Disruption comes in many forms.
Sometimes it comes after an industry that was at its height. There are also times, when disruption tears through something already teetering.
The COVID lockdowns really made life difficult for the commercial real estate sector. This is something that is not going to get any better. To many the question is how much damage it causes.
Here is a video that covers some of the basic of the situation.
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Commercial Real Estate: Devastation In The Making
In the United States, many major cities are finding their commercial real estate sector half full. The lockdowns were seen as a temporary measure. Unfortunately, this is not how it unfolded.
The remote work movement is real. Major companies opted to reduce their footprint. At the same time, workers realized they didn't like the daily commute.
As the video explains, the situation is compounded by the fact that an estimated 20% of the commercial buildings in New York City are outdated. That means they are only worth the land less the cost to remove the building.
These properties cannot really be rented since tenants want modern offices.
The question is what about all the debt. These properties were all leveraged, stacking more loans on tOP each step of the way. When values were increasing, it was never a problem.
Now that values are plummeting, the situation is bad.
Economic Fallout
As we saw with Evergrande in China, real estate collapses can cause massive problems.
Banks have taken a wait and see attitude. Unlike residential real estate, institutions that lend on commercial properties have a bit more flexibility. They tend to put off foreclosing as long as possible. Banks detest the write downs since they have to raise more capital.
When this happens, their stock get crushed. We saw this start earlier this year.
Will it spread?
The answer is an affirmative. A more important question is who will be affected. It is unlikely the major banks take a hit. What is going to get hurt are the regional banks. This could pose a similar problem as we saw with the likes of Silicon Valley bank a couple years ago.
Unfortunately, if this was just one country, it might be limited. The challenge is that it is global. China's real estate issues are well known. The EU is suffering from an abundance of commercial space as compared to demand, albeit to a smaller degree than the US.
Major US cities are in peril. Not only are there outdated buildings, the race against technology is on. With the pace of advancement, an uptick in unemployment could only add to the woes.
Many technology companies are already laying off workers. The latest is Intel canning over 15,000 people.
In other words, commercial real estate was suffering when things were supposedly good economically. What happens if the predicted recession hits with full force?
Things will only compound.
There is no way that we are not going to see a lot of paper written down. It is only a matter of how much and when it happens.
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