A recent Bloomberg article highlighted the concerning situation of empty office buildings, labeling them as a ticking debt time bomb. The piece begins with accounts of owners of prestigious office towers in San Francisco abandoning their financial obligations, while the city’s largest mall has been left behind by its landlords, burdened with a staggering $558 million mortgage. Additionally, two defaulted hotels have left $725 million in debt, and a portfolio of apartment buildings worth $1 billion has been neglected. Bloomberg points out that the primary culprit behind this predicament is easily accessible and inexpensive debt. Economist Mark Thornton, from the Missus Institute, associates this pattern with the “skyscraper index,” a recession tracker that signals trouble whenever the world’s tallest building is constructed due to excessive borrowing, ultimately leading to economic downturns and real estate disasters.
Nationwide, there is a looming challenge of $1.4 trillion in commercial real estate loans that are due this year, heavily relied upon by regional banks that are already facing precarious situations. Consequently, commercial real estate prices are plummeting, with prime office spaces experiencing a 27% decline in value over the past year, apartment buildings losing 21%, and malls dropping 18%. Drawing parallels with the 2008 crisis, it is expected to take years, if not a decade, for prices to recover. In fact, a study conducted by Columbia NYU suggests that prices will never fully rebound, predicting a permanent devaluation of property in cities like New York and San Francisco by 50%. This bleak outlook implies a multitude of abandoned buildings and an increase in defaults, particularly affecting older structures burdened with higher maintenance costs. If you have ever visited New York, you would be familiar with such buildings that are plagued by maintenance issues, reflecting the state of many urban areas.
Unfortunately, the ramifications extend beyond real estate, as urban tax revenue takes a hit, draining public services such as law enforcement, waste management, and the cleanliness of streets, exacerbating what Bloomberg refers to as an “urban doom loop.” As a result, people are fleeing these cities, driven by rising crime rates and highly publicized incidents of retail theft. Recently, a cell phone video captured a shoplifter in San Francisco using a blowtorch to access locked shelves, serving as a distressing symbol of an empire in decline. This urban doom loop is now spreading to second-tier cities; for instance, in Atlanta, tenants vacated nearly 300,000 square feet of downtown Class A office space last year, leaving a staggering 31% of office space vacant. Furthermore, one-third of Atlanta’s office-based debt is set to mature within the next 18 months, which, if left unoccupied, will likely lead to defaults. Even cities like Austin are feeling the impact, with six million square feet of empty office space, and Denver and Houston witnessing significant defaults. Europe, although not as severely affected as the United States, is also grappling with higher lending costs, resulting in defaults on prestigious buildings in London’s Canary Wharf, often referred to as London’s Wall Street.
A few months ago, Sweden’s largest landlord was downgraded to junk status due to its $13 billion debt, while Swedish landlords are currently struggling to refinance a daunting $42 billion in debt in a country smaller than the state of Ohio. While the rise of remote work garners attention, it is important to acknowledge that every boom-bust cycle profoundly impacts the real estate sector. This time, the consequences are amplified by the remote work trend and the challenges faced by American cities that have increasingly devolved into a situation reminiscent of third-world nations. These cities seem to prioritize the demands of utopian activists over the interests of the middle class, inadvertently aligning with violent criminals. If you happen to reside in one of these declining cities and are not involved in criminal activities, it may be advisable to consider relocating. Meanwhile, the looming debt time bomb will undoubtedly exacerbate the already fragile state of regional banks. We will closely monitor the situation and provide updates in the future.
Until next time, stay informed and stay vigilant.
