you cannot tell me the Catholic Church needed it. They are sitting on assets worth billions they could have sold/borrowed against to stay afloat. Same with large private educational institutions and public corporations.
The next round, and there will be a next round, will be more of the same. Carve outs will be rampant.
The USA should have looked at other countries providing direct income replacement to citizens. 70% income replacement sent to citizens and not force them through state's unemployment processes. Other countries did this and it worked.
As I said, the bank investors should have gotten wiped out.
The worst part is that a bank is probably the single business type that the Federal government can actually replace on a short timescale.
The US still uses SSNs for everything because everyone is too afraid of government identification to pursue a more sane approach, the result is a government issued identification that is poorly designed for what it's used for and extremely insecure. The same thing happens with our economy, instead of taking sane measure to fight against the penultimate death of capitalism (the slide into oligopolies) the vitriol against any form of government intervention has placed us in a situation where heavy handed government intervention is regularly required - we're avoiding a soft form of socialism and ending up with having to intervene like a planned economy about once every decade.
I really hope this can be solved by some smart people without trying to enlist wide-spread political support since I don't think that support is ever going to materialize.
Pretty much every market in the US has been insanely free, like "just don't kill people quickly and we don't care" free at some point. They all stopped being free when they got big. Then government got involved and regulation, regulatory capture and whatnot happened (I'm intentionally glossing over the details because they vary by industry and I don't want to pass judgement).
The US is thirty years out from the previous commercial real-estate reckoning. The S&L crisis. Everything that was booming a year ago was built on top of that reckoning.
In London a lot of commercial rents in newly gentrified areas have went up 10x+ in the last 10-20 years. There has been an awful of lot of value transferred to these landlords for really not a huge amount of work in many cases.
I don't disagree with you in principal, but unfortunately, we have a parallel problem of how the debt market works, which is essentially to generated and then sell the debt to investors, diffusing the "risk", or rather, I think of it more as displacing it. Much less incentive for active participation in investing via debt. People who end up holding the debt are many steps away from being able to have conducted due diligence.
Not to harp on a point, but the big theme of this whole fiasco starts with the displacement of risk from the risk taker. And since we've permitted that, we're all stuck with it.
And they should face the losses. And maybe learn from their mistakes.
And the people that were responsible with their money, didn't take on the risky assets that generated out-sized returns will be able to invest because they preserved capital.
(That hasn't been in the news for a few months, so I had to look around for some perspectives. Cf. https://daily.jstor.org/the-commercial-real-estate-markets-i... and, perhaps more controversially, https://www.propublica.org/article/whistleblower-wall-street..., suggesting that some of the same practices that turned the residential
market into a crash-in-waiting may have been applied in the commercial market as well.)
The new laws did nothing to prevent this. They weren't meant to. We had a law designed to stop it that was enacted following the Great Depression. It was called the Glass-Steagall Act, passed in 1933. It was repealed in 1999 during President Clinton's administration... because Citigroup was too big to fail, and they promised to be good... honest.
2008 was an opportunity too great to pass up. Congress used the opportunity to enact a Federal bureaucracy that controlled banking and is not directly answerable to the Executive branch. This was the Dodd-Frank Act. Congress could have restored the rules in Glass-Steagall, which would have broken up Citigroup as a side effect. But they didn't.
Seems like recipe for disaster.
I'm sure that can't possibly go wrong. Especially since the entire SERP when I looked up the "non-prime" term you used was pages put up by fly-by-nights to reassure the suckers that there's nothing wrong with the paper and if anyone tries to tell you otherwise, you should probably punch them in the face.
Basically the Fed and the US government did their job. They stabilized the markets. The state governments (at least the competent ones) implemented lockdowns that cut the virus down. They will stabilize anything that is too big to fail.
I'm not too worried at this point, I don't think there will be any big problems. The Fed has learned a lot from the Great Recession and they are acting a lot more decisively than before. And I've lost a lot of money shorting the markets over the last 6 months so I've taken the other side of this and learned a lot (ie. don't fuck with the Fed).
