Is the commercial real estate market collapsing?
I have been seeing in my Reddit feed an increased amount of posts from this subreddit.  What is going on?
[{"id": "fl3vob6", "text": "Absent some sort of major government stimulus or miraculous containment of the virus CRE is primed to take a huge hit. Imagine stores, restaurants, bars, MF and SFH tenants, and almost anyone who rents not being able to pay their bills. People in self-storage, industrial, logistics CRE might be well insulated, and enough government money pumped into the economy could turn things around in a few months- but right now, no one knows what the fuck is going to happen.\n\nI think [Denmark's Economic Freeze](https://www.theatlantic.com/ideas/archive/2020/03/denmark-freezing-its-economy-should-us/608533/) might be a policy worth considering- if CRE falls it takes everything with it. As long as companies have money to pay their bills, rent gets paid. Once this virus dies down we can just restart the economy where it was instead of going through all of the inefficiencies and loss of productivity caused by firms having to hire new workers, and all the pain those workers will face from loss of employment.", "replies": [{"id": "fl46hkp", "text": "Wow that Denmark plan is really something.  They are basically betting on their near future dramatic comeback.", "replies": [{"id": "fl46ku1", "text": "Yeah I was thinking about that- what if this shit lasts a year? two? Will they be better or worse off?", "replies": [{"id": "fl489o4", "text": "Depends on what kind of reserves they have but if it's not much I can see them being in a far worse situation later trying to sustain unsustainable situation", "replies": [{"id": "fl49ltn", "text": "Like the sunken cost fallacy on a national scale", "replies": [], "depth": 5}, {"id": "fl4fvkp", "text": "The Danish Krone is pegged to the Euro (per ERM II) which will limit their ability to inflate their currency and print their way out of the downturn if it goes long term.\n\nWhich raises an issue I have not considered:  What will happen to the Euro?\n\nEach country may be faced with agreeing to massive devaluation if they take the massive money-printing route.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fl3wvx4", "text": "Longer term, many workers are in the midst of proving they can work from home. This may lead to a reduced commercial footprint for many corporate businesses after they realize how much they can save in overhead if they don't renew.\n\nThe upside is these commercial properties will present some mixed use opportunities down the road.", "replies": [{"id": "fl43ztq", "text": "I\u2019m highly skeptical of this. Employers know that in-person communication and collaboration is far more productive and creative (for most businesses) than working from home. I think the impact on office demand will be minimal in the long term.", "replies": [{"id": "fl478td", "text": "They can downsize space to adapt to periodic team meetings.\n\nReducing overhead is a competitive advantage for many businesses.\n\nSide note:  If WeWork wasn't already double bankrupt, this event would be its death knell.  It was tragically doomed, evidently.", "replies": [{"id": "fl48k1x", "text": "For hotel office companies like wework, sure. But I still think most companies won\u2019t downsize due to 2-3 months of remote work. People thought the whole \u201copen office layout\u201d would crush the industry. It didn\u2019t.", "replies": [{"id": "fl48txl", "text": "We will wait and see, but the overhead issue will be paramount for a lot of clients.  \n\nThey can offload the overhead of office space to their employees; employees get an effectively free raise, with reduced commute expenses and added free time at no cost to the employer.", "replies": [{"id": "fl48ysm", "text": "At the cost of productivity and collaborative creativity, i don\u2019t think so. Maybe for call center type employers. \n\nLike you\u2019d said, we\u2019ll see.", "replies": [{"id": "fl49sm6", "text": "Good point.\n\nKeep in mind, Zoom and similar services are growing, as people use them and get accustomed to doing those things in virtual meetings, their adoption should grow.\n\nIt will be an interesting time in the industry, to be sure.", "replies": [{"id": "fl4c255", "text": "I have about 25000 co-workers in my company. This is a very geographically diverse group litterally spanning the globe. People that sit 4 desks away still just get on Skype or zoom to work on something instead of booking a room or walking 20 steps.