The Commercial Real Estate Tsunami Just Shifted Into A Higher Gear
(theeconomiccollapseblog.com)
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I think it is long overdue.
Too many shopping malls and office buildings. There is a need for affordable housing that does not involve oversized homes.
Sadly though I think that small business owners will be caught in the collapse as it happens though. But hopefully it allows new opportunities for small business owners to be able to have more favorable rent or lease agreements.
Won't happen. Mainly because the internal infrastructure is too different for an easy conversion. People REALLY need to stop insisting that we convert office buildings into apartments.
It's not that it's impossible to do, it has been done before. But there's a reason it's not more common. It's so cost prohibitive to do, that only those with money to blow who're looking to harvest LIHTC (Low Income Housing Tax Credits) bother doing it. And even then, they'll only do one or two buildings a year, since the cost of properly converting an office building into an apartment building is equivalent to ground up developing 4-5 similar size apartment buildings.
It's just not economically feasible. The interior layouts are too different. And I'm not just talking about floor plans. It's the building guts too. Fire codes are different, piping systems are different, heck, even the foundation standards are different since office buildings typically will have lower weight ratings than an apartment building.
So not only do you have to gut a massive 20+ story building and completely redo the plumbing, water, electrical, etc. But you'd also have to upgrade the internal support system so the building can stand the extra weight of all the residents crap, the new walls, new plumbing, etc. etc.
Malls are a little bit more feasible since skyscraper sized malls are actually rather rare (malls are almost always on first several ground floors of super tall buildings). But even then, you still suffer from the exact same problems.
In either case, it'd be more cost effective to just demolish the building and build a whole new residential building in its place most of the time. But then you run into OTHER problems.
Like zoning. Legally, a developer can't just build residential buildings wherever they want. It has to be zoned for it. And unless the areas that these hypothetical office buildings/malls stand on are already zoned for multiuse, then you'd have to apply to get the plot rezoned, which in most major metros (with the notable exception of Texas since most Major cities in Texas have no zoning laws and instead use an individual permit system) takes anywhere from 6 months on the low end (if you're lucky and know all the right people) to 5+ years (Much more likely).
And even then, after waiting for literal years, there's no guarantee you're rezoning request will be approved.
THIS is why mass conversion of malls, office buildings, etc. is a pipe dream. There's little appeal to developers (the people actually fronting the money and funding the projects), and it's actually disadvantageous to all but the absolute biggest developers since it means locking up 10s of millions to 100s of millions of dollars, usually with 75-90% of it being leveraged in most cases to maximize returns, for years with no guarantee that they'll even be able to finish the project since they may get denied on rezoning.
What investor/developer in their right mind would think that's a good idea? Locking up 10s-100s of millions of dollars for literal years, while paying massive debt payments on this basically useless property with little to no cash flow, all while there's a high chance they'll just be rejected for rezoning and be stuck with a worthless property that does nothing expect drain money from them in the form of debt payments, upkeep, and taxes.
This is the biggest problem with this mentality. People who insist on mass conversion of commercial real estate from one from to another don't understand the complexities involved in doing so, or the financial risk/burden the ones fronting the money have to go through. There's VERY LITTLE incentive to do so for anyone that isn't just looking for a tax write off. And even then, the tax write offs are only lucrative enough to get the biggest builders to only do this for a few large scale buildings a year.
All those small and medium sized office buildings and malls? Yeah, literally no one will ever touch those. The tax write off for those buildings doesn't justify going through the trouble and headache of dealing with all of the above mentioned problems.
Again, it's not that it's impossible, it's just that there's little to no incentive to do it, and the financial burden it creates on the developers makes it a pipe dream.
Pretty much the only buildings that are suitable for apartment conversions are hotels, and SOME hospitals (really depends on the layout of the hospital). And even then, the apartments are usually those stupid small studio apartments that are basically glorified cubicles.
So you know, not exactly conducive or attractive to anyone other than a college age kid looking for their first place after they move out. Anyone who isn't a late teens early 20s bachelor(ette) would immediately be cramped, want something bigger, etc. etc. And forget having a family. Who can raise a family in a 600 square foot apartment? You'd be lucky if you could somehow manage having a cat or a small dog in such an area.
Not trying to be a butthole, but reality is different from what most seem to think it is when it comes to commercial real estate repurposing.
I am going to have to disagree on the principal that you are operating on the paradigm of the 20th century.
For us as nation to move away from McMansions and to create affordable living spaces we have to think outside of the box.
Currently many young adults and college students do live in cramped spaces but with little freedom or even a burden on their parents still living at home. Being able to offer more affordable living spaces may in fact allow mobility of the workforce and growth. The younger generations are more than willing to be more mobile to obtain pay raises compared to older generations but the lack of housing is a huge road block.
