What are Vacant Office Towers Worth? Foreclosure Sales Show How Values of 1980s Office Towers in Houston Have Collapsed, Dishing out Huge Losses for CMBS

The loans were securitized into CMBS in 2014. From hype to heck in 7 years. Other markets with office busts have something to stew over.

By Wolf Richter for WOLF STREET.

We’re now seeing some of the results of the Houston office bust percolate through Commercial Mortgage Backed Securities (CMBS). Houston’s office market got hit by a triple-whammy.

First there was an office construction boom riding on high oil prices. Then there was the collapse of high oil prices – WTI plunged from over $100 a barrel in mid-2014 to about $25 a barrel in 2016 – that sent a slew of oil-and-gas companies into bankruptcy and caused an industry-wide wave of layoffs, including of office workers, cost cutting, and debt restructuring. Then came working from home, which reduced the need for office space further.

By Q4 2021, 33% of the total Class A office space was on the market for lease, the worst in the US. In the Energy Corridor, 35% of all office space was on the market for lease.

As the latest and greatest office trophy towers were completed and came on the market, and with so much fancy space available, oil companies, law firms, and other businesses began to upgrade their digs, moving from older office towers to the latest and greatest, and the older office towers started emptying out, and then started defaulting on their loans that had been securitized a few years earlier into CMBS and sold to investors.

So what are older office towers like this worth when they’re finally sold? Not much. And how much are lenders and investors losing on them? Huge amounts.

This is an example of such an office building that was just sold, and the numbers are in. Three Westlake Park, a 420,000 square-foot Class A office tower in Houston’s Energy Corridor, completed in 1983 and renovated in 2005, had gone into default and was taken over by its lenders. It has now been liquidated, and the numbers are in, and they’re horrible.

Its sister tower on the same campus, the 450,000 square foot Two Westlake Park, had already defaulted on a $87.5 million loan in 2018.

The loan, which had been securitized in 2014 by Wells Fargo into CMBS (WFRBS 2014-C24), was liquidated in mid-2020 in a foreclosure transaction, where the collateral sold for $18 million. Trepp, which tracks CMBS, reported at the time that after $2.2 million in foreclosure fees and expenses, lenders wrote off $71.6 million of the $87.5 million loan, for a loss severity of 81.9%.

OK, so now the Three Westlake Park was liquidated, and the numbers are even more horrible.

The outstanding mortgage loan balance on Three Westlake Park amounted to $76.3 million, according to Trepp. Back in 2014, when the mortgage was securitized by Goldman Sachs into CMBS (it made up 10.4% of GSMS 2014-GC20) and sold to investors, the tower was occupied by ConocoPhillips and BP. But BP moved out in 2015, amid job cuts. And Conoco Phillips vacated in 2019 when the lease expired. Since then, the building has been vacant.

In 2014, on the verge of the collapse of the price of crude oil and the downturn of the Houston office market, the $76.3 million loan for Three Westlake Park was securitized into CMBS. For the purpose of selling the CMBS to investors, the collateral was “valued” at $121.1 million. Investors even in the lower classes of the CMBS rested assured that they would have little risk of loss, protected as they thought they were by the high “value” of the collateral.

This has been a slow-moving train wreck. In 2017, with the oil bust in full swing and older office towers starting to empty out, Kroll Bond Rating Agency estimated that lenders would take a $27 million loss on the collateral.

In October 2018, given the departure of the tenants, the loan was sent to the special servicer, which commissioned a series of appraisals. The first appraisal came in 2019, which slashed the “value” of the collateral to $41 million. The second appraisal in 2020 lowered the value to $38 million; and the third appraisal, in 2021, slashed to collateral value to $25.2 million.

The tower has now been sold for $20.6 million, after having been “valued” at $121.1 million in 2014 for the purpose of selling the CMBS to investors. After liquidation expenses of $11.7 million, lenders got just $9.2 million, forcing them to write off $67.4 million of the $76.3 million loan, for a loss ratio of 88.3%.

The Houston office market is in a particularly tough spot. And as with Two Westlake Park and Three Westlake Park, the issues take years to finally get resolved with huge losses for the lenders.

Other cities too are now facing their own office busts, with huge amounts of office space on the market for lease, and few takers, amid massively inflated office rents.

The Number 2 hardest-hit office market, behind Houston, is San Francisco, which just a few years ago was the hottest office market in the US where the “office shortage” made headlines. Then the shortage turned to glut. By Q4 2021, 26% of the total office space in San Francisco was on the market for lease. In Manhattan 19% of the office space was on the market for lease. It’s the older towers that empty out, as a flight to quality sets in when the lease expires, allowing the fancy new towers to find tenants eventually, but not at the rents they’d envisioned.

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  177 comments for “What are Vacant Office Towers Worth? Foreclosure Sales Show How Values of 1980s Office Towers in Houston Have Collapsed, Dishing out Huge Losses for CMBS

  1. masked ghost says:

    Wolf. Can the empty office towers be converted into NFT’s and sold to the Crypto-currency crowd ?

    I sense a lot of pain ahead………

    • Petunia says:

      Real estate in the metaverse I hear is going for top dollar. Even the banks are paying to open branches there. You can’t make this shit up.

      • Brent says:

        Ray Bradbury made this shit long time ago – short story “Rocket Summer” in Martian Chronicles.

        “One minute it was Ohio winter, with doors closed, windows locked, the panes blind with frost, icicles fringing every roof, children skiing on slopes, housewives lumbering like great black bears in their furs along the icy streets.And then a long wave of warmth crossed the small town.”

        So far so good, everything is skyrocketing, everybody feels warm just like now…

        Then Martians created Metaverse i.e. exact replicas of rocket crew’s childhood towns and long-dead family members.

        Then, after inviting astronauts in, wining & dining them, killed them all…

        All Ray Bradbury stories have double or even triple meaning.

        • Desert Sage says:

          Good call out. Remember the story about people turning into plants? Their feet got sore and they stopped walking…..love Bradbury.

      • raxadian says:

        Is not even something new, remenber Second Life?

        • Nathan Brazil says:

          “Active Worlds” was, to my knowledge, the first with the concept, back in 1995. It was great fun and they were way ahead of their time, but they never gained a large enough user base to monetize it. They had to give away the real estate, all you needed to do was stake a claim and build on it. You could rent your own world (server license) for a few bucks, but that appeared to be the extent of their income stream. It was actually great fun for a couple of years. The company changed hands a few times and remains a bit player to this day.

      • Crumbcruncher says:

        Shit is made up all the time. It’s up to you the shit you digest.

    • Glenn McClendon says:

      Can they be converted to condos? Young people love downtown office settings. Maybe somebody with vision could come up with conversion costs that make it reasonable. Better than tearing them down.

      • Cem says:

        Immediately where my mind went as well. They’re actually doing just that to an office building in phx on Camelback, it was a bank building. Problem is I believe the developer is or was in some financial trouble..

        Has to be much cheaper than building an entirely new tower for condos though.

      • Mike R says:

        Those towers will be imploded, and the rubble hauled away to some landfill. They are worthless. This will happen to 40% of American commercial office buildings. A lot of foreign entities are owners of these debt laden monstrosities. So many buildings in cities like Chicago are many decades older than those Houston buildings, and they all reach a point where they are so obsolete, so inefficient, that they cannot be refurbished or even up to code of all the new buildings being built. COVID accelerated the demise of the business model, and distributed workers (I.e. working “remote” ) is now so firmly entrenched in the white collar worker economy, this will end up the same way so many American factories got shuttered when we began outsourcing all our manufacturing jobs to countries with lower wages and far less government and environmental regulations.

