Today, let’s talk about commercial real estate. Now, the main topic here is:
- Is commercial real estate ready to crash? Or is it crashing?
- How would you compare it to the 2008 residential crash?
- When was the last time commercial real estate crashed?
- And where is the money flowing out of commercial?
I’ll give you my final thoughts at the end. Welcome back to the Shawn Realty podcast!
So, I was just reading some articles. Basically, commercial buildings, specifically office buildings, are selling at like 40%, 45%, even 85% loss compared to the last purchase price. Let’s dive into May 6, 2024: commercial Worcester foreclosures spike 117% as stress mounts.
In March 2024, California had 187, New York 61, Florida 60, Texas 55, New Jersey 42, Pennsylvania 27, Georgia 21, Ohio 19, Connecticut 18, and Illinois 17 foreclosures. That’s quite a bit of foreclosures. If you see this graph, since 2014, probably since the 2008 market crash, commercial properties were foreclosed around 2014 because that’s when the loans were due, I’m sure. Then it went down, and in 2020, right at the pandemic, it hit its lowest and now it’s going back up. People who bought commercial buildings from 2018, 2019, 2020, they’re going to be the ones that get hurt the most.
One more thing: The Starwood Real Estate Income Trust, a commercial investment fund, is in trouble, but this article is behind a paywall. So, I briefly read it; it’s pretty much the same thing, three different examples of buildings selling for probably half of what they paid for. So, it makes me wonder if it’s just one individual losing that kind of money, let’s say $40 million, just shaking it off and moving on with life. But if a bunch of investors put money into it, what happens to them?
I’m more concerned about the local banks. My understanding is that local banks heavily invested in commercial real estate, and their loans typically have shorter due times, not like 30 years like residential, they can be seven years, they can be ten years (up to 20 years).
Based on what I know, especially right in the middle of downtown, those big office buildings, the leasing space, the demand is just not there. Too much supply, as far as I know. The owners of buildings, they have to pay back the loan. Then what do you do? You either have to sell at a loss or go into foreclosure, right?
The last time about a 40% loss was actually 2008, ’09, ’10, that was residential. The homes were losing that kind of value at the time. The average was about 35%. One main key point that I wanted to bring up in this video is that when this commercial risk-taker money is coming into residential, what I mean by that is some of these REITs, the investment groups, the capital funds, if they are diversified in commercial and residential, they’re losing, they’re bleeding money on the commercial, especially office buildings, but they’re doing fine in the residential, right? They’re now realizing residential commercial side is where they need to put the money into.
That’s why, like you know, Blackstone is one of the biggest ones in the world; they’ve been buying up residential quite a bit, even single-family homes, multiplexes, apartments, you name it. That’s why the residential market, the demand is so high; that’s why some of the first-time home buyers cannot even buy because you can’t compete against these big fund buyers. There’s so much investor money out there. I always want to advocate for individual homeownership rather than a bunch of companies owning thousands of homes. I actually told one of my commercial building buyers to wait. That was about a year, year and a half ago.
Two different markets for office buildings: one in downtown and one suburban. Now in, you know, suburban office market, I would think that it’s going to do a little bit better. As long as there’s a demand for it and it’s midsize, it’s fine. But if it’s huge, if it requires downtown pre-pandemic, a bunch of people going to downtown, if that’s not coming back, I don’t see how commercial market in downtown office buildings can come back. I just don’t see it. People aren’t going back.
First of all, the cities have to be safer so that people will feel safe to go downtown. And at the same time, companies have to come back downtown. But in the last two, three years, most of the companies are leaving downtown, which is a problem because of their employees’ safety issue. Until the office space supply goes down or demand goes up, I don’t see this office building real estate coming back, and I think it’s going to crash even more until this supply and demand balance is out. It’s almost like a silent market crash because many of the commercial real estate people that I interact with on Twitter, now at the X, the ones that are doing well are the ones that are buying the multifamily buildings and selling multifamily buildings or industrial warehouses; they’re doing great it seems. But when it comes to office buildings, this is where people don’t want to talk about it because there are big losses there. But that’s what’s happening in 2024, in my opinion.
Final thoughts: More money is coming into residential, and that’s where money is coming in. That’s why residential is doing great, and they’re talking about the rent keep going up, prices keep going up even at the high-interest rate. When the mortgage interest goes up, that doesn’t affect the cash buyers. If the capital fund group is cash buyers, more likely they gather people’s money. They don’t care what the interest rate is. It only hurts the small people, just regular home buyers hurt the most. Don’t blame the realtors or real estate agents here because it’s monetary policy that’s hurting people. That was my thought. Commercial money coming into residential real estate is raising the demand for residential, getting more competitive, while the commercial real estate is slowly crashing.