SBA helped a lot. I have an SBA loan, and they gave us 6 months. Six months are up in October. At this point, we are not making money, but not using personal saving either. I won't be able to pay the mortgage after October.
I wouldn't worry about that. I fully expect the federal reserve to "fix" this by buying the toxic assets with printed money.
Many people cite the 1984 bailout of Continental Illinois as a turning point, but there are many examples before and after that.
Bad execution is punished by going out of business.
This forces everyone to be hyper efficient at taking raw resources and getting useful value out of them. Thus people have more goods for less money.
People get confused because government gets involved and you end up with cronyism.
Free market is as another comment says, the minimum amount of regulation possible that isn’t killing people.
Government was involved from the beginning; capitalism was historically a redirection of the power of government from serving the feudal aristocracy to serving the mercantile class.
The utopian (and largely self-inconsistent) rationalizations for capitalism as something that magically exists separate from government and cronyism came much later than capitalism itself, and most of them even later than the early socialist critique of the reality of capitalism.
That's true for the entrepreneurs, but this was about the investors and it tends not to be true for them. It should be.
Not sure if it's just part of the joke, but the word is "tenet".
But what's equally important is ... if they are going to lose everything, how much of the social, economic and political infrastructure do they destroy on the way down?
It may well be that the era of the mall is over, for example. But malls crashing and burning as the mortgages associated with them fail is very different than a slower process in which there is time to think about repurposing and to give those directly affected to contemplate their options.
Because many people who still technically had jobs had their hours drastically cut, and because it's an economic stimulus, not strictly welfare.
Pretty sure that already happened. The US built waaay too much retail space, and still has an overhang in most markets. And yea, Amazon kinda ate the Sears / JCPenny lunch, which has not helped matters.
If the disruption happens to not be temporary, then it will be a problem (retroactively, so a huge one). But in that case, there are more pressing issues.
Pausing collections is fine. Pretending those loans are still performing is an exercise in fantasy.
This is, unfortunately, a very complicated problem.
I would argue that in Germany this is not the case. Everyone minds the gigantic soulless corporations suffering, because only they have the unions deeply intertwined with politics and the sympathy of the media (for whatever reason, ad money maybe?).
The Lufthansa bailout was clearly made to benefit the workforce and not the general population.
This crises lifts the high-level corruption here in Germany to the next level it seems.
Government help was supposed to alleviate that pain, but I doubt they'll receive any - another point for UBI. But forcing the debtors into liquidation when they could otherwise survive won't help anybody.
Speaking of films about the previous big crash, you could try "Margin Call" if you want a very straight-faced (to say nothing of po-faced) take, or "The Big Short" if you prefer something that, while no more genuinely incisive, is at least willing to pretend as though it were.
There's nothing wrong with not knowing a lot of malls, but come on, you have to qualify your statement a little bit, because your comment doesn't make sense to me as someone who can drive to KOP and at least a half dozen of the other malls I've been to when I was younger.
Although "still open" isn't exactly saying much either on your end - how many stores are empty? Are they on the decline?
I will concede that there are thriving malls in existence in the same way that stores that closed in one area of the country thrive in others. Not sure what that says towards malls as a whole but imagine it would trend to being viable in only a subset of the country.
...if rents don't fall. And maybe they should.
In both cases, the lenders and shareholders of the firm, have contractually obligated the firm to have specific returns (and often have built financial instruments on top of those predictable returns, which is why they bothered to invest in the first place!) So the firm itself is destined to either return the predicted profit, or die, with no middle road.
If the current tenants can be viable if rents are reduced, along with other cost saving measures, then maybe that’s a least worst outcome for society and the landlords.
Ultimately though, to me, the actual business leasing the property, employing people and providing service to customers is doing more for society and the real economy than a heavily leveraged management company. Those retail businesses don’t deserve to exist on any terms, but if they do have value, then I think they’re worth giving a second chance.
If that instrument defaults, it's not of so much concern that a property management company will die; but rather, that the companies who were on either side of it, relying on it as a conduit for money to flow through, will end up illiquid, unable to exchange through that instrument.
