Will Commercial Real Estate Go Kaboom? Soon?
Let’s look at commercial real estate using only our eyes.
RJ Talks is a new analyst on YouTube nailing recent developments in CRE financing — if you want to dive into the data.
If you live in any major city, go outside, and count the new buildings going up. Do some quick mental calculus. Relative to your life’s experience, do you believe there is less new building construction, average building, or more building than you’ve ever seen?
Don’t get me wrong. I don’t believe all this construction is bad. Maybe it is; maybe it isn’t.
Think about every house and condo your friends and family own and decide by what number you could add more people and they’d still have enough space for some privacy. My number is DOUBLE. (many own empty second homes).
Wanting (for whatever reason), it not needing.
Financial crises begin when people panic that they can’t get what they need if they keep paying for what they want.
We’ve built more units (living or commercial) than we need, to give everyone some space (seeing that we already had plenty of space to begin with) while wages haven’t gone up, the population is getting older (therefore downsizing) and the money used for this construction was lent because the lender believed it would get the money from asset appreciation. Now that interest rates are rising (inflation), the expenses of these new buildings must be paid by wages…
Of the people who could afford those buildings, losing their jobs!
How do I know this building boom is based on expected asset-appreciation and not wage-supported need? Empty retail and office space. Proof has been out in the open, for years.
Let me repeat this because my whole argument hangs on it. If we had market-based forces behind commercial retail and office space most of those owners would be bankrupt. The amount of empty space I’ve seen in the past five years is staggering.
Everything we construct depreciates, so again, why didn’t owners of retail space go bankrupt long ago?
I dare you to walk five minutes in any city without walking past a “for rent” sign.
Building owners did not go bankrupt when the pandemic started, why not? The only way commercial real estate could have survived the pandemic is if it used cheap debt to pay its expenses. Again, I don’t know this by looking at data. I know it because I don’t see any occupants in these buildings paying rent!
Eventually money must be spent on maintenance, like this work performed a few years after this hotel went up near me.
Subsidizing commercial real estate with zero-interest credit went on for years, there’s no theoretical reason why it couldn't go on for another X years. It’s why I’m not going to say it’s ending now.
I’ll let everyone rushing to this party say it with fresh data.
Or you can go outside and connect the dots yourself. It’s all right out in the open, as far as the eye can see.