        • Weston Marx says:

          And look at all the factories that were once in nice areas but never demolished. There they sit. Over grown, toxic, decaying, smashed windows. Detroit, New England, East coast mid-Atlantic, small towns…

      • KGC says:

        Just try to wrap your head around on small part of the issue. Take plumbing…

        Office buildings are not constructed with plumbing at the same rate it’s required for housing. The junctions to the sewer mains are too small, the piping throughout the building is inadequate, and as anyone who’s ever done a bathroom remodel knows the only solution is to tear out the walls and start over.

        But structurally all that added material and water are heavy, and most office buildings are not designed to carry all the weight that would require.

        You could build living space built on the existing plumbing, but you have to find people willing to buy 15,000 square ft apartments while sharing the 1-2 bathrooms (usually without bath or shower facilities) per floor with their neighbors. Not really ideal, but hey it could work.

        • Michael DeVivo says:

          Well said. Even the extra weight of interior walls needed to break large office spaces into apartments would probably be a problem.

      • David in Texas says:

        Those buildings aren’t downtown. Not even close. They’re in the far suburbs about 20 miles from downtown.

        They’re just garden variety buildings, a long way from the cultural amenities that people look for when they’re going for the “downtown” lifestyle.

        They were designed as office buildings. It’s hard to see what could be done with them otherwise, at a reasonable cost.

        Whoever figures that out will be a hero!

        • Anonino says:

          Yeah, years ago everyone in Houston real estate starting slinging around the term “Class A” for anything with windows still intact.

    • historicus says:

      Why arent Blackrock and Blackstone interested?

    • DanS86 says:

      Great idea, the Fed will buy that!!!

      In all serious, think of the fraudulent securities on the Fed’s balance sheet. Someone with the means could easily pull a joke on the Fed. Goldman for example.

    • Gammer says:

      Perfect place to house the poor and border crossers. Just fill it up with a few walls, tons of twin beds and maybe drop down curtains. Everyone shares the bathrooms and pays per bed per night, week or month.

      Let a church feed them and park their shopping carts in the covered parking structure. Allow them to rent clothes, computers, cars, bikes so they can get interviews and jobs, then extract the profits. Maybe you have levels, lower levels for the worst off and higher floors for those who can pay. The democrats can then point to their shanty towers as an example of their utopia and it will fill their nimby requirement too.

  2. Jake W says:

    i once securitized commercial mortgage loans for a living. i feel dirty now.

    • JE7 says:


      Everything has changed now. What used to make financial sense no longer does.

  3. gorbachev says:

    Affordable housing units anyone

    • WolfGoat says:

      Damn Russian’s, beat me to the punch!

    • DawnsEarlyLight says:

      If you remote work in an apartment that was once where you worked, is this still classified as remote working?

      • phleep says:

        Your pretend to work and they pretend to pay you: FedBux.

        • cas127 says:


          This old USSR saying seems more and more appropriate as the US dissolves into year 21 of ZIRP.

  4. WolfGoat says:

    Affordable housing? How many lofts can you fit into 450,000’sq? I kid you not! This is going to get a lot worse before it gets any better, if it gets any better.

    • Cem says:

      Does it need to be “affordable”, just by adding supply it would make it more affordable without the negative connotation.

      • cas127 says:


        Excellent point…people just don’t seem to grasp that any additional supply (high end, low end, whatever…) is going to lower prices…even though Wolf makes that exact point in the article (migration from old to new offices lowers value/price/cost of the older offices).

        I am always suspicious of “affordable” housing hucksters…simply allowing more supply is going to lower prices…without taxpayer subsidies or gvt manipulation.

        • Fred says:

          Paul Pelosi made a good living off of affordable housing in San Francisco. It’s a great way for Democrats to supplement their income while claiming to help the poor.

  5. Anthony A. says:

    Here, on the North side of Houston (The Woodlands), Oxy still is in the old Anadarko tower and Exxon still occupies its $4 billion campus on the south side of The Woodlands. However, many retail strip centers are vacant and many were completed within the last two years.

    • Old School says:

      It’s a good lesson that once the momentum trade is over in stocks they will be valued on the cash flow they generate which for many is zero.

      Saw a good graph that for many years the economy was financialized at about 3 times GDP. Now it’s 6.2 times GDP. Wonder who caused that? Looking at you Greenspan, Bernanke, Yellen and Powell.

      • Kaleberg says:

        If you read business stuff from way back when, the essence of a corporation’s value was its ability to pay dividends. Then – was it in the 1960s – it became all about growth. Just paying out a regular or slowly increasing dividend was boring. The ability to pay dividends was irrelevant if the company was growing. By the 1980s, finance and the economy were decoupled.

  6. John H. says:

    Any publicly-traded structural implosion companies in Houston?

  7. Brent says:

    “The ballooning costs of health care act as a hungry tapeworm on the American economy.We share the belief that putting our collective resources behind the country’s best talent can, in time, check the rise in health costs while concurrently enhancing patient satisfaction and outcomes.”
    Warren Buffet

    One of the rare cases where Mr Buffett is 100% wrong,all his homespun wisdom and Berkshire Hathaway fund achievements notwithstanding…

    All empty office buildings must be converted to hospitals ASAP.Next step is FREE universal health care.Because when the price is ZERO demand is INFINITE !

    Feeling blue,making a wet fart,thinking that you kinda sorta having incipient chest pain ? Not in the mood to visit your doctor’s office to refill prescription ?

    Call the f… ambulance immediately ! Then watch 4 ambulances and 7 fire trucks appearing within seconds setting yet another Guinness Book record.

    Overpaid underworked firefighters will double their fat salaries with overtime.And AI-based medical billing software at the hospitals will do the rest to keep economy humming and assets skyrocketing.

    • Brant Lee says:

      Are you pretty sure about the “overpaid underworked firefighters”?

      • Jake W says:

        it’s just like with teachers and cops. it depends where. in the inner cities, they tend to be underpaid and overworked. in the wealthy suburbs, it’s the exact opposite.

        • Apple says:

          90% of fire fighters are unpaid.

          I seem to recall that California often uses prisoners to fight fires.

        • Wolf Richter says:

          Yes, a force of firefighters made up of trained and eager inmates that fight large wildfires, which is dangerous and people die doing this.

        • Flea says:

          Jane you been in a school lately,kids 4 th grade tell teachers to fk off get drug away by resource officers ,in my days got your ass wiped at school and again at home

        • Jake W says:

          flea, not in the nice suburbs. the parents are more likely to be the problem there.

      • phleep says:

        Maybe some proprietors will be looking to employ some underpaid overworked firestarters.

        • Brent says:

          It already happened 50 years ago in NYC.

          In the 60’s Mayor John Lindsay created FDNY-RAND to optimize and cut down to size bloated FDNY.

          Then came historical moment “FORD TO CITY: DROP DEAD” and Mayor Beame closed 15 or so fire stations and sent hundreds of self-proclaimed heroes to pastures.

          Hell hath no fury like FDNY faced with budget cuts …

          And then Bronx started burning in the late 70’s. All by itself.

          I’ve got a feeling that something similar will happen again.

        • Kaleberg says:

          I was going to mention Boston in the 1970s. Some firefighter got worried about losing his job, and the next thing Boston was burning. Any other cities?

      • Depth Charge says:

        I grew up in suburbia with a beautiful firehouse right up the street. Every night during the summer it seemed the firefighters were BBQing out back. They’d wash their engines regularly, and the grounds were spotless. It was a novelty when we’d actually get to hear the engines emerge from the garage. These guys were/are living life on easy street. Their monthly retirement checks are double the median household income in the area.

        • Brent says:


          IMHO volunteer FF are OK.I see them a lot during my business travels.They play dominoes, drink beer in moderation, fight fires once in a blue moon and,if the county is generous, get small stipend – about $40 – for putting out fire.