\n\n\nMy boss is in the Midwest, I am in the West, and my bosses boss is in NYC. Only the bosses boss has an office space that's used more than once a year.", "replies": [], "depth": 8}], "depth": 7}, {"id": "fl4buun", "text": "Not all jobs require collaborative creativity. There are hundreds of thousands of corporate jobs that can be done in isolation and many improve productivity due to less office nonsense. \n\n\nI agree though that those jobs that require in person face time won't see much change but all of the rest should be looked at for savings.\n\n\nAnd even setting the savings aside, how about the vast improvement in health for all the workers that don't have to spend 30-120 or more minutes of every day commuting. That alone is worth it to the workers, even if the assumption of reduced productivity comes true.\n\n\nIt's funny, when I was commuting I worked an average of 2.5 hours less every day because of being stressed about the parking lot travel to and from, and I'd take a full hour lunch.", "replies": [], "depth": 7}, {"id": "fl4zkie", "text": "I think you are out of touch with reality... business will inevitably shrink and businesses will see the office space as a burden, one which they can pass off to the employee( home work). Employee won\u2019t mind because they get to reduce car expenses.", "replies": [{"id": "fl5720u", "text": "Again if you are a call center or back off employees, sure.\n\nBut in the competitive professional services/sales world, employers prefer to have their staff together physically, collaborating.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "fl6csew", "text": "there's no evidence that this will be over in 2-3 months.   Even so, I personally agree that actual offices are not going away anytime soon, assuming this doesn't just turn into a seasonal flu with a 3% death rate and we social distance for years.   (I don't see any evidence for that happening either, but it seems as likely to me as us being over it in 2-3 months.)  \n\n\nI mean, I work a job that is prime for telecommuting.   Engineers need lots of uninterrupted focus.   And I know some engineers who are way more productive from home. (I roughly estimate this at 20% of the engineer population)   -  but most of us don't have that discipline.   Going in to the office makes me like 10x more effective.   Partly 'cause the communication thing, but mostly because going to the 'work place'  makes it easier to focus on work.   If you are going to hire me... you are best off paying for an office, even at bay area prices.", "replies": [], "depth": 5}, {"id": "fl6jwqx", "text": "&gt; whole \u201copen office layout\u201d would crush the industry. It didn\u2019t.\n\nWe aborted that because it was a bad idea for productivity because of distractions.  You know what has even less distraction?  WFH.\n\nSo this is the opposite direction of open office layout, interestingly.", "replies": [{"id": "fl6ueti", "text": "There are plenty of distractions at home. Distractions at home are the number one reason for office!", "replies": [{"id": "fl7ow62", "text": "I guess that depends on personality.  I can't imagine working in a room from home is more distracting that a cubicle with an assload of people around talking.  Not to mention an open office.", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fl6juir", "text": "&gt; Employers know that in-person communication and collaboration is far more productive and creative (for most businesses) than working from home.\n\nAs someone who's worked multiple tech jobs:    \n1) Plenty of the people you work with are at another location anyway, so that's moot    \n2) It's generally less productive to have people in the office, as long as you have defined work hours    \n3) The primary reason is that managers don't like it because it makes their work less visible, and they can't \"catch\" employees not spending all 8 hours hard at work (which never happens outside of crunch or something).  (not all managers)\n\nHaving no or an unimpressive office DOES have a downside, and that's VCs and customers.  MUCH harder to convince people you're a serious company without a large impressive office.... I think it's dumb, but I get the psychology.\n\nLots of scam companies around.", "replies": [{"id": "fl6u14r", "text": "Not sure what to say, beyond I disagree entirely. I think most employers and decision makers of office-using businesses (again, excluding back office and call center) realize the value of having a physical presence for collaboration. Architects, finance companies, professional service firms, etc. need creativity and collaboration to stay competitive in their respective industries.