On one side, that's large investors, e.g. mutual funds. So the markets will go down.
On the other side, that's the businesses themselves. Having no access to financially-healthy property management companies to rent from, is a lot like having no access to loans: it limits your choices as a business.
Maybe the valuations of these properties will crash without property-management companies around to compete over them, and businesses will be able to afford to buy them directly. But more likely, as we saw in 2007, the commercial real-estate market will just become illiquid, with everyone who is currently holding empty commercial property (i.e. mostly banks, after a presumed default or bailout of PMCs) refusing to sell it "until things recover", so that they don't have to write down a loss. And that means there won't necessarily be any commercial properties on the market for these businesses to buy into in place of their previous rentals.
If Fedex & UPS were to be forced to sell off package delivery in NYC to cover losses while USPS continues to be hamstrung by the administration then things will get bad - and there are a lot of other operators that are a lot less visible but just as essential. Let slip retailers and banks are less stable - let slip banks and companies that are operating through the pandemic on shoe-strings and a whole bunch of backed credits lose the ability to keep the lights on.
Then the market will adjust. If you can't get packages delivered in NYC, you will have to get your goods through some other means. Maybe all of NYC is a bubble. Maybe that many people shouldn't live on a handful of tiny islands, importing their food from the mid west and their goods from China. Maybe everyone's in the wrong place.
But if that's true, is the correct solution to crash-and-burn from the current scenario to some version of a "better" one?
Profitable compared to what? Profitable for whom? Profitable based on what assumptions? Profitable by what metric? Dollars accrued to capital? Dollars accrued to GDP? Quality of life index? Happiness index? Life expectancy numbers? Infant mortality? Profitable with what externalities forced to be part of cost-factoring?
What is "the market"? What is a "decision" in this context? What is the cost benefit analysis of allowing "the market" to "decide" versus more policy-driven unfolding of the outcome?
... and so on and so on ....
i.e. the usual litany of problems with free-market boosterism
But the implications go beyond the people who work for corporations that fail, into communities (possibly far and wide). I don't think there are policies that can mitigage this without damaging the entrepeneurial climate, which I'd rather not do. At the same time, the incredible ease with which one can start new businesses in the US, and the trivial availability of credit, almost guarantees that we have huge numbers of businesses that play valuable roles in their communities but have absolutely no resilience to negative economic shifts. I don't know how we fix that.
There are things that we benefit from as a society that aren't realistic to accurately price for ethical reasons so I think this is quite too simplistic a statement.
Basically, except in the first scenario everyone agrees to suffer together. In the first scenario, the initial investors suffer and the new investors think they got a good deal. It's worth noting that LP's are usually built from people who have worked together before or from people with track records of being good to work with.
Nah, the third option is bailouts, and they are not wrong for having high confidence in getting bailouts.
Described in this: https://www.theatlantic.com/magazine/archive/2020/07/coronav...
The Dodd-Frank act capital requirements seems like they'll protect banks a bit, but to an outside layman like me it does seem like the CLO risk is similar in structure to CDOs.
What am I missing?
I'd be skeptical how different this is in practice. In 2008 there was an incentive to give loans to people without caring if they could pay because you could immediately sell them to larger banks that never checked the underlying status of the borrower.
With CLOs the borrowers are already selected to be companies in trouble - is the underlying resell incentive fixed if they're still being bundled together? In some ways the selection is worse because while most people need a mortgage no matter how good their credit is, I think business loans are needed more by desperate businesses. At least if the banks don't own as much (like you said) that's probably good.
From that Atlantic article:
> "A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses—specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world."
I think the structure of the CLO tranches rely on not all small loans collapsing at once and I'd bet the banks risk models (which already are incentivized towards taking on too much risk) didn't account for a global pandemic forcing everyone to stay at home.
I know Dodd-Frank requires them to have lots of capital on hand to protect against this kind of problem, but is it enough?
Also for us regular people, what should we be doing? Sell index funds and just buy Amazon?
