Redditor explains why commercial property sits vacant instead of reducing rent
old.reddit.comI think this market has been headed for collapse since well before coronavirus. https://www.propublica.org/article/whistleblower-wall-street...
The industry is reading off the exact same script as 2008 but with all sorts of increasingly silly financial instruments based off commercial real estate. Because of course commercial real estate is different.
This is crazy and has been going on for a while. I fear this is every bit as big as 2008. A lot of wealth is about to evaporate. A lot of it from the middle class. I notice that the market is UP and Americans are killing one another in the streets. What is this going to look like when unemployment hits 30%? Our whole economy runs on credit. At some point the banks are going to get squeezed by this. Nobody is going to sign a lease on commercial property in 2020. Businesses need to borrow money. The fed is trying to print money fast enough to shrink the problem, but I do not think there is any way for them to stay ahead.
Totally unrelated question. That guy Jared Kushner: does anyone remember what industry he's in?
Where was the lesson in 'if only we screw up bad enough we will be showered perpetually in lavish bailout wealth'?
Yeah, I think the lesson was indeed pretty well learned. My initial comment was off though--I said that the banks hold a lot of this debt. I reread and saw that reddit poster claimed that the banks hold very little and pass it down the line to funds. Maybe they hold little enough that they will be fine. Maybe they hold enough that they will need a bailout. Either way they win. I agree with you. Their success with mortgage backed securities last time appears to have inspired a sequel.
Ok, forget re-writing old loans. Why do banks continue to write new loan with terms that incentivize their debtors to turn down free money? That must hurt the default rate.
The problem might be recursive. If the shortfall is tacked onto the back end of the loan (plus interest), so long as the tenant is solvent it isn't problematic for the bank. If the client takes a write-down, though, the bank takes a write-down, and they may need to think about reserve ratios and regulation.
I suppose the bank isn't primarily interested in the loan being paid on time, they just want it paid some time. (Not sure, a delay might even be good for their business model?)
The bank is definitely interested in problems of solvency, and the tenant is interested in minimising cost, but kicking the can down the road might be the easiest option for them. Maybe a competitive creditor could break that impasse though. Threat of insolvency certainly would.
Probably at a high level the bank really only cares about being able to somewhat accurately asses the risk of the loan so they can attach the proper interest rate and then sell the debt..
The bank has already sold off the loans.
You're asking why bond buyers keep buying bonds from banks that promise high returns, without looking at the underlying investments.
And that is what hasn't changed since 2008 (or 1929, for that matter).
but .. this has been going on for years in NY. Rossmann video checking out commercial spaces he was considering full year ago https://www.youtube.com/watch?v=Fk5o6cbq_Qs all but one are still vacant. He sometimes shows stores he tried renting 7 years ago, and they are still empty.
I believe this is why the renewed interest (last paragraph):
> That said, Covid is changing everything. I can honestly say I’ve seen 10x more modifications in the last 3mo than I saw my entire career including the great financial crisis. There is a HUGE flurry of activity happing in the commercial finance sector that nobody outside of the industry is talking about.
Maybe this is an ongoing game for commercial real estate speculators. Get a loan, try to get tenants, if you can't get people to pay full-price, default after a few years?
Why do the bankers play along?
Answer: because they pawn the loan off on naive investors who trust the bankers to not be scamming them. Naive investors don't care because they are money managers for a pension or something.
Add a vacancy tax into the mix and see what happens.
Also, seems as though the structural issues need to be updated on the 'owners' of said mortages.
Vacancy tax won't solve the problem, will just escalate the inevitable crash
Wouldn't stopping the very suboptimal behavior earlier be a net good if the crash is inevitable? It sucks to be caught in it of course but returning to remotely rational of renting it to /someone/ when there is demand should help the whole long term.
The "pray and delay" logic also seems to reflect inverted causation fallacies where they think a lower rent business will neccessarily drive away other higher rent ones and "devalue" it instead of it being a reflection of the fact they can't sustain the higher rents required to pay for it.
That's hell of a question you've made here. Irrelevant to the answer (if it even exists), humans tend to accumulate debt, it's just human nature, we are incredibly shortsighted.
And under debt I mean not just financial - if you look at every organisation you will see huge technical debt, which is often less observed and accounted compared to financial debt.
So going back to your question, it may or may not be suboptimal to do so, there is no way of knowing at timespan long enough to answer the question with substantial evidence.
And if we honestly ask ourselves if we want the vast crisis proliferating at every level of our society to happen during our lifespan or being delayed to some time after we die - the answer may not be the one we'd expect.
And even if you and me are ready to jump into it in order to save coming generations some normal life - most of guys behind us have different opinion on it.
> I’ve seen 10x more modifications in the last 3mo than I saw my entire career including the great financial crisis.
So what’s economic outcome of all this? It looks like more commercial properties should get rented out and the rents should also fall?
In theory down cycles are healthy to clear unprofitable businesses out of the economy and replace them with new ones. But it’s always complicated. I’m sure some analysts are earning their salaries this year figuring it out.
As long as government keeps propping real estate in a bid to prop banks up nothing will change.