\n\nWFH has been a possibility for over 10 years now. You would think companies would have tried it (obviously not to this extent), and adopted it more heavily by now. I think by 2021, office leasing activity/demand will commence as it was.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fl3xypd", "text": "Cre funny enough will be one of the last, quite possibly the last market to collapse, due to how illiquid it is. Sure reit prices will drop, but the underlying assets have not sold or changed hands. \n\nThe first to drop will be land prices, and after that who knows. \n\nIf this thing blows over and things bounce back, prices may be largely unchanged. Panicked people would have sold literally everything else first. \n\nEven if you wanted to fire sale a nnn property, if you waived all conditions and did it all cash, how many people are still involved in that transaction? Title, insurance, attorneys, estoppel, county recorders office, ect. \n\nAnd that is the best case. For a majority of properties it may be literally impossible to close on deals in some states. \n\nIt is not collapsing, it is frozen in time.", "replies": [{"id": "fl43hzr", "text": "Like tears in rain", "replies": [{"id": "fl44spx", "text": "sick reference bro\n\nfor the uninitiated https://www.youtube.com/watch?v=iOtf2vVScOc", "replies": [], "depth": 3}], "depth": 2}, {"id": "fl44k6x", "text": "Why land first? I have been interested in buying land for sometime.", "replies": [{"id": "fl45rkq", "text": "Because the value of land is in the improvements. Bare land doesn\u2019t generate any cash flow. If there is no market to develop the property, then the value goes down. Sometimes very dramatically.", "replies": [{"id": "fl47wrb", "text": "Makes sense", "replies": [], "depth": 4}], "depth": 3}, {"id": "fl470vv", "text": "Land's ultimate value is its potential...\n\nWhether you want it to grow crops or build homes or warehouses...\n\nIf all those things are depressed, the land's potential is reduced.", "replies": [], "depth": 3}, {"id": "fl475ia", "text": "Land is prone to speculation and speculation is prone to crashes. All the value of land is in development, no development means no value.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fl4lmqf", "text": "I agree. I\u2019ve been in CRE for 20 years...born and raised in Houston.", "replies": [], "depth": 2}, {"id": "fl5lb4g", "text": "Hotel market is in freefall.  Unemployment is going to hit 10% before summer is up.  Have you seen the trajectory of the stock market?  This is not going to be your typical end of cycle downturn.  Hotels getting smoked right now, retail is going to be right behind them.  The next few months are going to be unprecedented.", "replies": [], "depth": 2}, {"id": "fl5z835", "text": "NNN assumes the tenant has the money to pay.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fl3y139", "text": "done.  leasing done. brokerages done.  this will take a long long time to recover.  for all those big boys that didn't stash for a rainy day , now you know why I did.", "replies": [{"id": "fl4suhb", "text": "Not sure why people downvoting but am really surprised that a lot of businesses are barely hanging on and are operating paycheck to paycheck", "replies": [{"id": "fl4way4", "text": "they don't get it and they haven't been in the game long.   I've been in this over 15 years.  seen bad seen good.  this isn't bad.   this is done.  if I was starting out as a leasing broker right now id consider an alternative career when this shits done.   nobody will be looking to open new businesses in six months to 12 from now.   landlords that rely on commercial tenants are fucked.   \na lot of businesses will not be able to sustain a shutdown of this sort.", "replies": [{"id": "fl59rub", "text": "If I was starting out as a broker (leasing or otherwise) I would RUN to amazon right now to try to get a job until this blows over. Tenants are either begging for rent relief or just flat out telling us that they won\u2019t pay April rent. We\u2019ve had tenants who signed there leases last week asking us to tear them up. The only lease activity that I see happening is very short term renewals for expiring tenants - except landlords won\u2019t have the money to pay commissions or TIs. The only bright spot in commercial real estate that I see right now is the guys who do receiverships. \n\nPeople compare this to 2008. That\u2019s wildly optimistic, IMO. The benchmark right now should be 1929 - except this is going to happen faster, and since it\u2019s a virus we can\u2019t New Deal our way out of it by putting people to work on infrastructure.