Not could be, as in the future, but currently is, as in right now.
As long-term leases expire, more tenants are giving notice of non-renewal, because they're not using all the space they have. Many office buildings are facing declining revenues in the near term. Most cannot fulfill their monthly debt service obligations if tenant collections drop below ~80% leased, give or take.
Many regional banks, in particular, are loaded up with loans to office buildings.
This could spiral as a corporate landlord will need to raise lease charges to compensate which might cause more tenants to leave. I've seen this tactic used when they want turnover on tenants.
Good! Those who must have office space will grit their teeth and eat the cost, those who want it for non essential reasons will be forced to divest as the death spiral picks up speed.
As demand dries up, debt must continued to be serviced. If unable to, there will be defaults. Some office space will remain in service after the current debt holders take a haircut. Other office space will be taken out of service for other uses, constraining go forward supply and increasing what landlords can charge for remaining inventory.
We haven’t even touched on all the Boomers retiring and zombie companies that’ll be flushed out of the economy by the Fed holding the benchmark rate up.
We're in for a period of stranded assets any way you slice it - if it's not the demographics or central bank moves, it's the technology.
A lot of atoms in the economy are on their way to finding substitutes, and it's disruptive to our understanding of where economic wealth is - valuation of land, raw materials, intellectual property. Those are things I don't want to hold during a restructuring because I won't have a clear view of where they ultimately land. My portfolio focus has gone towards embracing new/emerging asset classes, as those are proven survivors when the economy undergoes structural change. Just a matter of spreading risk so that the ones that go to zero are cancelled out by the 10x'ers.
Crypto is a big one in that portfolio - for as much as I complain about how misguided it can be, there's a there there, and the political tension around it reflects the fact that its adoption would be part of a major structural shift. The current wave of generative AI is also that, and EVs, self-driving, and other disruptive tech. All the stuff that gets people really hot and bothered.
Hmmm... I find your comment thought-provoking. I'm not as confident as you that the restructuring you talk about will occur so quickly, mainly because big things always take a lot longer than we expect in the short to medium term. I mean, it could be a decade or longer before everyday use of self-driving, EVs, generative AI, crypto-assets, etc. reach mass adoption. But long-term, I think you're unto something. You're making me rethink my assumptions :-)
Raising rents above market price won't bring in more rent. The companies that are screwed either way default, and that's it. At the end of the day, there will still be the same amount of land/offices and similar costs but less demand for them.
Yeah I might be off on my comment thinking from the perspective of how sometimes they’ll jack rent up to flip tenants to bigger businesses with bigger wallets. Like if a few tenants don’t renew on a 15 story bldg then jack the rates up to get the rest out and hope for a larger company to lease the full building since they won’t want to build in this economy.
Residential units primarily. Chicago has received $1.2B in proposals to convert office space to residential apartments, for example. I imagine you might be able to convert to hotels as well, but admittedly I have not yet done that research.
Yeah man that's why the tenants refuse to renew. Even the crudest model of markets allows for someone to attempt to set prices that the market will not bear.
Saw this coming at least in Silicon Valley a year ago. Despite all RTO policies, the undocumented reality was, people were/are not really working in the offices. Even managers were super reluctant. At which point I decided SV was "deprecated" and moved entirely.
The primary challenge with office tower conversions are the floor plates. Most are big, sprawling rectangles with yawning amounts of interior space intended for cubicles, interior offices/conference rooms, and other windowless uses. Natural light is only available at the perimeter and therefore comes at a premium. The vast majority of proposed apartment conversions call for putting the living area along the curtain wall of windows and push the bedrooms into windowless areas within the core, which is problematic. Removing natural light from sleeping areas messes with circadian rhythm, reduces egress options, and reduces ventilation options as well. In my humble opinion we should not normalize the idea that access to natural light and ventilation in a bedroom should come at a premium in residential construction at least. If you’ve ever been on a cruise ship and seen/stayed in an interior state room, it’s pretty much that but a place intended for permanent residency.
Besides plumbing, one thing that came up on a similar discussion in the subreddit for my local area was that there the codes are different between commercial & residential in terms of how far away a room can be from an exterior wall. And it's not uncommon for commercial buildings to have a lot of space that would be unusable in a residential setting because of this.
Not really. Most of these kind of offices have either a raised floor or suspended ceiling, making the addition of this kind of service trivial, compared to doing it in residential buildings. Natural light and fire escapes will be more difficult to provide.
I don't know which cities we're talking about here, but i happen to know at least a few cities that are desirable to live in even if you don't have to commute to an office.
Yeah, there are cities that are nice to live in, but a lot of them were built around particular industries or had huge commute flows that surely had something to do with the housing demand. Like SF, Sunnyvale/Palo Alto area, Pittsburgh, Redmond, and Detroit.
People used to act like worker bees following the queen, but now it's more complicated, and some of the queens have moved.
San Fransisco's housing prices reflect the high pay available to tech workers living there, sure, but it would still be an extremely attractive place to live without commute reduction as a benefit. Night life, cultural scenes, gorgeous weather, it's an extremely attractive city in its own right. Urban living is extremely attractive to many people who don't have families to fill out sprawling suburban homes.
If in-office white collar work collapses totally, I'd expect to see a sudden drop in housing prices as older people who were only living in the city to save on a commute rush out, followed by a delayed correction of people currently living outside of cities because they can't afford them moving in. Prices would likely remain greater than suburbia, but maybe closer to the halfway mark between current city/suburb rent costs.
The cities that will be hit hard are the "cities"/glorified suburbs that litter the rest of the Bay Area. They're too expensive to for just the weather, they don't have the attractions of urban life, and basically the only reason to live in, say, Fremont, today is because it cuts your commute in half relative to living on the other side of the hills.
> San Fransisco's housing prices reflect the high pay available to tech workers living there, sure, but it would still be an extremely attractive place to live without commute reduction as a benefit. Night life, cultural scenes, gorgeous weather, it's an extremely attractive city in its own right.
It would be an attractive place to live but for the random stabbings, used needles, and human feces.
I can see why some people would like SF despite those issues. It's a big advantage that you can get around the city without a car and that the weather is nice, particularly those two things in combination. I still hated it for other reasons but don't assume everyone does.
The thing is, for each person there willingly, it seemed like there were 10 people just moving or commuting in for work. It was assumed by default that you don't live there or at least haven't been there for long.
Yeah, idk what's going to actually happen, but WeWork makes a lot more sense now. Most employers seem to agree that offices are good but also want to hire in a wider variety of locations.
I know of a few companies who have let leases expire and moved to WeWork. The plan is 1-2 years at WeWork so they can figure out how many people actually come to the office regularly before committing to new permanent offices.
This sort of model would be perfect for remote orgs. Offices near employees, destinations for corporate retreats. One vendor to cut a check to. Could also offer top notch vacation spots as a perk to employees.
As long-term leases expire, more tenants are giving notice of non-renewal, because they're not using all the space they have. Many office buildings are facing declining revenues in the near term. Most cannot fulfill their monthly debt service obligations if tenant collections drop below ~80% leased, give or take.
Many regional banks, in particular, are loaded up with loans to office buildings.