Again, from that Atlantic article:
> "For the moment, the financial system seems relatively stable. Banks can still pay their debts and pass their regulatory capital tests. But recall that the previous crash took more than a year to unfold. The present is analogous not to the fall of 2008, when the U.S. was in full-blown crisis, but to the summer of 2007, when some securities were going underwater but no one yet knew what the upshot would be."
I don’t work in finance and these topics always bring out over confident know-nothings on HN going on about policies they don't understand (and I don't want to be that), but there are parallels here that seem pretty disturbing.
I don't want to be in the Summer of 2007, our institutions are less stable than they were back then and the politics have gotten scarier.
Like in 2008, the Fed will print as much money as it takes to prevent this kind of systemic collapse.
I'd be worried that the political will may not exist this time, or that the administration wouldn't be able to understand the problem well enough to even figure out what should be done.
If capitalism does what it says on the tin, I don’t get why can't we have a market cleaning price for buildings. Are we doing too much capitalism, or not enough? Is this just all very efficient but I’m not smart enough to figure out how?
Market economy works fairly well as to get the most value from the least work. If you allow empty apartment buildings, you will have empty apartment buildings if that's likely the best risk/reward for the owner.
It's not about too much or too little market economy, it's about accepting the proliferation about the wrong kinds of markets, markets that are not in the best interest of people. We don't accept trade in ivory because that's not good for the elephants, there's no reason to accept apartment buildings left empty when it's to the detriment of people.
No economic policy will govern itself, especially not any policy claimed to do so.
Mostly too little capitalism - buildings are very heavily regulated. Zoning, property tax, planning laws, rent control, and habitability laws are big factors. For example maybe it's illegal to rent out the building because the kitchens are too small, and renovating it would not only cost a lot up-front but also push up the property taxes, so you'd have to be confident of getting a return - and maybe you're intending to knock it down and build a replacement as soon as you get planning approval.
Yeah the knock on effects would be terrible, but the underlying results being lower costs for renters, seems pretty natural / appropriate.
The federal insurance program made it so people could trust in banking again.
Now I do think that the policy has gone too far. Bank investments should receive any bailout, those are part and parcel of the normal functioning market.
The real laws should have been 'banks shall not loan out money from a depositor's account' and the problem would have been resolved. Investors could have loaned out money. Insurance could have protected against bank robberies, similar to how any kind of insurance works against theft today.
In this situation though, when there is a threat to society as a whole either military or natural, there’s a legitimate role for society to pull together and coordinate our actions. That’s what government is for. All societies can benefit from consensus and leadership, especially in situations like this.
If their business model really fails, then fine, that’s because there’s enough value in alternative providers that these ones are no longer needed. However in temporary crises it’s possible that the process of dissolving businesses can leave a gap in the provision of valuable or even vital services that the market cannot fill fast enough. Markets are incredibly powerful, but they aren’t omniscient or omnipotent.
This is why although I’m a believing capitalist, I think there is a role for regulation and even bailouts in extraordinary circumstances. I’ll even extend that to individuals, a crisis can hit any of us just as it can hit a business. I don’t see that necessarily as socialism, just good management when done judiciously and proportionately. Ultimately it’s about fairness and good outcomes. I’ve no time for ideologies.
And, in this fun world, you might find a terribly over-leveraged business where no one ever tried to act fraudulently but some vulture capitalist consultant helped "ensure access to liquid assets" and is now in Kiribati watching the world burn.
In practice, I think we will see companies being sold off the friends of the sitting president, and powerful senators.
Today, at least they must at least pretend to be equal in their bailouts, which gives non affiliated companies a chance to receive money.
... even more.
Behind this is a lot of overvalued debt, which is at risk. Large institutions essentially treat this debt like dollars and have a bunch of their holding spread across a bunch of mortgage-backed securities such as these. Effectively, debt needs to be written off, and as such, "dollars" will disappear. This could result in some serious deflation.
The people who will be screwed are retail workers.
Not everyone has aircon.
Not looking forward to that if COVID is still kicking our arse.
I think the idea of a indoor mall was great, but it’s a big building that’s hard to maintain.
Maybe future societies will just have geodesic domes around town centers to get the best of both worlds.