          Tenured $250K per year firefighters in LA & NYC are ultimate jerks.They retire after 20 years of doing nothing with $100K pensions and live in Florida well into their late 90’s.Their heroic image is based on ruthless self-promotion and not much else.

          Please google and read:

          Firefighter one of nation’s safest jobs

          Comments to this article are as good or even better than article itself.

          Then google Homeland Security report in pdf format :

          Special Report: Firefighter Arson USFA-TR-141

          At the end of this report is long list of FF doubling up as arsonists.

          Guess who is more likely to commit arson – peaceful volunteer FF or $250K per year tenured overweight clown clinging to his so-called “job” ?

        • OutsideTheBox says:

          Since it’s so great, why didn’t YOU become a fireman ?

          I guess the lure of nailing 2 x 4 s was overpowering.

        • OutWest says:


          Firefighters are first responders so they put their lives on the line, even in ‘nice’ neighborhoods. Drug addicts, domestic abusers, etc. Very few people could handle it and like cops and teachers, they’re easy targets.

        • OutsideTheBox says:


          I am in total agreement with you.

        • ram says:

          You would only hear the engines (with sirens going) when they were “responding” to an (emergency) incident. The “attend” many more incidents and events without lights and sirens.
          Their work days are long and often physically and mentally arduous.

          As a volunteer firefighter, I do not resent the full time paid professional firefighters their relatively modest financial compensation and benefits.

        • DF says:

          OTB — the short answer to “Why didn’t you become a fireman?” is that the cushy suburban jobs Depth Charge is talking about require you to know the right people (as in you are related to someone who can get you one of jobs).

          I agree that cops, firefighters, teachers generally have tough jobs, but there’s plenty of rich suburbs that e.g. pay cops six figures to patrol ultra-safe neighborhoods with almost zero crime.

        • Felix_47 says:

          Most of the calls are ambulance calls. I think they figured out a way to bill insurance or MediCal for the calls. So they might be profit center for the cities. I have two relatives in the Fire Departments in the Southern Ca area and they make around 200K per year or rather made since both are now retired in their late forties. They never tell me exactly what they make and that is what my wife says…..who knows? Both got their sons into the departments as well. One of them already had a degree from USC in chemistry but the security and pay is so much better than what one can make in the private sector. They did spike their pensions by taking extra hours in the last few years. Normally one works two to three days per week but a 24 hour shift seems to be the norm. But 200K and a generous retirement and lifetime health care is about what one needs to have a middle class life in Southern California or thereabouts. Any less and there is going to be a significant drop in standard of living. And 200K of Biden dollars is quite a bit less than 200K back in the Bush 1 era and shrinking fast.

        • OutsideTheBox says:


          If the point is to decry ” cushy jobs “, how about we become more discriminating ?

          I nominate the ” cushy jobs ” to rail against as hedge fund managers, C-suiters and boards of directors. You know, the keleptomanaics who steal from ALL of us.

        • DF says:

          I live in Albuquerque. Albuquerque Police Department sergeants make around $80k-$85k (https://www.petedinelli.com/2022/02/17/third-year-in-row-over-half-of-top-250-city-wage-earners-sworn-police-apd-police-union-contract-violates-federal-and-state-labor-laws-after-over-6-months-special-state-audit-has-not-reduced-apd/).

          I grew up in Ramsey, NJ. This police sergeant for Ramsey made almost $150k in 2018 (https://govsalaries.com/pieratos-vasili-32619512).

          The Ramsey officer just has to drive around and occasionally break up some parties.

          I assure you the APD officer has to do much, much more.

        • Depth Charge says:

          “Since it’s so great, why didn’t YOU become a fireman ?”

          Because the only people they hired were friends and family of the current employees. It’s nepotism, but you wouldn’t know anything about anything, so it’s a waste of energy to ever even reply to your nonsense.

        • JWB says:

          I doubt there is an underpaid fire fighter of any kind here in California.

        • Johnny Ro says:

          I know a fireman in Pueblo Co, his team are dead serious, dedicated public servants. The number 1 call is an old person or otherwise invalided person who collapses and they respond first. They get multiple licenses. They do not lay around ever, they have a gym on site. Some of the collapsees are 400 pounds, and then a real fire is an athletic emergency. They scoff at local police.

          Their station and equipment are clean as whistles not because they are lazy. A tight serious bunch.

          I also knew a NYC fireman, he had it easy on easy street. Short hours, big money. The story at that time was those people loved fires near or involving jewelry stores.

          No idea how the firemen situation relates to overbuilt useless towers, but there it is.

          My employer owns around $15b in commercial real estate worldwide. They tend to sell what they don’t hold, high, at nice profits and they steadily buy. A really really smart real estate team.

        • elysiansfield@gmail.com says:

          but there’s plenty of rich suburbs that e.g. pay cops six figures to patrol ultra-safe neighborhoods with almost zero crime.


          I was, back in the late ’60’s one of those cops in the cushy suburb…Oakland California.

          We were required by statute to be equal to the highest paid department in the State of California…we were very well paid.

          The axiom was, and is, that police are not paid for what they do, but rather what they might have to do…ditto firemen.

        • Beardawg says:

          DC & BRENT

          Truer words have never been spoken. I agree with the commentators RE volunteer firefighters. They are solid peeps.

          I worked 10 years as the Risk MGR for a medium – large city and firefighters and their leadership (in cities / suburbs) are disillusioned. I was involved with them regularly on budgeting and project analysis.

          2 firefighters admitted to me they sought the job because it required little / no education and they did not really have to work. We had to pay work comp claims associated with frisbee golf injuries and the like. They were (probably) incurred while working, so what are you gonna do?

          When we presented the due dept brass with ideas for optimizing productivity during “non emergency response” times, we got nothing but push back from them and the union.

          As someone who has seen and experienced it first hand, I can tell you my respect for suburban firefighters fell off the table quickly. Most of the rank and file are fed the superiority complex mantra, so they are ignorant to it.

          I am also sad to say the above applies to police officers as well (ignorant exaggerated self importance). A best friend is a retired suburban police lieutenant and confirms it. That said, I much prefer to fight a fire which is a fairly predictable risk vs dealing with the unpredictability of human crazy.

          It all falls under the constitutional mandate of providing safety / security to the “people ” Once the God complex is put in motion, it’s hard to temper it.

        • Kaleberg says:

          My uncle was a fireman in NYC, and it was like being a soldier. Most of the time the job was dead boring, so there was a lot of sitting around killing time punctuated by some rather intense moments. Sane people run out of and away from burning buildings. Firemen? Not so sane.

    • Marcus Aurelius says:

      I notice this too.

      You call an ambulance and 3 show up, with a fire truck, two police cruisers, and a ladder truck. Really?

      Then, you get a 20 minute ride to the Emergency.

      Then, you get a $1,500 bill for the Ambulance.

      No. I don’t pay it. I offer the “Ambulance Company” $350 with a take it or leave it extremely snotty attitude.. They take it. This may take about 2 years of refusing to speak to them, but in the end, they take the $350 which is still more than “others” pay.

      • Brent says:

        It is not hard to notice because this money-making BS stares in your face.

        Tenured FF recently created website firefighterovertime dot com where one may get PhD in “Applied Overtime Sciences”

        Even Willy Sutton was much more modest.Being asked “Why you rob banks ?” he answered “Thats where the money is”,shut up and did not elaborare.

        Many tenured FF have staggered shifts so they know who’s shift is ending and needs an overtime-boosting ride to look at the ran-over squirrel or kitten meowing in treetop.

