One of the concerns I have for the economy at large is a perfect storm in commercial real estate. Bloomberg has a great article that lays out the coming crisis. Bottom line, we don’t need gleaming office buildings in city centers. Covid taught us to work from home and once we tasted the convenience and efficiency we got hooked. Technology has made in-person business less critical. Much like the car made horses whips less of hot commodity.
The problem is that most of these office buildings and skyscrapers were bought or built with borrowed money. In the United States alone there is about 1.7 trillion in commercial real estate loans coming due. They will have to refinance at much higher rates, with too few paying tenants. In once enviable locations like San Francisco tenants like Elon Musk and PIMCO just decided to stop paying their rent. These are office buildings, malls and apartment complexes.
You are probably not crying for wealthy landlords who default on their mortgages. And you are probably not losing sleep over banks getting stuck holding the bag. But you should be concerned. Because as these banks default we could find ourselves in a 2008 style credit crisis.
What’s also alarming is that these cities are in a vicious cycle. Empty skyscrapers lead to less tax revenue. Less tax revenue leads to less infrastructure and services. Less police and garbage collectors means more crime and more trash. More crime and more trash leads to residence evacuating. When will these icons of the American empire recover? Never. According to NYU researcher and fellow kill joy Arpit Gupta, the value of city real estate will never reach these heights.
Cheap debt leads to over-building and over valuing of real estate and equity markets. Once people realize that all this stuff is not worth what we thought a recession ensues. The Skyscraper Index was devised by an observation that easy money leads to record-breaking skyscrapers, typically finished after the recession has started. For instance, the Burj Khalifa was finished in 2010. Well now we have a skyscraper in Jeddah, Saudi Arabia that was going to be one kilometer high. Currently it’s abandoned and empty.