Now if we can just seem to adjust whatever weird tax rules or situations allow real estate to sit largely empty and apparently not not put all that much pressure on prices... that would help too. I see a lot of commercial real estate sit empty for ages and I hear from the local businesses that the rates are still high and even going up.
A development not far from me has been at sub 50% capacity for YEARS and I've heard from locals that they're moving because they won't adjust the pricing or are demanding more...
Would be nice to see some variety beyond Chipotle or Noodles & Company or rando fitness center... or mostly nothing.
Seems like bad economic policy to have a system that has capacity, but leaves it unused save for only the highest of profit margin chains ... who probably don't pay the rate anyone else would.....
You're not wrong, and under normal circumstances this would be a blip on the radar. However, the hundreds if not thousands of locations each of these companies plan to shutter will have an unprecedented effect on the commercial real estate market. Within months we will have thousands of property owners suddenly unable to pay their mortgages because they no longer have tenants, meaning they will have to default on their loans. This will greatly affect banks and other lenders in the months and years following. It's a domino effect that will be felt for many, many years after we've wiped out SARS-CoV-2.
I invest money into the market. Sometimes the market does poorly and goes down. My job as an investor is to accept risk when others do not. It is my money that disappears in these circumstances.
The general idea is for the riskier among us to lose money. The investing class reaps benefits when the economy is good, but they lose money when the economy suffers.
When downturns happen, investors become frightened. Which is fine: it means more opportunities for me to buy back into the market. But accepting this year's losses is part of the plan.
I understand some people treat their home as savings but that's bad in every way for society and for the homeowner. I have a home and the only return I expect on it is to be able to continue living there. I'm certainly not going to depend on it for my retirement, as that would be really unwise.
How else can we think about an expense of hundreds of thousands of dollars? It's ludicrous to spend that much on something assuming it'll just depreciate and fall apart on you, worthless. I understand that you're not paying rent in a home, so it's serving a purpose, but they aren't exactly equivalent in terms of upkeep and taxes.
At this point, given the instability in the market I have no idea what is the wise move to put money into for retirement. Investments have tanked and I don't know at what point they'll recover, interest rates are abysmal, and apparently our homes should be worth nothing. There's really no practical, accessible way to invest.
With all the instability of a once-in-a-century pandemic, the S&P is still up 1% today from where it was January 1. Specific large companies' stock like Amazon, Apple, and Tesla are up 50-300% since January.
The issue of saving for retirement is complex, thinking on a 10-40 year horizon as the world continues to change and evolve. But this is a bizarre time to be complaining about stocks as an investment.
Cars depreciate. Rent, medical services, and groceries don't return any money when you're done using them. Houses should be thought of as consumption first and a store of value second. Sure by buying as soon as you can you are betting on appreciation in value. Houses aren't a good investment compared with even a bond mutual fund. There's a 6% transaction cost, closing costs, you have to pay mortgage interest, property tax, maintenance, insurance, utilities, and maybe even PMI. A single event like a hurricane or unfavorable neighborhood evolution can wipe you out (extreme concentration risk); a single bond issuer declaring bankruptcy is a risk that can be diversified away.
Rental properties are normally cash-flow positive, including payments on their mortgage. This means that buying a comparable unit that depriciates to $0 over a period of 30 years is still expected to be a net positive.
I’m saying buying a home shouldn’t cost that much. See here’s the insidious thing about housing costing so much - when you were younger you surely didn’t want to spend so much on a house. You don’t want your kids to spend so much either. And if you didn’t spend so much you would never have cared so much if it drops in value.
But now that you have spent that much, you want it to cost the same, even though that perpetuates a system that punished you, your kids and your grandkids.
Do you really want to defend this? Does it boil down to yeah it sucks that houses cost so much but now that I have mine I want to slam the door on the younger generation?
And note that this isn't about things depreciating and falling apart. It's more about various policies that affect house prices indirectly. The existing arrangement, when you distill it down, pretty much means that once somebody becomes a homeowner, they have an economic incentive to make home ownership for other people as hard as possible, because it props their investment (and if they own more than one, and rent some out, lets them raise the rent higher).
