We do have the makings of “2008 redux”. The mass exit from office buildings has been in the works for 3 years. It’s taken a while for various reasons: It’s been propped up financially in some cases. Some buildings have converted to mixed use or multifamily. But it seems the chips are finally starting to fall as commercial defaults are rising.
Seems obvious we are not headed for good times with this. My question is: will anything stop it from being a major economic disaster?
The fact that everyone has been aware of it for 3 years. The decline in corporate properties has been priced in already - many if not most commercial real estate property holders are trading below book value right now.
In 2008 by contrast the way derivatives were rated hid the underlying issues with the mortgages and this made the problem for banks less obvious.
It’s also different in who is going to take the hit, and what happens to that hit. Many of the most impacted companies are going to be major global companies who have invested in sprawling campuses. Generally they’re not just going to walk away from them, leaving the banks to deal with losses and unsellable properties. I realize there have been instances of this, like in san francisco with that hotel. But It’s pretty substantially different. Google can take having their multi billion dollar campus drop in value by 50% without making it anyone else’s problem, or really even caring themselves.
I tend to agree with you, but then again, I worked in mortgage lending in the lead up to 2007 and we all knew it was coming. There was hope that a government bailout would occur either by a straight dollar investment, cutting rates, or a special refinance program, and a crisis would be avoided. That hope seemed to prop things up long enough to catch people with their pants down when it finally collapsed.
So, is it truly priced into the market right now, or is hope for a resolution propping things up?
The political situation would prevent any new bailouts. If there’s anything it’ll have to come from fed, which doesn’t seem to be in the mood right now.
One thing to note on rates though - presumably any mortgages held by troubled companies would be a pre-pandemic rates, or were refinanced in the temporary period of low rates during the pandemic. This means in a way inflation is its own bailout because many of these mortgages are below the rate of inflation, and this enhances whatever revenue streams these properties are able to produce.
Of course it’s a double-edged sword though, because high rates also reduce property values and means that selling has an additional financial cost (losing the favorable mortgage rate). Which also reduces the incentive to sell. As usual, the future is unknowable, but I’m not worried about it because the market has already priced in the worst outcome.
Definately agree on the political climate. I don’t see it happening again. One thing to note: Commercial mortgages are adjustable rate 99% of the time. If there is a fixed rate component, it’s typically only for the first 12 months of the term.
We do have the makings of “2008 redux”. The mass exit from office buildings has been in the works for 3 years. It’s taken a while for various reasons: It’s been propped up financially in some cases. Some buildings have converted to mixed use or multifamily. But it seems the chips are finally starting to fall as commercial defaults are rising.
Seems obvious we are not headed for good times with this. My question is: will anything stop it from being a major economic disaster?
The fact that everyone has been aware of it for 3 years. The decline in corporate properties has been priced in already - many if not most commercial real estate property holders are trading below book value right now.
In 2008 by contrast the way derivatives were rated hid the underlying issues with the mortgages and this made the problem for banks less obvious.
It’s also different in who is going to take the hit, and what happens to that hit. Many of the most impacted companies are going to be major global companies who have invested in sprawling campuses. Generally they’re not just going to walk away from them, leaving the banks to deal with losses and unsellable properties. I realize there have been instances of this, like in san francisco with that hotel. But It’s pretty substantially different. Google can take having their multi billion dollar campus drop in value by 50% without making it anyone else’s problem, or really even caring themselves.
I tend to agree with you, but then again, I worked in mortgage lending in the lead up to 2007 and we all knew it was coming. There was hope that a government bailout would occur either by a straight dollar investment, cutting rates, or a special refinance program, and a crisis would be avoided. That hope seemed to prop things up long enough to catch people with their pants down when it finally collapsed.
So, is it truly priced into the market right now, or is hope for a resolution propping things up?
The political situation would prevent any new bailouts. If there’s anything it’ll have to come from fed, which doesn’t seem to be in the mood right now.
One thing to note on rates though - presumably any mortgages held by troubled companies would be a pre-pandemic rates, or were refinanced in the temporary period of low rates during the pandemic. This means in a way inflation is its own bailout because many of these mortgages are below the rate of inflation, and this enhances whatever revenue streams these properties are able to produce.
Of course it’s a double-edged sword though, because high rates also reduce property values and means that selling has an additional financial cost (losing the favorable mortgage rate). Which also reduces the incentive to sell. As usual, the future is unknowable, but I’m not worried about it because the market has already priced in the worst outcome.
Definately agree on the political climate. I don’t see it happening again. One thing to note: Commercial mortgages are adjustable rate 99% of the time. If there is a fixed rate component, it’s typically only for the first 12 months of the term.