        Cops call it “collars-and-dollars”.When their shift is about to end they arrest the usual suspects and start doing paperwork,dotting every ‘i’ and crossing every ‘t’

      • Kaleberg says:

        It’s a similar scam where I am. Two ambulances show up, no firetrucks. One ambulance is fire department and one is a private company’s. The former decide if you are having a real emergency and take care of you on the taxpayer’s dime if so. If not, they leave you to the tender mercies of free enterprise.

    • RH says:

      I sense sarcasm? Actually, as Buffet correctly points out, our healthcare is so expensive in the US now that it is cheaper to fly people to other countries with better and cheaper medical systems, have them stay in a luxury, resort hotel, have a great time for weeks, and get their medical procedures done than to do it in the USA. See “How do healthcare prices and use in the U.S. compare to other countries?” in healthsystemtracker.

      Excluding Switzerland, which has amazingly high medical costs but not as high as in the USA, medical costs in the USA are usually more than twice to three times what is charged in other countries for better treatment. See “USA Celebrates Amazing 17 Year Streak Of Having Worst/Most Expensive Health Care In The World” in wonkette, which discusses a commonwealth fund study.

      Many articles discuss how the AMA/HMOs managed to limit the number of qualified doctors/providers in the USA, e.g., by limiting the number of immigrant doctors that can take and pass the necessary exam to practice here. Our HMOs and doctors have basically cornered the market by limiting competition, so they can charge whatever they can get away with charging.

      • Michael Gorback says:

        *The licensure boards – who can revoke licenses for a variety of reasons

        Should have been preceded by quotes, i.e., “The licensure boards – who can revoke licenses for a variety of reasons

      • cb says:

        @ RH –

        ” by limiting the number of immigrant doctors that can take and pass the necessary exam to practice here.”
        How about the large number of qualified American Citizens denied entry into medical school ………….
        every single year

        • RH says:

          That is the game: they try to limit the number of medical students and discourage them once inside the med schools or residency programs with unreasonable work requirements. Hence, they keep the number of US doctors per US person lower than other countries.

    • Kaleberg says:

      A lot of countries have free universal health care, and they don’t have infinite demand for health care. Having good health is valuable in and of itself. If your heart is pumping just fine, you aren’t going to go get a triple bypass just because its free.

  8. MiTurn says:

    Viz. San Fran, here’s a chance for the vast Wolf Street Media empire to pick up new office space cheap!

  9. John H. says:

    I remember reading articles about municipalities in Iceland, Ireland, Northern Europe, as well as US, that that had purchased this MBS back in the ‘90’s and ‘00’s and faced significant portfolio haircuts when the shyte landed.

    I assume that this batch of junky MBS paper has been sold to institutions as well as to individuals. Anyone have a handle on the systemic risks associated with CMBS, or is this episode more self-contained and isolated?

    • phleep says:

      The Fed’s put went out to half the planet, last time around. That is, to the connected half. I’m still holding the dinner check I got handed the last time. But the Fed’s credit card hasn’t been denied!

    • Petunia says:

      Even before the pandemic much of NYC retail/commercial real estate was empty, as was well documented on this site. The reason the storefronts remained empty was the landlords refusing to lower rents. If rents are lowered the CMBS has to be repriced, and both landlords and banks, would rather hold off on collecting payments than reprice the debt. It’s a big problem everywhere.

    • Augustus Frost says:

      I doubt many individuals have bought this garbage directly. It’s in their pension and mutual funds if they own it.

      • Jake W says:

        that’s correct. most of the issuances required you to be a iai, so you had to have $5 million or whatever in assets. the a tranches were usually bought by institutional investors.

      • John H. says:

        Pity the poor pensioner: squeezed on expenditures through inflation, and squeezed when his pension check declines due to asset haircuts.


  10. Kunal says:

    Lot of these will be converted into residential complexes and low cost housing partly funded by Govt. The construction cost would be immense and will perhaps worsen the inflation in housing costs.

    • Apple says:

      Much cheaper to knock those buildings down rather than convert to residential.

      • Flea says:


        • Felix_47 says:

          I think Chinese construction companies could come in and bring their own labor and succeed. The problem is getting their own labor in. Kaiser Steel was torn down some 25 years ago and the Chinese bought the steel mill. They were able somehow to get their own workers to do the work, disassemble and put the entire steel mill on ships to China. They pretty much were able to escape prevailing wage, the unions etc. I asked the Chinese manager, as I saw all the cranes and machinery being operated by Chinese, of the giant project how he was able to get around the Union and his answer back then was, “You Americans need your rest….”

        • Masked Ghost says:

          LOL. That reminds me of a neighbor’s son. Right out of High School he got a job “supervising” construction of a nuclear plant in Yugoslavia back in the 1970’s. He said the job during the day was to watch the locals do the construction. Nights were spent at the hotel bar listening to gunfire up in the mountains (or so he said).

          …..just another trip down memory lane.

      • VintageVNvet says:

        maybe so or maybe NO apl:
        Really depends on SO many factors that it is absolutely NOT possible to ”generalize on the basis of insufficient information” about the cost of remodel(s) of any particular site, or the entirety of these or any other ”type” of building.
        Design professionals who are specialized and experienced with remodels, along with contractors ditto, can and have done wonderful and cost effective projects on almost every type of building, although certainly NOT on every one of every type.
        Have done dozens of a wide variety over the last 50 years or so, California, FL, SE USA, to NYC

    • JoAnn Leichliter says:

      But who will live in them? I have seen a lot of commentary saying these buildings will become housing (probably expensive to convert), but with fewer productive businesses occupying offices, there will be fewer service workers, fewer restaurants, clothing boutiques, etc. Without amenities or jobs, who really wants to live in the middle of a giant metropolis? Yes, I get it, there are inveterate city dwellers, but don’t they need an income? Or will these abandoned towers just become the new, government-subsidized housing projects?

      • VintageVNvet says:

        Will almost certainly be a wide variety of results JAL, as has been the case for many times and places past.
        Have seen projects by both private and public entities, and seems mostly to depend on the market(s) for housing locally.
        And to be sure, some of the buildings that are too costly and out of place in their markets will be demo’d, sooner and later.
        While ”mordida” comes always to mind in any situation requiring cooperation of many public agencies to accomplish any project,,, there are also many examples of public servants doing their best to ” help our citizens build what they want within our codes and ordinances.”

      • Flea says:

        Make great cheap prisons

  11. phleep says:

    Eye-glazing writedowns in boom town.

    Houston makes me think of a sort of narrow-focused hedge fund with lots of variance dependent on energy prices and credit cycles. Goes back to the 1980s S&Ls, then there was Enron, noe these glorious securitizations. Probably goes back to days of breathtaking oil geysers. Still has a flavor of the 1800s, somehow. Hopefully the inhabitants have been cycle-hardened, and put in their strategies for it.

    But this time, it could be the canary in another grand credit cycle-real estate coal mine.

  12. COWG says:

    It appears that someone hit an oil slick on the highway to hell and ended up in the tranche…

    • Depth Charge says:

      The stock markets appear to be doing a swan dive at the moment.

      • Anthony A. says:

        Where is the PPT? Or are they setting up for tomorrow if the Ruskies invade?

        • Wolf Richter says:

          These people on the PPT are the wurst of the wurst. They’re very unreliable. A bunch of them are out with Omicron, but they were seen at the massage parlor around the corner in the middle of the day, according to sources familiar with the matter.

          There’s also a labor shortage, and the PPT has lots of job openings that they cannot fill, and they doubled their pay and offered signing bonuses, and they just cannot fill those freaking jobs, and when they do finally hire some yokels, they don’t know buy from sell, and they screw up.