\n\nEdit: of course if they find an effective therapeutic in the next couple of weeks, or the government figures out an effective financial intervention then we might be ok. If this drags out for more than about 2 months then we\u2019ll be looking at CRE Armageddon.", "replies": [{"id": "fl5alag", "text": "this.   1000 percent.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fl4wffa", "text": "most businesses operate with this cashflow.  they don't have reserves past 1-2 months max.  if that.   \nI've built a business over 15 years going strong and even I'm going to be fucked a bit", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fl3yb5d", "text": "I think there\u2019s a lot of over reacting in here. \n\nThose $1000 per adult stimulus checks will go a long way for my MF tenants.", "replies": [{"id": "fl46mtg", "text": "I don't see how $1000 can do much for cash strapped people. They will burn thru that in a couple weeks", "replies": [{"id": "fl6jxoo", "text": "I think the intent is it's only to help for a few weeks.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fl47ggn", "text": "What about next month? 1k a month is nothing for people in major metros like Miami, NYC, SF, Seattle, Portland, LA, and many others. It's a band aid on a bullet wound.", "replies": [{"id": "fl48k88", "text": "I live in CA. I would never invest here beyond my personal residency. $1k wouldn\u2019t do much for the metros and states you listed but in the Midwest for my tenants it will go a long way.", "replies": [{"id": "fl49pze", "text": "It will go one month, two months tops.  What happens after the GOP socialism runs out in three months? Also those stimulus checks are not going to be available for a ton of your renters if 1k a month is going to be a lot for them.", "replies": [{"id": "fl4asx8", "text": "Why would it not be? I have seen nothing under the current proposed plan that would suggest it wouldn\u2019t be. \n\nWe\u2019ll take this one month at a time. Will be a rocky road this year. Fortunately I have planned reserve to cover any debt service I need to and I don\u2019t have any balloon payments due for a few years. \n\n\ud83e\udd1e", "replies": [{"id": "fl4axgf", "text": "Where are you seeing that it is going to be a regular payment?", "replies": [{"id": "fl4b6ik", "text": "From the plan I read proposed, both Dems and GOP said it would be sent in two payments once per month for next two months. Also it\u2019s a check per adult and child.", "replies": [{"id": "fl4b9qo", "text": "Can you link the plan?", "replies": [{"id": "fl4bizy", "text": "Yeah I\u2019ll try and come back to this with a link. Wife yelling me to get off phone.", "replies": [{"id": "fl4c2ja", "text": "My name is Buck, I'm a 57 year old American man who has been left by his wife Debra.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "fl6jzsr", "text": "The people renting is super expensive areas like that should have commensurately more income which counters that.", "replies": [{"id": "fl6kfg0", "text": "You think Portland is a \"super expensive\" area? Maybe compared to some shithole red state lol", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fl494ko", "text": "If my tenants are cash-strapped and evictions are stayed they\u2019re not going to be prioritizing rent. There are some decent ideas in the sub about stalling and prorating rents until things stabilize.", "replies": [], "depth": 2}, {"id": "fl8jd95", "text": "Location matters.  $1,000 will not go far in Long Beach California.  And there are many more expenses than rent that need to be considered.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fl43sbq", "text": "Not anymore than the rest of the economy when you remove demand completely. The market should bounce back just fine once this is over. Some office space might take a hit if people decide they can work from home productively, many cant, but office was already taking that hit. Im not sure this thing has legs.", "replies": [], "depth": 1}, {"id": "fl44fjd", "text": "Certain markets are getting crushed for sure. Retail is one. I think it\u2019s still too early to know the exact fallout. Multifamily still looking like the safest asset but there is a lot of uncertainty for sure. I think a lot will depend on the specific market and asset class.", "replies": [{"id": "fl7cz5x", "text": "&gt;CMB\n\nI have 3 small MultiFams in Long Beach and I am concerned:  The duration of the Stay at Home order is indefinite.  My renters do not typically have much savings.  Politically, landlords are cast as villains so I am worried the most expedient solution for government is to freeze evictions, and suspend lease obligations.