What amazes me is that we didn't see a faster cratering in value in office space.
On any given day in any capital city, perhaps 50% of office desks sit empty.
Yet I can't buy an office building for cents on the dollar.
Normally when supply far exceeds demand like this, companies owning those assets can't pay their bills, the building is sold, there are no buyers, auction prices crash, the crashing prices cause more companies to go underwater, those buildings are sold too, and there is a big wipeout of all leveraged property owners. Rent and purchase prices prices for office buildings fall 70%, encouraging other uses of the buildings (retail, residential, industrial), and they end up full again.
But for some reason that isn't happening. 3 years later, and still more office desks are empty than full in most capital cities.
Typical business leases were 5-10 years. If you weren't willing to commit to 5 years in 2018, nobody owning a building in a major CBD wanted to see you. You could get sublets from businesses that wanted to recoup costs while moving to a bigger space, or space at the fringes or outside of the CBD.
I don't understand why they can't have shorter leases with lower rent. I'm not sure why they can't do that and swallow their pride a bit. They can charge the next renter more when the short term 1-2 year lease is up. Better than making $0
It isn't better than making $0 because now at lower rents the property gets revalued to be lower, and when the rents and underlying property is used as collateral on loans then they adjust higher than they already would in a rising rate environment to cover the risk of default.
It works out better to kick the can down the road for as long as possible, hoping that something will change and to put off the day of reckoning, so they fight it tooth and nail.
The market is only going to adjust downwards when there's a real crisis and fire sales start happening due to forced liquidation that causes everything to get marked down to market. Then there's no point in kicking the can down the road any more.
One of the things that can be done is to maintain the illusion of a high rent by working out lease terms. For example, a 60-month lease at $75/sqft might come with the first 4 months of rent in each calendar year for free, making the actual price $50/sqft. Or, a ten year lease on biolab space might come with the landlord paying for the initial buildout and equipment installation, equal to a 30% discount.
Interests rates only started rising in 2022. Before then it was possible to get a basically free loan to buy time in hopes of locking in a good long term deal. It’s going to take time to suck all the money out of the system and force hard choices.
In the UK this isn’t even limited to office space. Business rates on any kind of retail space are so absurdly high that it is a huge barrier to entry for setting up shop.
They haven’t adapted to the continuing death of the high street at all, so you have loads of property sitting empty because the rates to lease it, on top of the rent, are too much.
In fact, a loophole was to allow a business shop to set up rent-free for a few months, and then close up just before they were due to cover tax and business rates, allowing the landlord to keep the property vacant for a while longer. This is how places like Oxford Street in London became inundated with ‘American Candy’ Stores.
Even san francisco isn't that bad, only about 25% of office space isn't being use. It's not an apocalypse, these real estate people are just trying to declare "woe is me" because profits are down 10%
Your numbers may be outdated, San francisco is lower than my city coming in around 16 or 17% (i do not have the numbers in front of me atm).
The hard problem with % numbers is that they are usually made up on the fly, 62% of the time. However, in my case, I got the CRE vacancy numbers from NAI which is more credible than a random person on HN (no offense)
Those figures are the percentage of office space that is unleased.
However, there is a good chunk of office space that is leased by someone yet isn't actually used every day. Usually because the company now does WFH yet can't terminate the lease early.
There seem to be a large number of employees who have a desk in an office, yet barely ever use it too.
I'm classing any seat that doesn't have an ass on it during the day as unoccupied.
On any given day in any capital city, perhaps 50% of office desks sit empty.
Yet I can't buy an office building for cents on the dollar.
Normally when supply far exceeds demand like this, companies owning those assets can't pay their bills, the building is sold, there are no buyers, auction prices crash, the crashing prices cause more companies to go underwater, those buildings are sold too, and there is a big wipeout of all leveraged property owners. Rent and purchase prices prices for office buildings fall 70%, encouraging other uses of the buildings (retail, residential, industrial), and they end up full again.
But for some reason that isn't happening. 3 years later, and still more office desks are empty than full in most capital cities.