          That’s what happened today, those few people that were actually at their desks, and not at the massage parlor, didn’t know buy from sell, and then, when the manager cussed them out, they got mad and jumped up and ran out in the middle of the afternoon and went to the bar across the street, and got drunk while they watched CNBC on the TV above the bar, and they had a blast, and they hooted and hollered as the market tanked, according to sources familiar with the matter.

        • Peanut Gallery says:

          What is PPT?

        • Wolf Richter says:

          Plunge Protection Team, which is that miraculous mythical entity that always steps in with HUGE buys every time the market is about to sell off bigly, unless they’re all out drinking or at home with Omicron. This mythical team is employed by the Fed, the Treasury Dept. and Wall Street banks.

      • Ted says:

        Thanks to the two pipsqueaks in Moscow and Washington.

      • Brent says:

        “And still the creature flies – until, just as you’re beginning to think the thing is completely immortal, it finally, and perhaps a little anticlimactically, keels over and dies.The sooner the better for everyone.”

        This guy Jeremy Grantham has $110B under management, could possibly double or triple it by front-running Fed moves…

        But even he appears to be nauseated by all this meaningless perpetual skyrocketing.

      • Augustus Frost says:

        The decline in the S&P 500 was slightly over 2%. The Dow, somewhat less. The NASDAQ, closer to 3%.


        The point declines look big because the price level is so inflated. The S&P 500 isn’t down even 10%.

        When it really starts to deflate, it will look like the fall of 2008 or March 2020.

        • ivanislav says:

          I think the Fed and federal government will continue to tag-team if indexes fall substantially. The Fed will stay their hand in an effort to maintain their already-shot credibility and the federal crooks will send out stimulus checks yet again. The time after, that, back to the Fed.

        • Depth Charge says:

          If they do that, ivanislav, then they’re just going to keep pumping inflation and destroying the currency until they destroy the entire country. There’s no free lunch. The money-printing is having only negative effects now.

  13. Enlightened Libertarian says:

    Can you short commercial real estate? If so this seems like a good bet.

  14. phleep says:

    Maybe I could swap some Houston GS CMBS’s for some GS Greek sovereign credit CDS’s.

  15. fred flintstone says:

    These types of losses are going to be everywhere very soon……Bullard, who is JP’s mouthpiece just announced that he thinks the federal funds rate will need to go above 2% to quell inflation……That puts the 10 year above 4….and lending rates into the high single digits.
    The speculators will be in deep trouble and those that lent to this pack of dreamers will be feeling the pain.
    At least San Fran has good weather…..I spent a year in Dallas…..and after one summer there decided to pay an income tax happily.

  16. phleep says:

    Like a big ol’ hedge fund sittin’ atop a speculative oil property with a credit cycle cyclone comin’ down the alley. I think it’s been that way for many, many decades. Hope the locals have their hedges in place!

  17. nick kelly says:

    It has lots of windows so conversion to condos or apts is more feasible than with malls. Which does not make it feasible but ponderable anyway.

    • HowNow says:

      …”feasible” as in “able to charge fees”…

      Hat tip to Phleeb: “…credit cycle cyclone comin’ down the alley.”

    • Wolf Richter says:

      Someone bought those buildings. They have a much lower cost base than prior owners. They could renovate the buildings and put them on the market with a much lower rent, and heat up the competition. This is what brings down office rents.

      • DR DOOM says:

        Lower rents? WTF? are you mad? Next you will be saying lower rents are a good thing and could be deflationary . You do not appreciate the sacrifice and hard work the mythical PPT does to keep assets inflated. What’s next? Interest rate hikes?. Balance sheet reduction? Madness.

  18. DawnsEarlyLight says:

    Vacant office buildings has truly uncovered the gold that once laid hidden. Also, the once firmly established office workers, once snug in their corporate cubicles, are now targeted remote workers. As the worm turns.

  19. Marcus Aurelius says:

    This had nothing to do with today’s post, but the even disturbed me. Some of you may have Wisdom concerning this.

    I am one of those freaks who has accumulated “cash” to pay all my bills for months. Yeah, I’m a prepper loser. Anyway, I have 3 banks for separate reasons. I usually take out $2,500 to $2,900, per month, per account, with no problems. I have been doing this type of thing for decades.

    So, today I visit one of the most corrupt Banks. I won’t mention the name, since I don’t want my account seized like a Canadian Trucker. I have been doing this type of thing for over 30 years with this Bank. My check was for $2,800, cash to me.

    The teller looks at me and says: “I need to get approval” (WHAT?). I say nothing since I know how obnoxious and arrogant I can appear. I wait. He comes back, says nothing and continues the transaction. I get my cash.

    BUT, I act all “golly, gee whiz, I’m stupid” and mention that was the first time that ever happened. He says:, any cash withdrawal over $2,000 needs “approval” from the manager. I say nothing. No point, and all of this is being recorded and filmed with the 7 cameras.

    As he gives me the cash, half of the $100 bills are the OLD ones. The ones you can print off your own 1982 Xerox machine. I say nothing, except, I comment that it is hard to find the old $20s and $10’s. He is polite, thinks I am your typical stupid American, and, while acting stupid, I inquire why they still have the old $100 (which 7-11 and Burger King don’t like)…….He says, “Headquarters is sending them to us since they don’t have enough new ones”.

    Hmmmmm. Then, this very same day I hear how 50% of the population of Turkey is using US currency as money. Lebanon is going totally underground using US currency. Venezuela has gone so far as to use Silver Mercury US dimes as money……………..It seems to me the $100’s are being sent (smuggled) off shore to family relatives who want US money and not the printed paper Lire, etc.

    I used to live in the Middle East (raised in Lebanon). I am extremely familiar with trading my US money for cash in all the “black markets” while visiting Egypt, Syria, etc. I can imagine it today.

    So, your opinions? Am I a typical conspiracy nut-job? When will they limit my cash withdrawals to $1,000, then $100 per day?

    If this post is “deleted”, I will understand. It is very provocative.

    • HowNow says:

      You cannot be a conspiracy nut-job and ask if you are one. A conspiracy nut-job’s head would explode if a doubt crept into his or her mind.

    • DawnsEarlyLight says:

      Actually, this was a refreshing comment, as I ‘sat back’ enjoying my cup of coffee. Keep up with the provocative insight.

    • sunny129 says:

      The nightmare scenerio you described could happen during suddenly declared bank holidays ( Bank run!) and restriction of the amount. It has happened elsewhere in more than one country!

      • Shiloh1 says:

        Like the observation about the OLD ones. U.S. Grant and Andy Jackson look great.

        Is 2/22/22 too obvious for government banking shenanigans?

    • phleep says:

      When a bank robot scans your eyeballs, says your account is suspended and “asks” if you would like a shrink, I will start worrying.

    • Crumbcruncher says:

      The bank has most likely been filing a suspicious activity report on your cash withdrawals for years. Tellers can do it for any reason and they will not tell you.

      Like you, I prefer to handle most in person transactions in cash. I use $50s. They are more acceptable at merchants than $100s. Easily fit over $1000 in my wallet in $50s.

      Use cash to starve the banks and take back your privacy.

      • Crumbcruncher says:

        PS, it really sucks getting a counterfeit $100 for a retailer. It happened to me twice in six years. The retailer doesn’t just lose the $100, he loses the $100, loses the change given, and loses whatever merchandise was purchased.

        Say a retailer sells something for $20 and receives a fake $100. He’s out $180 in cash and the $10 cost of the merchandise. That is a $190 risk in order to make a $10 profit. $50s are much more acceptable in part due to their reduced risk.

    • Hal says:

      I do the same thing, but I usually ask for all twenties and they have a machine that counts and spits it all out. They NEVER do anything crazy like getting approval to give me my own money.