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fl44nvx", "text": "Citigroup has effectively stopped lending on CMBS", "replies": [{"id": "fl47d4m", "text": "Honestly, this reaction should be predictable. \n\nWould you lend in this environment?\n\nI wouldn't.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fl4a77e", "text": "We have a bunch of subdivision development appraisals in the works. We just got the email that they want a few different scenarios included so they can pare back the cope. \n\nNot a huge difference, but between them, it's maybe 100 lots, so maybe $3mm in development costs that won't be spent, and maybe $25mm in future residential construction.  There are a lot of people affected by that.", "replies": [], "depth": 1}, {"id": "fl4m7dg", "text": "Lender here. Our capital provides the backbone of the entire industry. The volatility in the capital markets has completely locked up the system - bond yields change drastically by the hour, which causes competing yields (ie mortgages) to also change by the hour.\n\nThe issue is lending on real estate isn\u2019t as quick as clicking a button to buy a bond. You have to underwrite cash flows. Normally those are pretty stable (except hotels), but now that\u2019s not so true. I\u2019m closing a shopping center right now, and all of the tenants are dark. How long until the Borrower can\u2019t make debt service payments? Should I revoke my commitment? I\u2019m quoting a few apartment complexes in a particular market that has concentrated exposure to the energy sector -  I\u2019m requesting details on tenants\u2019 employers - how many will be laid off? I\u2019m trying to close another multi property and need to complete radon testing - oops our consultants won\u2019t go into the property cause someone had covid19.\n\nQuoting new business is tough - I\u2019ve had to retrade clients often, sometimes twice in the same day with spreads going out 50 bps each time. At least we\u2019re still lending but not at 65%. I\u2019m only focusing on the best sponsors and low leverage (on new underwriting metrics that I feel comfortable will not miss - no rent growth for a few years, 25% credit loss through half this year, higher vacancy, etc). 1 month ago these deals would be 40% LTV, now it\u2019s 55% and I\u2019m not giving I/O, I want lock boxes day 1, and cash reserves funded. \n\nThe lending environment has changed dramatically in the last week. CRE CLO market is gone. Repo lines completely changed pricing/advance rates, banks have tightened, agencies have 300+ spreads. Retail, hotel financing gone. Everyone is risk-off. A few months ago at the MBA there were 200+ debt funds competing for deals.  I think those guys are all out of jobs now. \n\nThis is not only happening in real estate - it\u2019s happening in every sector across the economy. This is why the fed is freaking out trying to inject liquidity otherwise the whole system breaks down and next will be massive layoffs, debt restructuring, financial institutions will be crushed and the juice that makes the economy turn evaporates.", "replies": [{"id": "fl4p7hd", "text": "I agree and would like to add that this does not only impact the new deal pipeline, but if you have existing loans in your balance sheet as my employer does then you need to look at how measures such as rent deferrals and eviction freezes are going to affect cash flow for class C Multi Family.  \n\nPersonally, I think that office footprint demand will decrease going forward. All of those employers that were reluctant to let their employees work from home are finding out that a lot of them can really do their job from home and will adopt flexible and rotating schedules.", "replies": [{"id": "fl7z6eq", "text": "That\u2019s what we\u2019re thinking too. Office space cut back or any spaces held get thinned out. More WFH and teleconferencing going forward.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fl4x44k", "text": "Can you talk about CMBS loans? If the underlying loans fold? Everything on top folds, like mortgage backed securities, correct? Who is holding those assets on balance sheet? Credit suisse, DB, morgan Stanley, prospect capital? Who should we be looking at to see if this is starting to collapse? That's my big concern. Carl Icaahn just talked about this. I appreciate your input. Thank you.", "replies": [{"id": "fl6evl9", "text": "Sorry CMBS is not my specialty. I don\u2019t want to speculate. All I know is spreads are out and there\u2019s execution risk.