Commercial real estate crash Commercial Real Estate could be in for something worse than even the Great Financial Crisis warns Morgan Stanley 1.4 trillion to be refinanced !
Commercial Real Estate Could Be in for Something Worse than Even the Great Financial Crisis, Warns Morgan Stanley: $1.4 Trillion to Be Refinanced!
While the future is uncertain, it's possible that we are already in the midst of a recession. If you go by the old definition of a recession before they changed it, IMO we've been in one since January/March 2022. For those that don't know, a recession used to be defined as "a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. 'The country is in the depths of a recession'."
Yeah so this recession is going to be nasty IF it happens.
The impact of a commercial real estate crash could be far more significant than that of the 2008 residential crash. With 3 Banks inflicting more damage than the 25 of 2008. CRE is the backbone of first-world elite wealth, and any decline in this sector can cause ripples throughout the entire economy. With remote work becoming more commonplace, the value of commercial properties is in question. For example, a restaurant in Canary Wharf may not be worth what it was five years ago, given that foot traffic in these areas is not the same and may never be the same again. The better technology gets, the less of a need there is for a permanent office. While productivity may improve, AI technology can make productivity four to ten times better, which may lead to a reduction in the need for physical office spaces.
For example, is a restaurant in Canary Wharf worth what it was five years ago? The answer is probably not, as foot traffic isn't the same and never will be. The more we think about it, the less of a need there is for a permanent office as technology improves. As foot traffic isn't the same and won’t ever be the same. Productivity is better in the office some argue but now AI (according to ARK INVEST t “Big Ideas 2023” report) makes productivity 4 - 10x better
Investing in AI or an office? The answer is not clear cut, and a simultaneous wipeout of white-collar jobs because of AI could cause less foot traffic in an already declining situation, leading to a cascade effect on blue-collar jobs and businesses. As commercial real estate closes and collapses en masse, roofers, electricians, plumbers, drywall installers, and hardware stores like Home Depot and B&Q would all be hit. As a result, demand for materials and commodities would drop, leading to a decline in shipping and exports. All in line with Ray Dalio’s thesis on the debt cycle.
Evidence of this in that Goldman whos office is the jewel of the wharf take note 25% of its workforce are developers (10,000) seems to be trimming excess fat with 3,000+ layoffs. (Thats a lot less people going to Pret the parrot on the shoulder)
Transportation is already being used less. According to the Office of National Statistics, 1.4 million people no longer commute to London, and the biggest transition was from Autumn 2019 to Winter 2020.
If less foot traffic takes a JAB at Pret who has 434 shops in the UK, including 273 in London has fewer customers, it's then a major problem for London. Pret which used to have a bustling lunchtime trade, are experiencing fewer customers, leading to the need for innovative solutions to keep up with the changing times. The new subscription model may not be enough, and unless they can make the online/subscriber system explode, all that unnecessary real estate could put Pret out of business and leave an exit bullet wound in London's already-damaged and declining commercial real estate market.
Yes, they have the new subscription model, but if you get a remote job, do you need it as much ? or a Deliveroo, Uber Eats subscription?
PRET - jab JAB right hook
If you know you know
Jab holdings ;)
This all ties in with the VELOCITY of money, which refers to how much a pound goes around a community before ending up at a bank. Today, money moves quicker and may have higher volumes, but it is by fewer intermediaries because of digital wallets such as Revolut and Monzo allowing people to transfer out from Nationwide or Metro Bank, HSBC in a swipe. Institutions haven't calculated that a run on the bank isn't as physical as it used to be. It's now called withdraw and delete the app, causing even more problems for banks. Thus resulting in banks themselves to not need physical locations and pay increasing intrest rates themselves. WOW look we are back full circle at commercial real estate ! Below is some evidence maybe ive been accumulating in a cognitive bias but none the less if foot traffic on oxford street is declining from 2018 levels there is a problem.
May 2022 Oxford street foot traffic dropped to 761,889 from 2.4 million in the same month in 2019 and a drop from 1.1 million the month before of April 2022 —- So lets see how we do in 2023.
Businesses may need loans to keep physical locations …. But oh yeah interest rates have gone up !
Little known fact I’ve observed first hand the House of lords has a shocking energy efficiency rating so let's see what they do there.
Retailers have seen 68% less foot traffic from PRE-Covid levels, and inflation might not have helped with that one. bad decisions to be greedy when people don't need to leave home to buy your products.
So the solution is the need for more business and more entrepreneurs or foreign business to set up in the west specifically the UK … but oh yeah office prices are high , the weather is crap and most teams all work remote …
So… back to the debate does a good CEO Invest in AI or an office ?
One thing for sure it's crucial to look for alternative investment opportunities. Mr saylor wont look so crazy now neither does Balajis and Cathie Woods million dollar bitcoin might actually have fundamental possibilities if liquidity gets teleported from commercial real estate as a flock to saftey as old money clambers to stay afloat.
The UK keeps making bad choices and IMO needs the Russian oligarchs to keep the commercial real estate and specifically the London (Ponzi) property prices high.
Especially now everyone is slowly starting to work remote.
These are all factors that investors should consider when looking for investment opportunities in commercial real estate. The pandemic has shown us that businesses need to be flexible and adaptable, and this should be the guiding principle when considering investing in commercial real estate. The future is uncertain, but by staying informed and aware of the trends and changes in the market, investors can make smart investment decisions that will help them preserve their wealth.
