So check it. I've been going through the motions of buying a commercial building, off and on, since 2017 or so. It's a bugshit process. Make no mistake, it's stupid, it's everything that's wrong with capitalism, and all if it is fucking horrible. To wit:
- You're going to pay prime plus two, prime plus three. If prime is 2.27%, your commercial loan is going to be 5.27%.
- Your term and amortization aren't the same. You buy a house? You amortize the loan over 30 years and pay it off over 30 years. You buy a dentist's office? you amortize the loan over 30 years and pay it off over 5. Maybe 8. Rarely 10.
- Which means obviously you will never pay it off. Which is okay because what you're going to do is sell it and buy another. Because of the carried interest rule you don't pay taxes that way. Capitalism!
Prime ain't 2.27 anymore, tho. It's 8.25, mutherfucker.
Let's play a game. You bought a million dollar dentist's office in August 2015 when prime was 3.5. You put down $300k and have been paying $4k a month.
You've paid around $300k. You owe $600k. The building is maybe worth $1.4, $1.5 and you've got $400k in equity in the place.
And no one is buying.
So okay. Let's re-up. You owe $600k. Nothing changes, except now you're paying $5700 a month for the same damn building. Your mortgage fees just went up 30%. How much of a cushion do you have, by the way?
- Fitch Ratings recently estimated that 35% of pooled securitized commercial mortgages coming due between April and December 2023 won’t be able to refinance based on current interest rates and the properties’ incomes and values. While many malls and hotels face high default risks, the situation is particularly dire for office owners.
Xiaojing Li, managing director at data company CoStar’s risk analytics team, estimates that as much as 83% of outstanding securitized office loans won’t be able to refinance if interest rates stay at current levels.
Gonna show you a picture. Comes from here.
$22.9 trillion minus $20.7 trillion is $2.2 trillion.
- Nearly $1.5 trillion in commercial mortgages are coming due over the next three years, according to data provider Trepp.
What's the outcome and response here? Should we expect to see more regional bank failures, systemic collapse/consolidation of the regional banking system? Further regulation into commercial loans? Bailouts? (which will kinda piss me off personally if we go this route while still screwing a generation and more with student loan debt). Plus...I mean...what happens to all this unoccupied physical space that is zoned for offices, retail, etc etc.
If you figure it out, let me know. I'll say this: I'm not spending money I don't have to... other than the sign, which pretty much allowed me to financially cripple my landlord. Would I have done that if he weren't an absolute douchenozzle? Absolutely not. I offered to buy the sign outright and charge everyone else airtime but that made his peepee shrink. I think those of us with powder? Are keeping it dry. And those without powder? Are hoping to shit the enemy doesn't come, while knowing he has to.What's the outcome and response here?
Its not a crisis yet, but it will be. If rates stay this way for 3-5 years a lot of businesses will be in big trouble not just real estate. Right now the interest rate inversion is suppressing rates by 100-200 bps because the market expects rates to come down soon. If that expectation goes away then you will be in the 10% range really quick. Its not just real estate either, a lot of business that skirted by on low interest rates but have high debt load are going to find out the hard way that they weren't actually viable. Thats why I think a bad recession has to happen soon. That being said soon could be 1-2 years because right now were riding the irrational exuberance roller coaster. As for your building, if its worth 1.4m but nobody is buying its not worth 1.4 mil. It might be worth 1m or it might be worth 700k, but if nobody is buying then it aint worth the asking price. Take the original price multiply by .7 for interest rates and then multiply by how ever much more you have been able to raise your asking prices since the original 1m sale and that maybe close to what its worth.
This is absolutely correct, but if you speak it aloud you kill angels. If you refinance it at 1.2 you just actualized a loss of $200k. The comps in the city go down by $200k. Commissions go down by $200k. This is one reason why pretty much all commercial real estate brokers no longer list anything - if you make it public, you move a very, very thin market. We're reaching the point where people are going to have to start speaking this stuff aloud because it's being refinanced. It's being sold. It's being recorded in the public record. And then it will be in the economic data, and then it will be the new reality, and then it will be a crisis.As for your building, if its worth 1.4m but nobody is buying its not worth 1.4 mil.
Commercial real estate pricing is some sort of mass hallucination event. Everyone from investors to banks to developers. All the players are mostly investing with other peoples money and so there isn’t a force that naturally check prices back down to reality. Right now we’re in phase where wile e coyote has run off a cliff but hasn’t realized that it’s time to fall, but it’s going to happen eventually. Someone will need cash, have to sell and price discovery will happen.
Yes and no. The loans are callable from my recollection but nobody wants to call an asset that’s more than worthless. CRE that’s selling right now is going for a steep (70%) discount in sf and other metros, so while it could get forced to liquidate it’s unlikely to happen until the owner walks away and taking possession is the best of the shitty options. It’s better to restructure the deal and play hide the losses for a couple more cycles.
Dude if nobody is writing leases in all of Bellevue the minute something ticks, it's all going to tock. San Fran is its own clusterfuck. Hilton is about to walk away from Union Square FFS. NY is fukt in a different way. Deals need to get done in the course of normal business and they ain't - when they do, it'll all happen at once.
Thanks. I think he does too. He's too much of a pothead to have any ambition to change jobs without a reason to, and he only ever started working for that shitty company when they bought the company he used to work for. So while I'm sure it's frightening in the short term to have three kids and no job, it will be liberating eventually.