[0xADADA]

Banks also have a MASSIVE amount of CRE Commercial Real Estate (office buildings) that are completely empty, without lease payments flowing in, and since COVID-19 has shifted knowledge work to remote-first in many cities, these office will be empty for a long time.

The CRE bubble is going to burst in the next 18 months as the 5-year commercial office leases signed in 2017+ are all going to come to an end, and the banks will be realizing these losses starting now and the next few years. Its going to get ugly soon.

[taylodl]

Commercial Real Estate is a completely different animal than residential real estate. Yes, you can mortgage commercial properties but the downpayment requirements are significantly higher and the term of the loan is significantly shorter.

Most of the entities on the hook for paying back the bank are commercial real estate development firms. As such they often have a mixed portfolio of residential (think apartments), office, retail, and entertainment properties. Offices are further divided into small business, professional services (doctors, dentist), and general office space. Unless their portfolio is extremely focused and not diversified, then they'll be alright.

Fortune 500 companies also aren't letting go of their iconic office buildings, as the building itself is an icon for the company.

Given all these factors, I think the idea that commercial real estate is going to crash and burn and that the banks are going to be left holding the bag are being quite a bit overblown.

[gumby]

This is right on, and I normally roll my eyes at comments that single factor X means we’re all doomed.

But the looming CRE crisis isn’t making it into the mainstream consciousness, even though its big driver (WFH and its ramified impact) is being well reported on.

[surfsvammel]

Is this correct? I’m guessing you are taking about the US, right? In the country where I live, those types of properties are normally owned by companies that specialise in owning and letting out spaces.

Often the companies buy property themselves, to use (since rents have been so high in he last decade or so). I don’t think banks are over-represented as owners, at least where I live. But I might be wrong.

Why is it that US banks are owning so much commercial real estate?

[cypherpunks01]

Commenter probably means that banks have massive exposure to CRE, primarily through mortgages they lent on.

[gerad]

It’s bad business to tie up that much capital in an asset, so you borrow to buy it. Banks are the folks who loan you the money to do so. Works great when the asset price goes up, and/or the rent from leasing out the space can cover the mortgage payments. It isn’t looking so great when asset prices are depressed and buildings are empty (like they are now).

[phendrenad2]

Those companies don't own the buildings, they bought them on credit, just like everyone else.

[wolpoli]

These companies do actually own the buildings based on the normal definition of own. The fact there are loans on the buildings does not change that.

[phendrenad2]

You're right, but the normal definition of building ownership is a bit weird. Can the company do anything it wants to the building without consulting the bank?

[wolpoli]

Well, there are some restrictions on what the bank might not allow the owner to do and that might be where the confusion lies.

[ddorian43]

Banks get the property when you cant pay the mortgage.

[mistrial9]

banks do not want to own commercial property. The only time I saw this up close was a business I knew in detail, got foreclosed. The attorneys involved sought, confirmed and signed the new owners, all before they started the foreclosure. No one wanted to hold the empty commercial property for even a week.

[short_sells_poo]

Most of these CRE holding companies acquire their inventory on leverage- they borrowed money to gobble up properties while money was cheap. Those loans have to come somewhere, and often (mostly?) it was banks.

If the holding company can't rent out the property, at some point they stop being able to service the debt. This leaves the banks with a lot of illiquid assets and bad debt...

[andy_ppp]

People have been claiming everything will fall apart for a long time now, we might just as easily have 10 years of growth and AI bots that help us with everything. Who knows!?

[pengaru]

> People have been claiming everything will fall apart for a long time now, we might just as easily have 10 years of growth and AI bots that help us with everything. Who knows!?

The shift to remote work has enabled replacing most of those effectively virtualized staff with AI agents that never sleep. Their takeover won't put those people back in offices, it obsoletes them to unemployed couch-potatoes. Likely notified of their new employment status via AI agent on a Zoom call....

[boringg]

People have been claiming since the beginning of time that things will fall apart. Hyperbolics don’t facilitate good discussion and probably isn't healthy for your own well being.

[tablespoon]

> People have been claiming since the beginning of time that things will fall apart.

During that time period (beginning of time to now), things actually have fallen apart, many times.

[boringg]

Not as much and to the depth of despair that it has been foretold

[tablespoon]

> Not as much and to the depth of despair that it has been foretold

So what? What you say would be true even of all the predictions were right, but just 1% less in magnitude. It's setting an unreasonably high bar.

A lot of people don't want to think about the harm that their enthusiasms could cause, and are eager to discredit anything that isn't a rose-tinted assessment because it's a threat to their fun or ambition.

AI will be great for those who already have money, and they'll be the ones writing the history of its effects.

[Forgeties79]

Do you live everyday actively concerned about your home burning down and all your belongings bursting into flames with it? Or do you take reasonable steps to prevent it/have critical stuff saved in case of emergency and go about your daily life not thinking about it very often?

I’m not being dismissive of your fears here. It’s not like what people are talking about is impossible. But there isn’t much you or I can do about it at the top and generally the economy doesn’t crash a la 2007 every time a big shake up happens. So if you’re really concerned about it, do the best you can to insulate yourself from it and inform yourself about the possibilities to a reasonable degree. But we can’t sit here and agonize over every potential doom and gloom situation that could happen on any given day, especially when tons of times what people talk about on HN, the news, wherever, never come to pass or are not nearly as bad as predicted. It’s just no way to live.

[lamontcg]

Okay, I'll go back in time and tell myself in 2003 not to worry about the residential real estate bubble expanding, and that in 2006 I should really not focus so much on doom and gloom and consider that the people running the economy have good models and know what they're doing and that a soft landing is the most likely outcome.

[gumby]

Probably the true in the long or even medium term, but there is a short term “node” not far away.

[ww520]

Banks usually lend out commercial loans at 50%~60% LTV. They get some cushion.

[mrDmrTmrJ]

You're correct about LTV, but over 2020-2021 many buildings sold at 'cap-rates' of 2%. (A Cap rate is the yield on the building and effectively an inverse P/E ratio.) However, cap rates are now moving towards 4.5%-5% as interest rates went from 0%->4.5%. And we expect Cap rates to end up slightly higher than interest rates, say 5% or 6%.

So when cap rates double the implied value of the building falls by 50%. Effectively the building goes from being valued at a P/E of 50 (cap rate 2%) to a P/E of 25 (cap rate of 4%).

So the halving of the building's value, as cap rates move in response to interest rates, may mean that a 50% LTV loan is now underwater. Especially if the building is unoccupied or may soon be unoccupied.

[ww520]

If the buildings are priced at cap rate, that means they can be sold at market. The banks can just unload them.

[lamontcg]

Nobody wants to buy them.

[DSingularity]

Does that mean I should save up cash to buy the commercial real estate that’s about to go on sale?