Here’s a dark view that may cause more than a few sleepless nights if you’re into economic predictions.
I’ve blogged before about the linkage between the failure of the big retail chains and the fate of what remains of the newspaper industry, since advertising by those chains has long been a stable source of income for publishers. Newspapers used to be the primary place for real estate, help-wanted, automobile sales, and classified, all of which have now migrated to competing digital platforms. The implosion of Sears, J.C. Penney, and others is just another big shoe falling.
Now an old friend and successful blogger, Charles Smith, now predicts that what we’re seeing is likely to turn into the next massive financial crisis. Commercial real estate, including the companies that built or own those empty malls and buildings across America, has been built on credit, just like the housing market that crumbled in 2008.
With malls and office buildings facing tough times, Smith predicts there’s going to be big trouble when these loans come due and can’t be rolled over due to a lack of remaining equity.
Talk about an overvalued market set up for a fall. It isn’t just malls becoming empty retail wastelands–it’s Corporate America shifting to flex-work and work-at-home, slashing the need for floor after floor of costly business-park office space.
It’s about restaurants moving to smaller spaces as they move to serving more meals via delivery services.Commercial real estate is grossly overbuilt in retail and office space. Combine sky-high valuations with cratering demand and billions in short-term CRE loans that must be rolled over into new loans, and we don’t have a liquidity crisis, we have a collateral crisis– the assets supporting the debt are no longer worth the loan balance.
Unless the Federal Reserve intends to buy up every dead and dying mall in America, this is one crisis that the Fed can’t bail out with a few digital keystrokes. Gordon T. Long and I discuss this brewing crisis and its potentially devastating consequences in our program, Is Retail CRE The Next Financial Implosion?
His “Of Two Minds” blog is worth being on your reading list. Whether you agree with his analysis or not, it will make you think.
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This could be another sign of problems down the road – laying off risk to the “little guy”.
https://www.wsj.com/articles/a-startups-pitch-come-invest-with-your-rich-uncle-1477408605
There’s a problem with this reasoning:
These properties can be redeveloped, and the new tenants do *not* have to be retailers. The banks can resell the real estate for other purposes. This isn’t like home sales; you do need to rely on the housing market to come back.
Atlanta had loads of empty warehouse buildings. Today, these once-decrepit buildings are expensive overpriced popular apartment buildings with busy restaurants and rich tenants. If Ala Moana lost all of its stores one day, nearly every developer in Hawaii would give their left knee to turn it into condos and make millions. Shit, I would.
you do *not* need to rely on the housing market to come back……………….
Actually, it isn’t all that easy to repurpose buildings designed for one use to another. Malls and retail are basically boxes with minimal plumbing and electrical, often poorly built. Turning warehouses into housing costs as much or more than starting from scratch, so the value is solely in the land. Of course in $1 M per house Honolulu, any large tract of land will be bulldozed and luxury condos constructed. Ditto S. F., West L.A., Seattle, and so on. But these high-demand markets are a thin slice of commercial real estate nationally. Using HNL as a national commercial RE metric is misleading in the extreme. Also, “valuation” is based on income in commercial property. So when a retail center that once fetched $3/sq. ft is now being rented for occasional community college classes at 30 cents a sq. ft., it’s worth 90% less. Outside the bubble of HNL et al., a massive revaluation downwards in commercial RE is baked in, and few people are pondering the consequences.