    • VintageVNvet says:

      maybe ”ethnic profiling” MA??
      Not my local branch recently told me and the seller of the vehicle I was buying that that branch could only give me $4,000 of the price, but said he could have it the next day or could direct me to a bigger branch…
      Have had similar comments regarding large checks
      ( $10-50K ) TO DEPOSIT over the last few decades, so not really anything new. More like the bank in your case either having difficulties with staff, etc., as so many biz places appear to be these days.

    • Fat Chewer says:

      No, you’re not crazy, but since I have found the same thing happening here in Oz, it would appear that the reason is inconclusive. A mate of mine had it happen to him a while back. Probably costs too much to print so many high denomination bills when most people use credit cards now.

      • El Katz says:

        High denomination bills are easier to transport than stacks of $20’s. There used to be $500’s and $1,000’s (and higher) but those got “recalled” (in the U.S. in 1969) as they were the favorite of the “entrepreneurs”.

        • Crumbsnacker says:

          $70,000 in $20s is about 30 pounds in weight. You can hold that much in your hands with rubber bands. General rule is 1g per bill.

        • Crumbsnacker says:

          Wait, no. I got my math wrong. it’s 7.7 pounds. $70k / $20 = 3500g = 7.7#.

    • Cobalt Programmer says:

      1. Printed cash contributes to global climate change and destroys paper making plant materials. Ban cash to save the planet. Change to digital coin.

      2. A convicted criminal pays huge sum and went back to lecture about the personal ethics, great reset and how to live like a King! A man caught with more than an ounce spent 6 months in the pen.

      3. If someone told me all the wealthy people will come together to fix everything in a common mans life, I would consider it to be an conspiracy theory. Not anymore…

      4. The provocation can lead to delete this post. May be this site. We are all keyboard truckers.

    • Softtail Rider says:

      Some years ago my wife was afraid our money system was collapsing. She tries to withdraw $10,000. The teller informed her they would be required to report the transaction. She should only withdraw $5,000 a day. So she does this on two days. Thus no notification.

      This was a misunderstanding of our banking system and the $10,000 was later restored to our account. We now keep excess on hand. It also highlights a problem the overlords never see. Your local banker is much sharper than any regulator up the shaky ladder.

      I encountered a similar problem many years ago by asking for a $500 dollar bill when moving money from one bank to another. I was ask to sign for the bill before it was issued. I laughed and refused and today you can not get such a bill. Such is or system today.

      I also have a couple of the old tens and twenties as collectibles.

      I post this only as a reminder of the stupidity in today’s world.

      • Augustus Frost says:

        I’m surprised the teller did that. It could technically be considered “structuring” or attempting to avoid the BSA currency reporting requirements.

      • Crumbcruncher says:

        The local banker is a quaint notion. They completely vanished around the same time that the reserve requirement went out the window. We are not living in a fractional reserve system any more.

      • Swamp Creature says:

        At my crooked Wells Fargo bank, they report every transaction over $5,000. In the summer of 2020 when my checks were stolen and deposited in a WF ATM, the criminal wrote the check for $4,995 to excape detection.

    • Wolf Richter says:

      Marcus Aurelius,

      To your question about the older paper dollars being handed out…

      You may be on to something. Paper dollar shortage?

      Right before the pandemic, there were $1.8 trillion of these paper dollars in circulation (Federal Reserve Notes, as they’re called). Many of them were overseas. During the pandemic, demand for paper dollars surged, and the banking system has to supply them (the process you went through), and the banks have to order them from the Fed, in exchange for collateral, and the Fed has to get them from the Treasury Department’s Bureau of Engraving and Printing (BEP), which manufactures these paper dollars. By August 2021, there were $2.19 trillion in dollar notes out there, that’s a huge jump. It has slowed since. Today, there are $2.23 trillion of them.

      That spike in demand likely strained the BEP – labor shortages, etc. etc. – creating a paper dollar shortage. The “coin shortage” has already been well documented by the Fed itself. Normally, the Fed pulls older notes when they come through the banking system. But in order to allow the BEP to catch up with demand, the Fed may not be pulling the older notes as it would normally do, and so you got some of these oldies.

    • Will says:

      Thank you for your insightful comment:

      “Am I a typical conspiracy nut-job? When will they limit my cash withdrawals to $1,000, then $100 per day?”

      That’s a possibility. For an illustration of this I recommend that you read up on the Argentinian banking crisis around the year 2000, when the Peso was devalued on the order of 30x (this is off the top of my head). The banks were all closed during this period of devaluation, cash withdrawals were limited and inconsistent (it made more sense to stay out all night trying to find an ATM where you could get your daily Peso limit than it did to go to work – to give you an idea of the extreme dislocation this caused).

      Many people lost their entire life savings during this time, as they’d incorrectly assumed that the Peso would maintain its USD 1:1 peg in perpetuity.

      The potential for these things to happen are extremely disconcerting, and living through one of these episodes would be extraordinarily terrifying, with social damage that lasts generations. Why anyone (Trudeau?) would flirt with these types of forces/dynamics is beyond me..

      Thank you again for your comment.

      • Crumbcruncher says:

        Read up on Cyprus and how they did a “bail in.”

        Wasn’t that long ago.

        • will says:

          lol, that’s true. there’s that as well.

          In Argentina the banks closed and the government stole all the peoples’ money. In Cyprus the banks closed and the bank counterparties stole all the peoples’ money.

          I would expect a Canadian experience to be more like the former rather than the latter – also they’d stretch it out over a long period of time (like Argentina) to make sure that people actually put up with it, perpetually hoping that the slow-ish bleed ends soon..

          Fun fact, in Cyprus only the Cypriot branches of the closed banks closed. The rich people simply flew to London and withdrew all their money there – since those branches were still open! Sure does pay to be rich – they’re so lucky!

          People don’t really remember it too much here, but there was a similar situation in the US and precedent set with Corzine’s “MF Global” bankruptcy, although this was not an actual bank. I forget the case, but there was also precedent set with a Michigan bank failure for depositors to have less standing than bank bond holders for claims during dissolution. But in Argentina’s case the banks never “failed” (as they did in Cyprus) the government just destroyed the currency and held the banks hostage..

          It’s interesting stuff..

          With respect to Wolf’s comment above re: USD supply. There has been some written since 2008 about the phenomenon of “disappearing dollars” – basically described as a HUGE demand for paper currency followed by a huge supply of said currency, only to have the currency seem to largely leave circulation soon after issuance. Theories abound from foreign demand (as Wolf pointed out), to US citizens traumatized by their experiences in 2008 into hording extra cash. But AFAIK, the reasons remain unclear..

        • Wolf Richter says:

          Crumbcruncher and Will,

          That applies to Cyprus, and to Argentina, and some other places, but not the US.

          In the US, when a bank is resolved, this happens: The FDIC takes over and here is who gets bailed in first:

          1. stock holders
          2. preferred stock holders
          3. holders of contingency convertible bonds
          4. and if this is still not enough: unsecured creditors such as depositors.

          So there is a lot of “bailing in” before it gets to depositors.

          But for depositors, bail-ins are irrelevant because their deposits are insured by the US government (FDIC).

          Deposits are “unsecured” but are “insured.” I have no idea why this is so hard to understand.

          If the FDIC runs out of funds, it borrows from the US Treasury, and the US Treasury is backed by the Fed with its unlimited printing press. End of discussion.

          Cyprus had none of this. It’s just a tiny country without its own currency, and its massive banks were stuffed with the proceeds from Russian money-launders.

          People need to know the FDIC limits and stay within them, and their deposits will be fine.

