If you’ve heard about the looming commercial real estate (hashtag#CRE) crisis, tonight 60 Minutes had a segment on this, the “Urban Doom Loop”. Here’s how it goes:
1. COVID prompted work-from-home (hashtag#wfh), an overnight phenomenon.
2. Office utilization declined sharply and is still way below historical levels.
3. Tenants (employers) are downsizing their office footprint. This hits the CRE landlords gradually as leases expire over a multi-year period.
4. CRE revenues, profits, and free cash flow decline accordingly. This reduces the NOI, which lowers the value of the property, by up to 40% in some areas (cap rates have increased too).
5. Office buildings were bought with loans that are different from home mortgages in that they often mature after 5 or 10 years with large bullets at the end.
6. $1.5T of CRE loans are maturing in 2024 and 2025. This represents ~30% of banks’ loan portfolios, where smaller, regional banks are typically more heavy.
7. CRE owners are forced to refinance. But is it even worth it if the building is worth less than what is owed to the bank? Massive equity infusion is needed, and debt service will be more expensive than ever because of double interest rates.
8. City appraisers acknowledge that values are down, which means property taxes go down.
9. Less tax revenue means less room for public investment (trash collection, parks, schools, etc.), making it a less desirable place to live, which is compounded by a challenged economy.
10. 2 million people have left the 10 largest cities since COVID, which further decreases the tax revenues and economic growth prospects.
