The Time Bomb Lurking in All Those Empty Office Buildings

how much do you think you can buy this for 13s the snag is it comes with at least $800 million of debt it's the sort of thing that's happening a lot right now and that's a big deal because a global property crisis can rapidly spread to the rest of the economy Office Buildings hotels and other commercial real estate projects around the world are going insolvent or being sold at knockdown prices one investor has warned that the industry could face a trillion dollars in losses this is the biggest realate of State crisis since 2008 a lot of office space around the world is now redundant there's too much of it and that's why we're seeing such massive value declines there's a building in Manhattan owned by Blackstone that's being marketed at a roughly 50% discount on the loan Aon Center the third tallest building in La sold in December for a 45% discount compared to what it sold for a decade earlier there's been Chinese developers run into trouble and some of them have been threatened with the loss of their buildings as well so this is happening around the world and will continue to happen so what exactly is going on at the heart of all of this is how most commercial real estate projects are funded so a lot of these buildings are funded largely by debt in a game of Monopoly you can't make money if a property has a mortgage but in real life landlords use rental income to pay for debt if there are no renters and not enough money then landlords have a problem and the banks then loan them the money they're not going to consequence for the economy is job losses from those Banks less credit available which means less investment into things like factories warehouses growing your business and then in turn potentially further job losses because instead of the economy growing the economy starts slowing the roots of the 2008 financial crisis also lay in plunging property values a lot of banks were exposed to extremely risky lending for the subprime mortgages tied to residential housing mainly when a region goes into a recession this time it's more like the Savings and Loans crisis that hit the US in the 1980s and 1990s where again small Regional banks are trusts Advan lots of money to real estate everything went wrong loans SED and in the end they demolished a bunch of the properties it saved more money than to actually try and find a buyer to buy them some of the solutions to the 2008 crisis actually solded the seeds of today's problems when the world was in financial meltdown central banks decided that the best thing to do was cut interest rates to almost giving away free money to people and the aim of that was to stimulate the economy it became harder to make money from bonds so investors looked for other places to invest in many cases what happened is that money went into alternative Investments so a lot of that money went into real estate at one point we work with the largest private tenant in New York City which says a lot they were bigger than a lot of the major Banks and that just kind of showed the insane growth and capital that flowed into the space investors thought offices were such an attractive investment because they were betting on the fact that a lot of companies were growing would be locked into these long-term leas and rents would continue to rise for the foreseeable future as new development sprung up all that investment changed the face of cities around the world but landlords weren't counting on what came next the World Health Organization has declared the Corona virus a global [Music] pandemic oppositions went completely dead and empty across major cities New York London San Francisco Toronto nobody knew how it would unfold or whether people would come back to the office so landlords would work out agreements with their lenders called extend and pretend where the idea is let's just extend the loan as it is and ignore any potential short-term valuations that might have fallen because of the pandemic The Hope was that offices would be buzzing with employees again before the deals had to be renewed but that hasn't happened us office occupancy rates today are about half of what they were pre pandemic and while Asia and Europe are doing better better than the US they're still far below what it was landard in the US have a trillion dollars of commercial real estate loans coming due this year if the landlords can't find the money then it could create massive losses for the banks we're already starting to see that play out New York Community Bank Corp stock down 41% in early 2024 it started with New York Community Bank which increased the amount of money it had to put aside to cover potential losses tied to the commercial real estate sector and shortly after Azora Bank in Japan also saw the same thing with the shar's plunging because it was putting more money aside to cover losses tied to yis commercial real estate especially offices we got to talk of course about Azora because that was a huge plunge yesterday that happened in the Bank of Germany Canada as well where Insurance firms and Pension funds started to put aside more money or write down more losses tied to commercial real estate in the US these write Downs in the US are starting to have Global impacts and investors are reacting very aggressively when they see these losses being recognized share prices are plunging bond prices are plunging some of this was predictable low interest rates can create risks people at the Federal Reserve have been worried for at least 8 years about commercial R estate and the threat of a bubble but in a way it is the acceptable byproduct of the larger picture which is to try and cure the economic wo from the financial crisis nothing really was done to prevent commercial real estate prices soaring it's going to put a lot of stress on the owners of these properties the banking agencies are very focused in helping the banks what will really allow more owners and lenders to skate through this crisis is if interest rates start to come down more to a level that is more manageable if that doesn't happen and the economy in the US in particular still seems to be running quite hot there's no really easy solution the financial stability system seems quite secure at the moment one of the reasons for that is lenders demanded larger down payments from borrowers which means they have more protection but things could still go badly wrong if a few banks have too much of this debt they could go under and when Banks start going under a panic could ensue that Sparks a wider financial crisis

Channel: Bloomberg Originals

Views: 1,008,752

Keywords: News, bloomberg, quicktake, business, bloomberg quicktake, quicktake originals, bloomberg quicktake by bloomberg, documentary, mini documentary, mini doc, doc, us news, world news, finance, science, commercial real estate, real estate, empty office buildings, empty commercial real estate, commercial real estate bubble, empty offices, real estate bubble

Id: SfW5BAch9jQ

Length: 7min 7sec (427 seconds)

Published: Fri Feb 23 2024