          I have been involved in three bank resolutions, including the second largest at the time, MBank in Texas, and for me as depositor, I never knew the difference. One day, you get a letter from the FDIC that says that your deposit has been moved from collapsed bank X to healthy bank Y. And that’s it, you do business with bank Y or move the deposit to a different bank. That’s how it works.

        • Crumbcruncher says:

          Will, Thanks for the reply. I also remember Refco. They stole thousands from me.

  20. DR DOOM says:

    I am not an investment sophisticate but is this an example that cash ain’t trash, or cash just bought discounted trash ? It looks cash on the barrel head caught a bid in the Lone Star State. Maybe Delbert Mclintock wil write another good tune with the hook ” Cash ain’t Trash”.

    • phleep says:

      “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

      Attributed to Andrew Mellon, supposedly said to Herbert Hoover

      • OutsideTheBox says:

        Crazy old Andy…..notice the liquidations didn’t come anywhere near HIM !!!!

        • Marcus Aurelius says:


          His family financed ALCOA and Gulf Oil, etc.

          In fact, those who discovered the incredible Spindletop oil field, went to Standard Oil for financing, etc. They were turned down. Standard Oil believed there was no real American oil fields outside Pennsylvania.

          They went to the Mellon family and got the money.

          When Andrew Mellon became the Treasure Secretary, most had never heard of him, yet he was the 3rd richest American at the time.

          He wrote and published an excellent book about fair and honest taxation.

        • Augustus Frost says:

          According to Ferdinand Lundberg using 1937 TNEC data, the Mellons at one time owned 70% of Gulf Oil and 35% of ALCOA. They also owned large stakes in a bunch of other stuff, such as General Reinsurance (or maybe General Tire & Rubber) and 43% of the First Boston Corporation (later a “bulge bracket” investment bank).

          They were one of four really rich families (along with the DuPonts, Rockefellers, and Fords as a distant fourth) up to at least 1960. This as opposed to most of the current 724 billionaires who mostly own mania priced assets with little if any real substance.

      • Softtail Rider says:

        Andrew Mellon was in the government. Federal Reserve I think, at this time and here is a consequence of those words.

        Sometime around 1930, I believe, My father once told me during this period he was making 3 dollars a day when he went home on Friday night. On Monday the boss informed him and others they were now making one dollar a day. Back then a day was 10 hours!

        I was never employed then as it was before my time. However in the 1950s I picked cotton for 3 cents a pound and drove a tractor for 5 dollars a day, again a ten hour day.

        Cotton pickers and hay balers were just invented and during a summer I made more money than I could spend. Time working reduced play time!

        My brother in law and I were lucky back in the day to be among the first to make $100 a day for an 8 hour day. This for all the young ones was a long tine ago, and 8 hours meant, 8 hours of work, not sleeping in the haystack.

        • Augustus Frost says:

          Andrew Mellon was US Treasury Secretary, though I thought it was in the late 20’s.

  21. Frank says:

    Opens up inexpensive space for new & innovative start-up companies. Capitalism is harsh but this is what we go through to shake things up and create new businesses.
    REITs in the commercial sector must be taking a real beating… Likely followed by the residential REIT’s in a few years they way they have been buying regardless of price.

    • Augustus Frost says:

      There has been a lot more speculation versus innovation this century, to a lopsided extent. Can’t post the link here (against the blog rules) but when I recently did a search for the most “significant” inventions/innovations of this (21st) century, wasn’t impressed with anything on the list at all.

      These supposed “disruptors”, mostly or entirely BS. We’re not talking about the transistor, microchip, ICE, electricity, telephone service, printing press…much less the wheel.

      Not saying there isn’t anything at all. Presume there has been something or quite a bit in medicine (as an example), but whatever it is, not remotely enough to lead to a growth cycle in real production which is going to compensate for the distortions in place now from unprecedented malinvestment and debt.

      Since 2008 with ZIRP and a fake economy, it’s been very easy to raise tons of money for practically anything. Outside of a financial mania, most of these companies never would have been funded, would have gone bankrupt, or would have been forced to actually make money.

      The latest fad is the most idiotic I have ever read, even worse than crypto which is nothing.

      The “metaverse”, an alternate fantasy world where I’ve read someone supposedly paid millions for imaginary real estate. It’s as dumb as NFT’s. Meta (FB) has reportedly lost billions “investing” in this future “market” which will supposedly be worth trillions.

      Totally fitting that as an unprecedented historic mania reaches or approaches its end, society completely “loses its marbles” to finish the detachment from reality. It’s the ultimate belief in nothing being something.

      • Cashboy says:

        I just do not understand NFTs.
        Someone buying a digital copy of a twitter post or a digital copy of an original painting for millions of dollars that once the file is shown on a computer can be copied by anyone.

      • mariah says:

        Speculation + moral hazard = rent extraction. eCon 101.

  22. Augustus Frost says:

    There are going to be similar losses in other asset classes when the mania finally ends. Entire asset classes, not just individual securities or segments.

    • phleep says:

      If parched in a desert, what would you trade for a thimble full — of liquidity?

  23. Michael Gorback says:

    Nope. The architecture of most modern SF office buildings is not conducive to residential conversion. It’s not about windows it’s about the size of the floor plates. To my knowledge not one single conversion applicaction has been filed in SF.

    Houston has two components. One is the dependence of CRE on oil prices. The other is, believe or not, Houstonians (those who live inside the 610 loop) are are as fond of their town as someone from Boston or SF.

    So Houston and SF might have convertible space and the demand might be there, but the conversion cost for most office buildings is prohibitive.

    I don’t see sidewalks filled with tents in Houston like I did in SF so I don’t see the pressure to convert in Houston but the problem remains: converting office buildings is not economically feasible, especially when you consider the rent. Tent dwellers are not going to be able to afford the rents these conversions will require.

    In addition, not only are WFH opportunities available in the US, but several countries are offering incentives for WFH for Americans.

    • VintageVNvet says:

      Not sure where you’re coming from with your first sentence MG, and even though it’s been three years since I have priced out MF residential construction, new and remodel, in TX, it seems first of all that if a buyer get’s these buildings at numbers mentioned, approx $40-45/SF, they will be able to modify them to at least acceptable levels of residential for another $40-50/SF.
      Three years ago, IIRC, we were bidding right around $100-120 per SF, total for new multi family housing in TX, much more in SoCal and NorCal.
      Don’t know under what codes these buildings were built, but, typically, office occupancies are required to have approximately double the ”live loads” of residential; and as to MEP conversions, almost all multi story buildings the last several decades have had dedicated ”chases” to accommodate all manner of pipes and wires from basement to roof; if none or insufficient existing, it is fairly easy to install such chases as needed.
      Be interesting to hear from others re current cost per square foot for residential locally, as I am out of the biz and just enjoying the play and Wolf’s reporting thereof.

    • Wolf Richter says:

      “To my knowledge not one single conversion applicaction has been filed in SF.”

      People are talking about talking about it :-]

      • Michael Gorback says:

        Those people sound like the FOMC.

        • richbutpoorcalifornian says:

          thank you for saying this. as an architect i’ve read through the comments and resisted saying it because i didn’t want to pick a fight, but it’s not feasible. floor to floors are different, egress can’t be met, energy efficiency isn’t there, etc etc.. some buildings are not economically or even physically convert-able.

  24. andy pyle says:

    What a great place to put all those immigrants stuck at the border! Yu know, those “tired, poor, huddled masses yearning to breathe free.”

  25. ram says:

    Thank you for that article Wolf. I was wondering what has happened to Houston real-estate, especially the fancy high overhead buildings used by the once giant US petroleum industry.

  26. David Hall says:

    Commercial mortgage delinquency rates are low. Residential mortgage foreclosures are low.

