And that's what I think is behind much of the push for RTO. While a lot (if not most) office space is rented, corporate executives are the kind of people who could have a lot of money invested in commercial real estate. They see this large threat to their portfolios, so they're trying to keep their assets from depreciating.
Sure, many of them do.
But there's something else they are far more invested in: their company (through huge pay and even larger stock option grants).
I don't buy this meme that CxOs are willing to hurt company efficiency just to protect personal real estate investments, when for nearly all executive (I'm sure there's some exception but not enough to matter) they own far more share in the company than in their side business in real estate.
I do. Think of all the inefficiencies you've seen reported (or reported yourself) and nothing is done. On the grand scale companies have abandoned the idea of retaining talent altogether, with best performers leaving over the refusal for some 10% CoL raise and hiring/training a new person for 20% more.
I think the most dangerous part is that these aren't rational actors fully focused on maximizing long term profits. So they aren't making seemingly rational decisions.
As an alternative viewpoint, there are probably a lot of peer pressure from people we never see nor hear about that can influence these CxO's as well. They are still people at the end of the day (85% of the time or so). if their friends or [company they admire] do something they will follow suit, no matter how incompatible it is with their company.
The push to RTO boils down to:
- leaders want the over-committed. Remote doesn’t feel like that.
- they miss working in person as a team and the fuel it provides for getting things done. Remote doesn’t feel like that.
It is almost universally a gut-sense that has driven the effort.
I think it does make sense for the leadership team and their close team members to work in person most of the time.
But there’s a funny flip side to this - almost all of them are on the road most of the time. Coming back to an empty office sucks.
I’ve been building remote-first companies my whole career. I prefer frequent onsites to offices.
But in the end, the prestige of the office, social cohesion of organizing life around it, and personal sense of power from having a team around you are unlikely to be replaced by any alternative for most leaders.
By far, the biggest investor in real estate is government pension funds. Government has every vested interest to enforce RTO, because without it, if companies stop leasing space, then government pension funds will be unable to pay out.
All too often people assume 'greedy bankers' are the ones who are going to lose. That's wrong. Bankers are the middle men. Bankers don't care. They'll get their cut.
“Real estate always goes up” is treated like a damn entitlement to the point that the financial well being of everyone under 40 today has been sacrificed to it. In 2008 it felt like the entire real economy was put on the chopping block to bail it out.
I’d love for a real estate market that looks like Japan. That way the real economy built around people actually doing things could flourish free from endless real estate idle rent extraction.
The de-risking has come in the form of artificial scarcity caused by zoning gatekeeping and outdated fire code, amongst other things. It’s time North America took a hard look at the root causes and fixes them before there is a crisis of confidence in leadership (which is already happened to me - I’m moving out instead of buying in to the insanity.)
Real estate took a bath in 2008. So much that it scared developers and investors so much that they slowed building to ridiculous paces
If you want reasonable housing prices in the US you need either:
- to change demand so people want to leave today's dense and expensive cities and stop competing-up the prices. The "RTO is all about commercial real-estate" true-beleivers think remote work alone could do this, but the last few years aren't providing strong evidence of that. Density and geography have other appeals.
- or, some way to re-start massive construction in those in-demand areas to push rents and individual-unit pricing down... but in this case, the price of the real land would actually go way up (there's no development if there's no future value > present value)
In some way I hope it crashes as well, just so I can get back in if I wanted too, but on the other hand, so many of my friends and family have bought into the "real estate always goes up" mantra that if it goes backwards, they will be ruined financially. With interest rates up and their mortgage repayments going up dramatically, I've already seen more divorce than I ever imagined I'd see. The financial pressure just broke marriages.
In hindsight, I'm probably better off now that I moved away to a cheaper place in the mountains and leave nearly debt free. I invest my money rather than give it back to the bank with interest.
[1] https://www.travelandleisure.com/travel-news/monuments-hotel...
[2] https://newsroom.chipotle.com/2021-04-27-Chipotle-Invites-Fa...
Most of them are 5 year (there are others), interest only and a massive balloon payment at the end. They are written based on the income of the property & its value. We're seeing these markets unwind, and it isn't going to be pretty.
Commercial property across the board (not just offices) has been in a strange place for a long time, and it isn't getting better.
https://www.reuters.com/business/finance/us-bank-regulators-...
Have you written about this anywhere? I can’t decide if it was mindnumbingly boring or the ride of a lifetime (leaning towards the latter).
Yes this article is about commercial real estate but it shows something is actually very broken from a credit market perspective - my loan is probably going to be underwater for the financier (JPMC assumed from FRB) for the rest of the term (just on the fed rate, but then I'm also making a margin on the leveraged capital. And tax deductions on the interest.).
> but then I'm also making a margin on the leveraged capital.
Do you mind expanding on this? I’d like to understand what you are doing, as a fellow ridiculous mortgage holder.
It makes sense that some banks might be offering them now at 7% since they have little to lose but I don’t think low interest longterm fixed mortgages are really possible without significant government interference (like in the US).
From the piece:
> For investors, the attraction of snapping up discounted commercial real estate loans is that the loans could be worth a lot more if the industry recovers in the next few years. And in the worst-case scenario, the buyers get to take possession of a building at a discounted price after a foreclosure.
“Buy when there is blood in the streets” — Baron Rothschild
In the US it's more or less impossible for the loans to be worth "nothing". They are usually secured by the property itself. But the loan itself is worth less if it's in default, rather than not quite yet in default. So it can be a better deal for a bank to sell it away now rather than later.
Other investors clearly think that the loans have some value. Some loans may not go into default, but banks down want depreciated assets on their books, other lenders may prefer to restructure the loans at higher interest etc.
A lot of commercial loans require certain rental rates, which is why you’ll sometimes see large vacancy instead of price reductions. This could be one tool that allows that to change. Maybe with a price cut the tenants will be viable, but the bank would rather offload that risk to someone willing to restructure the loan.
Banks dont want to be in the business of landlording properties which have gone into foreclosure or bankruptcy. However, there are players out there who are happy to take on the job of landlording or renegotiating debt in bankruptcy -- if they can enter the investment at a favorable price. Those are the buyers.
There are many investors who would like to buy the loan for cheap due to their risk tolerance and/or recouping time horizon and/or non-obvious benefits.
Firstly, it is clear that publicly listed banks have to remove loss makers from their loan portfolio because it affects their quarterly earnings. This is the reason why they'd take a small loss now than a large loss later.
Among the buyers, there could be someone who wants to own the land and the building for future generations - and buying the loan for cheap and foreclosing it might get them an amazing real estate. They could potentially keep this valuable thing in a trust for future generations - aka their time horizon may be over 50 years to recoup it.
Other investors might already be a roster of clients who want cheap office space but might not be able to buy the undervalued building. Buying the loan for cheap lets them get some cash flow and later foreclose on the building so that the roster of clients can be filled in for future use.
Others have funds of corrupt money from foreign lands they want to put to taxable use.
The real value seems to be that there are buyers who want the building but don't want to meet the buyers at the price, so they'd rather buy the loan and hope the current owners foreclose.
Method = pay less than face value.