\n\nEdit - recent AAAs pricing with 300 spreads. That\u2019s insane. I would expect underlying loans to be extremely wide - ballpark 400 to be safe", "replies": [], "depth": 3}], "depth": 2}, {"id": "fl62jvl", "text": "Since you're on the inside, what are the discussions regarding servicing and the extension of forebearance looking like? I have asked two different lenders for IO payments for six months on two retail properties. I have two more properties with CMBS and if the B piece guys are getting destroyed, then does that mean they'll be coming hard after our assets to get it back? Or are they too busy licking their wounds? What are you hearing about that?", "replies": [{"id": "fl6f1dg", "text": "Case by case. Show me financials. I would want more collateral to modify your deal.", "replies": [], "depth": 3}], "depth": 2}, {"id": "fldzqq5", "text": "Great write up. The MBA sure was fun this year though.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fl4qnd6", "text": "Of course not. Stop overreacting sheeple", "replies": [], "depth": 1}, {"id": "fl59mxd", "text": "I\u2019m an industrial specialist and I am not seeing things quiet down  as much as office and retail (which is obviously getting crushed). Amazon has not slowed on multiple deals throughout the Midwest (I can\u2019t speak for other regions) and 3pl\u2019s in my market are frantically looking for short term space to compensate for supply chain disruptions.\n\nAdditionally, the thought process is that, In the aftermath of this crash, manufacturing (especially pharmaceutical) will start moving back to the US. \n\nFrom a broker standpoint, if you have cash buyers who have been looking for deals the last two years...this is going to be their opportunity.", "replies": [], "depth": 1}, {"id": "fl5xyry", "text": "If you don\u2019t have 100% cooperation from everyone involved, this whole charade is about to blow up. The government has to tell banks to work with landlords. Who can in turn work with companies. Who can in turn work with employees. Break one link in that chain and America as we know it is done. I\u2019ve reached out to multiple banks and they have all - to a T - given 90-day deferrals in payment. That is the only thing in all this mess - the only thing - that has given me an ounce of confidence we might make it through.", "replies": [], "depth": 1}, {"id": "fl6punq", "text": "For players in dare need of cash flow, it may be the end of the game. But for the big players is a lifetime opportunity. Real estate is a business where time plays a major component, and it is measure in years, not months. If your real estate business depends on months, you are in the wrong business.", "replies": [], "depth": 1}, {"id": "fl8ksgc", "text": "Anyone see any bright spots in retail?  Urgent Care Centers?  QSR\u2019s?  Dollar Stores? Crazy how since the 2008 debacle we have looked for multi tenant with a good mix of service sector tenants!!!", "replies": [{"id": "fldcetu", "text": "Urgent cares (already going out of business before) are being shut down to preserve supplies for hospitals in my market, can\u2019t see a bright spot there. Even general medical practices in retail properties are seeing a strong decrease in revenue due to decreasing patient volume.\n\nI\u2019m curious if grocer/big box/discount store profits are way up right now or if it is being offset by the need to ramp up staffing dramatically. Even local international grocers are seeing store shelves cleared here. That\u2019s the only potentially bright spot I can see at this point!", "replies": [{"id": "flde8y5", "text": "There will surely be some big winners in the market. With Grocers I\u2019m concerned that when this is over their revenue will fall off a cliff due to everyone wanting to get out and dine more. I believe investors will be looking for retailers who immediately change their models to thrive in the new environment we will all be living in after this is over.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "flao13f", "text": "With the ongoing virus, most property showings are being cancelled but we can't really say that it is collapsing.  The competition however is pretty tight though.  I use an app called Zumbly, they only cater in the mean time to LA and Chicago properties but they have this option call \"Cheapest per sq ft\" in their pro tools.  It helps you get the best deal in a specific area.", "replies": [], "depth": 1}, {"id": "fliw0pj", "text": "Definitely some things moving around. We\u2019re giving an update about the impact on retail this Friday, link below. Or reach out direct and we can chat offline.\n\n[Live Market Address | COVID-19 Impact on Retail Investment Property](https://attendee.gotowebinar.com/register/5242899557056040715)", "replies": [], "depth": 1}]