From Fortune, February 25:
The demolition phase is coming.
As remote work keeps employees out of the office and vacancy rates sit at all-time highs, commercial property owners are desperately trying to avoid default: by upgrading their spaces to attract new tenants, converting their space into apartments or simply offloading their assets. One longtime industry professional doesn’t think that will be enough.
As the market evolves, says Fred Cordova, of Santa Monica-based Corion Enterprises, there won’t be room for everyone—and about a third of office buildings are endangered species.
“There will be a bifurcation…The product in a good location with a good, safe environment will recover. And then you’ve got another group that will somehow hang in there and get reset in pricing,” said Cordova, who is CEO of the real estate consultancy. “And then you have the others that are basically worth nothing—the D class. Those just have to be torn down. That’s probably at least 30% of all offices in the country.”
Residential conversion is the much touted solution. And optimists have suggested that federal aid in the form of subsidies to assist with converting offices to apartments could offer some aid to developers suffering from the precipitous drop in demand for office space—but it likely won’t be enough to stop a significant chunk of the commercial market from collapsing, both figuratively and literally....*****... Converting offices into apartments can be prohibitively expensive. Zoning codes mandating natural light and fresh air make it tricky to adapt large, open-concept office floor plans into apartments that are up to code. Many buildings put up during the construction boom of the 1950s and 60s simply aren’t capable of being converted into housing. And skyrocketing construction costs are squeezing margins for would-be developers, meaning that simply tearing an office building down and replacing it with brand-new apartments is actually often the cheaper option, said Cordova.“[We used to be involved with] conversions that cost $75 to $150 a foot. Now, the market rate is $350. For high-end luxury, it’s $450. The economic model is very challenging for conversion,” said Cordova. “The way to do it is for governments to provide subsidies for conversion…the government needs to provide about a 20% cost subsidy.”
Those efforts are already underway: the Biden administration earmarked $35 billion in below-market-rate loans to help developers with these types of conversions last fall....
The ghost of JM Keynes isn't just smiling, he's laughing his (ethereal) backside off
From Bloomberg via Crain's Chicago Business, April 13:
The investor who won big in the 2008 housing crash has advice for office landlords: Tear 'em down.
Kyle Bass has some advice for real estate investors: Tear it down.Here's an interesting point:
The founder of Dallas-based Hayman Capital Management says office buildings in cities need to be demolished because demand isn’t returning and it’s impractical to turn most towers into apartments.
“It’s one asset class that just has to get redone, and redone meaning demolished,” said Bass.
The Dallas-based investor shot to fame more than a decade ago betting against subprime mortgages before the US housing collapse. He’s since pushed a series of contrarian investments that have occasionally burned investors such as predicting the collapse of Japanese government debt and Hong Kong’s dollar....
....“You have to jackhammer rebar and concrete. You have to re-plumb everything,” Bass, 53, said in an interview. “And when you finish it, it just doesn’t feel right. You wouldn’t want to live there,” he said, citing for instance the lack of light........MUCH MORE That was followed in May 2023 by:
"Warren Buffett on pain in commercial real estate amid tightening credit: ‘Too bad’"