This is why President Trump has proposed ideas like brand new cities as well because sticking to the old paradigm isn't good. And like you have outlined it is hard to repurpose old commercial real estate due to how the layouts are constructed which reinforces why President Trump wants to plan out brand new cities from the ground up with 21st century mindset.
But instead of bull dozing and starting over there is an opportunity to create spaces which can cash flow which is the entire point of the commercial real estate industry.
All you are doing is changing the cash flow from commercial real estate to residential real estate.
Work from home, amazon/ebay, and ai/automation is going to make commercial real estate feel the pinch.
I saw this coming back from 2008 when the Great Recession hit and a sneak peak of that with the plandemic of 2020.
We are being pushed into that direction by big players with big money, so we must adapt or find a way to thwart that descent where "no one owns anything".
......You didn't read anything I said did you? I literally outlined why there's zero incentive to repurpose retail or office buildings into residential buildings. Yeah building new cities would work, but repurposing office and retail into residential pretty much never works unless it's HEAVILY subsidized by the government.
As I said, the biggest problems are the plumbing (You literally have to rip out 20+ floors of plumbing and replumb the entire building based on the new floor layout), the fire codes (Because residential firecodes are infinitely more strict than office or retail fire codes since the spaces are more confined, and fires are more likely), and just general weight, since all the added walls, plumbing, peoples crap, etc.)
You can preach all you want about "the greater good", but the people with actual money that build these buildings aren't going to just spend 100s of millions, or in some cases BILLIONS, of dollars "for the greater good".
There has to be some kind of incentive for them to do this. And assuming we're all correct and the income tax is going to be a thing of the past post-cabal.... Well, there goes the last actual incentive developers have to do anything like this.
If the LIHTC (Low Income Housing Tax Credit) is done away with because the federal government no longer collects a federal income tax, then there is literally ZERO incentive for any developer to take on a project like this.
What's far more likely, is these buildings will devolve into urban rot, leading to the cities to condemn them, eventually resulting in them being torn down 40-50 years inn the future, which then would make the land plots appealing to developers again for things like residential, or whatever the current money making niche is.
That's assuming office and retail completely fails and never comes back, which also isn't true. I wasn't planning on giving this detailed of a response, but since my financial nerdery is flowing, I might as well.
The reason that so many office and retail properties are failing isn't because people aren't going back to the office (they are, in a hybrid setup if nothing else), or that people aren't going to physical stores anymore (Has actually been increasing despite things like Amazon).
The reason, is that the owners got screwed on the interest rates for their loans. Commerical real estate isn't like regular residential real estate (Single family homes). The loan terms are vastly different.
Here's the basic outline for a CE loan. 5 years at X% with an adjustable interest rate.
As a result, in most cases, commercial real estate isn't a "buy and hold" game. It's usually more of a "buy, fix/build, hold a few years, sell" kind of game. CE owners rarely pay down the principal on their loans since they intend to sell them within one or two refinance cycles. People like Trump who outright own buildings worth hundred of millions or billions of dollars are REALLY rare.
What's currently happening is simple. The owners refinanced during that period a few years ago when interest rates where 1%~. Now, a few years later, we have record high inflation and sky high interest rates. So those refinanced buildings have had their debt payments skyrocket over the course of a few years. So much so, that they now no longer produce enough income to justify owning them.
THAT is why, retail and office are failing. Residential and hospitality haven't been hit yet, since they generally speaking have higher cap rates (The way you measure your cash flow), than Retail and Office. But they'll be hit soon enough as well.
Long story short, there's no way to give a large enough financial incentive to repurpose office and retail buildings into apartments, and office/retail isn't even really dead. Companies are just getting screwed on the interest rates.
No I read what you said but I disagree in that there are big real estate buyers that do think outside the box. Ben Mallah for example did this with John's pass in St Pete Florida where he took the second floor of commercial store fronts of John's pass and turned them into hotel rooms. He had to obtain the go ahead from city planners but yes it is possible. While true it was a challenge for the architects and engineers they made it happen and it is up to code!
I am fully aware of how commercial real estate is about buying, adding value and then flipping quickly. But that isn't going to magically happen with rates going down this time around because the work from home environment and ai/automation is going to accelerate. That assuming the rates drop fast enough which I do not think is very likely given recent word from the fed as rate hikes are very possible next month or in a few months.
In other words yes rates dropping helps ease the pressure on commercial real estate but that also holds true for residential real estate.
If we are playing a game of chicken right now with high rates you want to be holding the residential real estate bag versus commercial real estate. Yes, both are losing hands if held long term and the high rates do not let up. But moving forward lowering rates for commercial real estate isn't a magic bullet that is going to solve everything IMVHO.
My opinion is that even with lower rates that commercial real estate is really going to be a construct of the 20 century that is going to fade as we progress into the 21st century.