Tell me more about this? Why can't banks re-value things that constantly change in value?
It may even be a positive for some of those workers to the degree prices go down, albeit with fewer high-end restaurants and so forth and fewer co-workers.
There is the Valco mall in Cupertino being demolished for mixed use residential, retail and office space. That mall was dying for a decade.
Then there is Santana Row in San Jose. Used to be a strip mall as I recall. Now its high end shopping and residential.
Going more "dorm" style could work for low end if there wasn't a pandemic and even then it would carry plenty of risks that would scare people away from such an arrangement let alone the consumer desires.
Banks have no shortage of money, lawyers, and friends in high places. They do not need you or I also apologizing their actions. If anything we should be extremely suspicious of ant bailout and scrutinize it to ensure it’s well deserved, and will result in a better society overall.
In any case, my point was not to discuss how much CRE is owned by individuals and small businesses, but rather the dismissive attitude that sweeps individual and small business landlords into the same bucket as giant CRE corporations.
I'm glad you agree that there is no need to be punitive towards them. This is a reoccurring issue I often find on HN which I find surprising, the derision towards lines of business that people don't have much understanding of. There are no free lunches in the world that will not get optimized out quickly, and any business you believe are simple are likely to have hidden complexities that you did not consider.
And to be fair, I and likely many other "regular Joes" benefited initially from the 2008/9 downturn; I was able to buy my first home, humble as it is, at less than half its usual market value. I'm still enjoying that benefit today, with a monthly house payment less than most people's car payment even on a used vehicle.
I think this time around it will be much different; this is approaching a true depression, not just a downturn. We are at 30 million jobs lost due to the pandemic, on top of the existing unemployment not related to it. We are on a dark road.
The real estate owners are no more resilient than a sheet of paper when it comes to the guillotine that could be coming for the economy. And, while I'm sure a lot of people aren't feeling any particular love for real-estate folks in general due to the current administration - letting them get liquidated and then trying to build up a replacement is harder and more damaging than just propping them up.
But I, personally, am seriously done with this slap-on-this-wrist for endangering the economy during clear weather BS. Engaging in unsafe business practices can cause massive loss of life - whether you're Wells Fargo inflating fake accounts and leveraging them as assets, the wolf of wall street or just committing some plain old accounting fraud we need to come down hard as a society and stop glorifying it as if these clowns are sticking it to the man.
It’s like this. Suppose a real estate speculator in your town buys a mall, leverages it with debt to afford it, and becomes rich. They buy the biggest house in town, drive a Bentley, in general live well for a decade.
Then the pandemic happens, and some of their tenants stop paying. They personally signed for the mall mortgage, and are now in default.
They need $10M to recapitalize their loan, avoid foreclosure, and ride out the rest of this. So they come to the city council and ask it to raise property taxes by an average of $100 a year per person in the town so the city can loan them the $10M.
They explain by doing this they will keep the mall open, be able to work things through with the tenants, saving jobs, the mall, the bank, the city, even goddamn America! The speculator then sits back smoking a cigar to await his bailout.
Then the (secretly libertarian$”) mayor points out if the city doesn’t step up, the bank will sell the mall to a new owner, who will work with the tenants to keep the mall open, and sell the speculators mansion, Bentley and jewelry to help recoup their losses. And the citizens of the town will all be $100/year ahead.
Then he slams his gavel down and screams, “and there is no smoking in public meetings you arrogant leach!”
You can buy insurance policies to protect your business against the latter. (Although with Covid a lot of insurers are refusing to pay out, and some are being taken to court.)
Where there's no insurance it's reasonable for government to act as an informal insurer of last resort, because it's hugely more expensive and damaging to allow businesses that are otherwise viable to go to the wall.
You don't just lose a viable business, but you create losses that ripple through the entire system causing upstream insolvencies. So you lose the productivity of all the businesses affected and the spending power of their employees. It takes a good long time to rebuild both.
