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This makes complete sense and there’s no question commercial restate is turning into a bit of a house of cards. In some big cities you have many large building

This makes complete sense and there’s no question commercial restate is turning into a bit of a house of cards. In some big cities you have many large buildings where their primary tenant was WeWork, which appears to be imploding, and now adding onto that the whole covid WFM shift where companies are starting to cancel and downsize future leases. When you start to dig into the revenue streams behind these buildings and the owners ability to pay the mortgage back it starts to look really shady in some cases. Most buildings need a fairly high percentage of the floors to be leased out for the building rent to cover the mortgage and moving forward it seems a lot of buildings will struggle to hit that number. It’s going to be an interesting time for commercial office real estate. On the plus side if you’re looking for office space there are going to be some amazing deals!

wnmurphy 6y ago
Commercial real estate is going to be really interesting to watch. For a lot of mid-size companies, the building lease is 15% of your total operating expenses.
- jiveturkey 6y ago
  Especially in CA, where it's propped up by umm prop 13! Every default should trigger a re-assessment when the property changes hands. CA recently put into place a rule (law?) where a change of control of the ownership entity also triggers re-assessment, thereby ending the long running scheme of selling the LLC owner rather than the property itself. If enough of these bad (metric-wise) loans default, there could be a very far reaching negative valuation impact, ie well beyond just the defaulted properties. I expect rents will go up, even as property values go down.
malandrew 6y ago
What would be interesting is if those holding commercial property in high rent cities start converting commercial properties to residential. It may not be easy or cheap, but I reckon it's mostly rezoning and just putting up walls and adding plumbing. If this happens, I wonder what happens to cities afterwards where the ratio between residential to commercial in a city shifts permanently. I reckon we could end up with more WFH or flexible work arrangements because commercial real estate becomes scarcer and more expensive.

wnmurphy 6y ago

Commercial real estate is going to be really interesting to watch. For a lot of mid-size companies, the building lease is 15% of your total operating expenses.

jiveturkey 6y ago
Especially in CA, where it's propped up by umm prop 13! Every default should trigger a re-assessment when the property changes hands. CA recently put into place a rule (law?) where a change of control of the ownership entity also triggers re-assessment, thereby ending the long running scheme of selling the LLC owner rather than the property itself. If enough of these bad (metric-wise) loans default, there could be a very far reaching negative valuation impact, ie well beyond just the defaulted properties. I expect rents will go up, even as property values go down.

malandrew 6y ago

What would be interesting is if those holding commercial property in high rent cities start converting commercial properties to residential. It may not be easy or cheap, but I reckon it's mostly rezoning and just putting up walls and adding plumbing. If this happens, I wonder what happens to cities afterwards where the ratio between residential to commercial in a city shifts permanently. I reckon we could end up with more WFH or flexible work arrangements because commercial real estate becomes scarcer and more expensive.