    The Russian ruble has been declining in value compared to the U.S. dollar over the past ten years. Russia printed money.

    • Cashboy says:

      I do not believe that Russia has printed more money per capita than the USA.
      The sanctions that Obama put on Russia has made Russia more independent and stronger.
      The price of oil going from US$30 to US$90 and the devaluation of the Russian Ruble gives Russia many more rubles for its economy.
      Maybe the reason the USA is trying to create a war in the Ukraine is because Russia has done rather well out of the situation it was forced into.
      Imagine if the USA shut off Swift to Russia and Russia then demanded payment for its oil and gas in physical gold from the EU.

      • ivanislav says:

        “Imagine if the USA shut off Swift to Russia and Russia then demanded payment for its oil and gas in physical gold from the EU.”

        Precisely. In fact, I would probably do that even without getting booted from SWIFT. There are no bridges left worth trying to save. They need Western countries less than visa versa as we enter an age of scarcity.

        If they had a better leadership and vision, they’d be in the running for the next global superpower. I’d like to visit one day when body-cavity searches are no longer a prerequisite for international travel.

      • nick kelly says:

        ‘the devaluation of the Russian Ruble gives Russia many more rubles for its economy.’

        What kind of fantasy is this? You devalue to make your exports more affordable. The only limit on Russian INTERNAL amount of rubles is the amount of paper and ink it can afford to print rubles. There is no internal problem with the ruble. The problem is external ( the real test of a currency) The ruble is not a convertible currency. It’s barely money outside Russia and Russia does not want rubles for its oil.

  27. Hal says:

    I don’t see how this doesn’t get worse considering the continued move to remote work, punitive taxes and high crime in most of these cities (in the linked article). In particular, Chicago has changed from a “destination” to a “don’t go” kind of place. Paying high taxes in exchange for high crime, at a time when office space ain’t renting, seems like a bad recipe.

  28. RedRaider says:

    I remember a story awhile back talking about a residential high rise in, I believe, Miami. They were holding an open house trying to sell the remaining 50%. The takers were getting them for $.50 on the dollar. At the end of the open house there were vacant units still available. How sad that the original purchasers overpaid 2X. At the end of the article it was mentioned there were 17 other high rises currently under construction!

    Anyone ever hear how this turned out?

    • VintageVNvet says:

      This exact pattern was widespread in FL when the crash hit there in 2008-09 RR.
      Several multi building sites that I was watching stopped buildings lower than planned, 3 or 5 stories instead of 7 or 8.
      Some folks were bailing on large deposits and paying much less for the same SF elsewhere, others just held on and took possession of their original place.
      AFAIK, all of the places, in SWFL, have been sold since, with the recovery of the new waterfront places recovering quickly and the then quickly going above their pre crash prices as inventory plunged for a while.

  29. El Cheepo Gooseman says:

    Bust out the windows, spray some obscene graffiti, and shovel the homeless in. Cheaper than building new, if the Gov does it.

  30. DanS86 says:

    The Fed will step in and buy.

  31. coboarts says:

    I happen to be the proud owner of all 17 (14 + 3) seasons of Dallas. I love watching Dallas change throughout the years. The building you show is so early 80s, late “Dallas.” It’s almost as fun as watching early CA cowboy movies to see the state as it was 1950s – 1960s, and old Dragnet views of LA (late sixties). I think I’ll go dig up some old Elvis movies.

  32. Sit23 says:

    Can somebody please find the name of the original Goldman Sachs valuer? I may have some work for him. I have a property I need valued for a bank loan.

  33. historicus says:

    “We are going to make investors take more risk.”

    The Federal Reserve.

    How’s that gonna work out?

  34. Gabby Cat says:

    In Central Ohio many organizations are shedding RE due to the remote workforce. It is becoming so common that many developers are looking to turn some of the new building into luxury condos. Oddly enough a subdivision with 50 newly constructed homes, between $400-$800K, was purchased by a single investment firm near the abandon towers. They are renting them all out between $3-$6K a month. Co-workers are looking forward to cheaper places in the condos. There is no RE on the market for many single families. The world often feels upside down.

  35. Michael Gorback says:

    NB: Oil prices in this discussion have been adjusted for inflation using CPI-U and are not nominal prices.

    As I said before, Houston rocks and rolls in tandem with oil. There has been economic diversification but oil is still a significant factor. The office projects started in the mid-teens with oil at $100 came on line just in time to see oil at half price. In 2020 it fell to $35. The nadir was April 2020 at about $12.

    1998 was the lowest price for oil at $20 (Enron era), but 10 years later it hit its highest price ever at about $120.

    Currently inflation adjusted oil is around $78, up from $63 in 2021. Quite a ride. I wish I’d gotten back in during 2020 for a double but I was too busy looking at CRISPER stocks and the like. Those did well until covid was eliminated – or so people thought.

    I know people in various aspects of the oil industry. One minute they’re depressed because they have to lay off 30 workers. The next year their hair is on fire because they need 30 workers.

    Given the double whammy of covid and the oil bust I think it will take several years for the market to recover – assuming no more oil shocks. Hahaha, sometimes I crack myself up.

  36. SpencerG says:

    Back in 2009 my brother was needing to renew the lease on his office for the mortgage franchise he owned in Dallas. His office was probably Class C property… if that! Resembled a boiler room to me. White walls, few windows, fluorescent lighting. On a whim he decided to see what else he could get for the same amount.

    Landed twice the space on the top floor of a Class A building that looked a lot like the picture Wolf has here. The space was so beautiful that when the franchisor wanted to impress somebody they brought them to a meeting at my brother’s office conference room rather than bringing them to the headquarters.

    When the market falls out for these buildings it REALLY falls apart.

  37. rick m says:

    At one time, Houston could have legally annexed I-45, it’s access roads and adjacent property to the city limits of Dallas. Unlike San Francisco, plenty of room to the east and west too. These towers can’t pencil as residential remodels if rents in Katy or Baytown are at all reasonable. I did commercial electrical in central Texas when these buildings were getting built forty years ago, and nothing and nobody was allowed to slow profitable construction down, you learned to wear blinders and shut up and produce or get canned. How long is the concrete/steel connectors/adhesive compounds really good for? Nobody in ’82 was building for retrofitting in ’22.
    Add four decades of wind and weather. And you have to run HVAC in empty buildings or they rot. The engineer and architect are history, and lawyers are paid not to admit being responsible for anything. The investment write-offs sound horrendous and will inevitably find their way to the taxpayers tab, if the burned have the juice to make it so. You would have to have a very compelling business plan and plenty of cash just to get involved in remodeling superannuated 200′ high office buildings in an city focused on petrochemical energy these days. Foreign investors who haven’t been to southeast Texas in the summer would work well. It’s cheap to them.and the US did well out of the British and Japanese malinvestments of the past.

  38. Kaleberg says:

    Oil is well over $25 a barrel now. Are those office buildings filling up again, or are they the new rust belt?

    • Wolf Richter says:

      Now the problem is working from home. Even at oil companies and law firms. And the problem is the construction boom that threw a whole bunch of super fancy towers on the market, and they attract the best tenants. Older building lose tenants. And they can’t cut the rent enough because of their high cost basis.

  39. CreditGB says:

    A mentor once told me that in the commercial credit approvals, it a bad debt write off was reviewed as if at the time it was approved, and the information then would still make it an approval, it wasn’t a bad deal when approved.

    Shopping malls once were a great investment. Times change as do economic factors, it requires constant vigilance and awareness to guide your little Titanic amongst the ice bergs.

    This doesn’t help anyone, it is just an observation of the passing parade.

  40. Bruce says:

    $49 a sq ft
    I remember when that was about what a standard house was priced at

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