The problem is in the grey area where it's hard to tell if businesses are genuinely viable and just need temporary reinforcement, or whether they're already zombies and need to be killed off.
Patronage and politics makes this even more complicated.
But the principle is still sound: in a national disaster insolvency is not a clear signal of failure, and allowing all business to crash regardless will do much more harm than good.
Nobody has wanted to acknowledge that so much of the US economy is a house of cards. COVID19 isn't forcing people to do so, but is making it much clearer.
Or am I being uncharitable, and you mean recently?
In the end, just keeping companies afloat through rare shocks might be the cheapest option.
Market economies create efficiency, not resiliency.
1. Retailer notifies their lease holders that a given location is impacted by public health closures, reducing revenues for products originating from that location from (100% of $X) to (y% of $X), and warns the leaseholder that the retailer may be forced to file bankruptcy if easement is not granted, reducing rent paid to (0% of $X).
2. Leaseholder notifies their mortgage holder of this, and warns the mortgage holder that the leaseholder may be forced to file bankruptcy if easement is not granted, reducing mortgage paid to (0% of $X).
3. Mortgage holder notifies the property tax authorities of this, and warns those authorities that the lendor may be forced to file bankruptcy if easement is not granted, reducing property tax paid to (0% of $X).
4. Property tax authority grants a public health easement to the mortgage holder, conditional on the same easement being granted to the leaseholder.
5. Mortgage holder grants a public health easement to the lease holder, conditional on the same easement being granted to the retailer.
6. Lease holder grants a public health easement to the retailer.
If anyone refuses to grant the easement, they get nothing anyways, because anyone in the stack can just give up and file for bankruptcy as a last resort — and that's where we're at today. It feels like a shell game because they're all trying to extract the maximum amount of money before bankruptcy, while withholding it until they themselves can file bankruptcy. It's such a shame they can't work together to get everyone that's owed a dollar to agree to just suspend their demands for their dollar until this is over. They're not getting their dollar either way, but if they'd rather have their tenants breaking leases left and right, so be it.
Everyone succeeds then. Might still need some stimulus for the bottom 10% of society but maybe not as badly.
I think we'll be better off when we use the excess retail space for something else whether it's apartments, warehouses, or offices. But the transition will be painful.
Those stores seem to be doing just fine during the pandemic (HD has been packed when I went).
Would be more useful to see a breakdown by retail size. Say <500 sq ft, 500-2000 sq ft, 2000-10000 sq ft and >10000 sq ft.
I’d suggest the small places are the ones at high risk (just thinking about typical tenants).
This situation exists because the US has been overly complacent for quite a while and happy to ascribe these warning signs as mere minor side effects of the most patriotic American capitalism - this was pretty easy to do while everything was building leverage on leverage and everyone had plenty of bread on the table.
The US economy is rotten to the core, it's really unfortunate but I hope when this house of cards inevitably falls down it at least serves as a lesson for history.
The fundamental problem is that the models investors use to manage risk become useless in novel market environments that break historical correlations between investments. This is a long-tail risk that is difficult to manage.
When suddenly all of your investments are losing value at the same time, even if the models say the correlation between the assets is low, you end up in a very dangerous place.
This is essentially the same thing had happened during the mortgage crisis.
Government needs to stop getting involved period. Help at the bottom - prop up the citizens who the government IS responsible for, let the rest duke it out. Corporations are not citizens. Government has no duty to help corporations.
But, yeah everybody will hurt by this, sure. Malls will close, businesses will close inside malls, investors will hurt, and workers who worked at those businesses lose, even some consumers who enjoy malls lose, cities lose because they become blight, many probably get abandoned and become gang hideouts or something. Homeowners lose because home values drop, but lots of other factors will be causing a lot of the cycles above to happen to. Next 10 years is a hazardous wasteland for prosperity.
Should just start bulldozing some of them and building green spaces and parks. I have a feeling open air is going to be a big trend over the next decade (less chance of viral spread).
Gangs would find them goddamned useless as territory because there is no income stream there. There isn't anyone to make money selling drugs to or johns for clients to pimp out. That is why the damn mall closed in the first place!
The low traffic ironically makes it a poor place to lay low as "I saw some guy enter an hour or so ago" becomes useful instead of vague and useless.
That similar noticability and lack of good pretexts makes it a poor choice for a meth lab compared to a random trailer or basement.
They wind up such an economic wasteland that they aren't even good for criminal purposes which is vaguely impressive. That is essentially the one "upside" of their separation from residences. They aren't like the Opium Den/Crackhouse/Methhouse because they lack the attractiveness to be an attractive nuisance.
Tax write offs are distinct from tax credits.
The idea of harsh leases in large retail stores kinda always made me laugh: For a JCP or the like, the setup costs, warehousing, and hiring work is so great that the only case where they would close a store is to stop cash from hemorrhaging beyond control. On a large scale this forces the only move for survival to be bankruptcy after falling way too far. If you're PREIT or such one can't help but realize that the overall outcome is that you'll push a tenant of a vast majority of your stores into really bad financial states that then leads to a much harder bankruptcy and possibly dissolving of the company, ripping stores out of ALL of your malls instead of 30%.
And thats why PREIT has so many malls with empty giant rooms and defaulted loans.
Landlords can and do go after the person after the bankrupt LLC is raided.
That said, all the people who've lost jobs or hours are probably not looking to pay $100s/month for an auxiliary junk room.
(I’ve heard rumor that) they pay just pennies on the dollar for their store leases because they draw so much foot traffic to the malls.
I can’t imagine them keeping stores open in the middle of a nearly empty mall, but I’ve only ever seen pictures of an Apple store that wasn’t in a mall or strip mall.
Now we have economic collapse, 40 million looming evictions, people will starve, and freeze, or die in a shelter w/ the pandemic.
Businesses are failing because they have to meet monthly recurring bills w/ or w/out actual sales receipts. They still need to meet payroll if they're even open.
Could've been stopped from the lenders down, instead of try to just throw money every which direction and see which sticks.
I'm for handouts for the poorest, but i think the other handouts were horribly done, and the loan program.
So if the downward trends had continued we'd have been in good shape and it would have been good timing. Of course, our covid control in the US has been a total disaster relatively to other much poorer countries even - we're still trying to figure out if masks are worth wearing (20 cents to maybe save a life).
Instead of handouts the layoffs would have been a fine option, folks would have received unemployment. But the overhead and disruption of firing folks, canceling their benefits, and then re-hiring them (maybe) etc is not insignificant. The handouts meant we are ready to go once everything resolves which was supposed to be a lot sooner than it is looking like it will be.
Alot of these businesses struggle because they have recurring bills: Rent, Mortgage, Utilities, etc... if all recurrables were 'frozen' or allowed 'pay what you want/can afford' then arguably everyone would be on better footing.
E.g. Big bank has ten malls, Malls go to businesses and ask for rent, J.C. Penny's is like we can only pay 10%. Mall goes back to Big Bank and says our customers can only pay 10% each, so that's all we can pay. Bank's like sure w/e it's a crisis.
Utitility companies, etc. same thing.
Obviously there's other costs of business, but that would save a lot of the issues. Do the same of course for residential/renters as well, cause everybody is in the same boat. Then we'd need less stimulus $$.
In other words try to make sure everyone's minimum (got the roof over my head) is met, and this would've been a good way to do that.
This is exactly what I was saying in March, but everyone was too busy clutching their pearls, concerned about what will happen when pension funds lose a few percentage points of their value.
Well, now they are going to lose a few percentage points of their value, in addition to society dealing with a tsunami of bankruptcies, on top of trillions of bailouts. And we're still early on in this epidemic.
There's no statesmanship, no concern for the people of America, just the top 1%, so they'll probably come out okay.
They won't starve or be on bread-lines. Everyone else though will suffer tremendously.
If all recurring payments just froze...for 1 year. If we locked down like Europe. We'd have had a better time. Now it's a shitfest just waiting. I'm certain some people who are wealthy/powerful see it for what it is, and also already have plans on how to become even richer/more powerful as a result.
There were miles-long food lines already by April: