What Are Older Office Towers Worth When They Finally Sell amid Record Vacancy Rates? Not Much. Huge Losses Everywhere

But foreclosure sales are far worse, including a total wipeout of CMBS investors.

By Wolf Richter for WOLF STREET.

36% loss. Private equity firm Blackstone sold two 13-story Class A office towers, the Griffin Towers, in Santa Ana, Orange County, California, for $82 million to a joint venture between Barker Pacific Group and Kingsbarn Realty Capital. The towers, built in 1987, have a vacancy rate of 24%.

Blackstone had bought the towers in 2014 for $129 million, according to the Commercial Observer yesterday. The selling price makes for a loss of 36%. And Blackstone was lucky on this deal.

In 2007, at the peak of the prior CRE bubble, the towers changed hands at $183.8 million. And in 2010, it sold again for $89.9 million. In Orange County, the office vacancy rate reached a record of 23.1% in Q1 2023, according to Savills.

Jingle mail. Blackstone has been dumping other office towers, including most prominently a year ago when it walked away from the mostly vacant 26-story, 621,000-square-foot, 1950-vintage property at 1740 Broadway in Midtown Manhattan to let the lenders – CMBS holders – take the remaining loss.

It had bought the property in 2014 for $605 million. It then borrowed $308 million against it. And by March 2022, the value of the tower had dropped so far below the loan value ($308 million) that it was better for Blackstone to let the CMBS holders to take the remaining loss, and it washed its hands off it.

47% loss. In Houston, Parkway Property sold the 960,000-sf San Felipe Plaza in Uptown, to Sovereign Partners for $82.8 million in late March. The tower was built in 1984. Parkway Property ended up with the tower when it acquired Thomas Properties, which had bought the property in 2005 for $156.5 million. So this was a loss of 47%.

The Class A office vacancy rate in Houston has been around 30% for years, and in Q1 2023 dipped to 32.3%, according to Savills. The vacancy rate had first blown out due to the oil bust that kicked off in serious in 2015, and then due to working from home and the accompanying real-estate downsizing. The tower had most recently been appraised at $219 million, according to Houston Business Journal.

37% loss and more to come? In Manhattan in March, the Chetrit Group sold the 617,000-sf tower at 850 Third Ave. for $266 million to its lender, HPS Investment Partners, after having paid $422 million for it in 2019. That’s a loss of 37% in three years on the property.

But this story isn’t over, and the outcome is still unclear. In October 2021, Chetrit had refinanced the property with a $320 million loan from HPS, and so now HPS took possession of the collateral, which covers only part of the loan value. HPS’ ultimate loss will become clear when it sells the building.

40% off, 47% loss. Argentic Investment Management, a lender, put the 1923 Barney’s New York Building at 115 Seventh Ave. on the market in March, for around $30 million. The seven-story building is vacant. The lender had obtained the building in a foreclosure procedure that it commenced in September 2020. In March 2022, it took possession of the building for $49.5 million. The defaulted mortgage at the time amounted to $46.2 million, plus expenses and fees. If Argentic can actually sell the building for $30 million, it would be a 40% haircut.

The defaulted owner had purchased the building in 2014 for $57 million, and a $30 million sale price would amount to a 47% haircut from that 2014 price.

Foreclosure sales of office towers are far worse.

88% loss and 82% loss. Finding a buyer for an office tower produces far better results than selling it in a foreclosure sale. For example, in Houston’s Energy Corridor, two towers at Westlake Park were sold in foreclosure sales. The towers were collateral for CMBS, and investors took the losses on the debt.

Both towers had been built in the 1980s and had been renovated some time ago, but lost tenants that moved to the latest and greatest office towers coming on the market in Houston – the flight to quality that sinks older office towers in markets with high vacancy rates.

After everything was said and done, including expenses and foreclosure fees, the CMBS holders had a loss ratio of 82% on Two Westlake Park in mid-2020 and a loss ratio of 88% on Three Westlake Park in early 2022. I discussed this at the time.

Real estate is slow moving: The whole process took about two years, from when the towers got into trouble, which was when the loans were sent to special servicing, to the actual foreclosure sales.

100% loss. This is about as bad as it gets with office towers. The vacant, 46-story 1.4 million sf office tower, built in 1985 and formerly called “One AT&T Center,” in downtown St. Louis sold for $4.1 million in April 2022 in a foreclosure sale.

In 2006, the property had been bought for $205 million and became collateral of a $112 million mortgage, which in December 2006 was securitized into CMBS. It made up 98.5% of the BSCMS 2007-T26. The first two letters “BS” stand for “Bearn Stearns,” which issued the CMBS in 2007, a year before Bear Stearns collapsed. At the time of securitization, the property was valued at $207.3 million.

In 2017, after AT&T, the sole tenant, had departed and the landlord had stopped making mortgage payments, lenders – represented by the special servicer Trustees of US Bank – foreclosed on the building. The outstanding mortgage balance at the time was $107 million.

The special servicer finally sold the tower in April 2022 for $4.1 million to New York-based developer SomeraRoad. But all of the proceeds from the sale were eaten up by special servicing fees and liquidation expenses of $4.25 million, according to Trepp, which tracks CMBS. It was a classic 100% total wipeout for CMBS holders.

Sense of reality in San Francisco?

One of the most horrible big office markets in the US is San Francisco with a record vacancy rate of nearly 33% in Q1, and rising. There still haven’t been any sales or foreclosure sales in 2022 and 2023 so far. The last sale was in 2021, PG&E’s sale of its 1.6 million sf headquarters complex to developer Hines for $800 million.

But that was in 2021 when the Fed was still doing QE and repressing interest rates to near 0%. Those were still the crazy times of consensual hallucination. Everything has changed since then.

So now, there have been two massive defaults in San Francisco: PIMCO’s Columbia Property Trust defaulted on the  debt of the office towers at 201 California St. and 650 California St. in the Financial District.

Lenders certainly don’t want to end up with these towers because there are already towers for sale within a few blocks on California St.

Union Bank is trying to sell its headquarters tower at 350 California, and lease back a portion of it. The tower was originally listed for sale in 2020 at $250 million. Union Bank then pulled the listing and relisted it in February for 52% off, at $120 million.

And Wells Fargo tried to sell its 550 California tower in 2022 for $160 million. It pulled the listing and will try again in 2023. This time, it may be marketing the tower at a discount of 67% off the original listing price, shooting for around $53 million, according to the San Francisco Business Times.

At this point, no one knows what anything is worth. There have been no transactions since the free money era ended. But given the price cuts by Wells Fargo (-67%) and Union Bank (-52%) on their towers, a sense of reality appears to be settling in.

It’s the older towers, such as those from the 1980s, that get into the biggest trouble.

Houston used to be the worst major office market in the US with a vacancy rate that has been hovering for years around 30%. Now San Francisco has shot past Houston in spectacular fashion.

And yet, in both cities, new towers have been built recently and are still being built. And ultimately, what happens is that companies move out of their old digs when the lease expires and move into the latest and greatest building, while downsizing the space, reducing their rents, and leaving the old office towers vacant – the infamous “flight to quality” that sinks old office towers. It’s the old office towers that get in trouble, not the new ones.

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  160 comments for “What Are Older Office Towers Worth When They Finally Sell amid Record Vacancy Rates? Not Much. Huge Losses Everywhere

  1. Office Towers are just a bad place to me. I feel relatively OK about the other types of real estate, but those office towers are horrible.

    I have 9000 feet of drive up office space (think retail space without enough parking). Probably costs $200 a foot to build it today, I paid about $100 a foot for it. I got it 2.5 years ago. Rents were really low — maybe $8.50 + NNN, but I signed more leases there beucase full is better than empty.

    Renewed half the property at $13.50 + NNN last week. Lots of demand for drive-up office it seems. And with cost to construct so high, and rents not covering it YET — it seems there is upside.

    Not all office is dead! Though these are in Casa Grande, AZ — lots of population and job growth there, but still doesn’t make sense to construct.

    Remind me to sell when rents get to $15.00 a foot + NNN. Office Space always annoys me. The tenants can just pick up and move and then you get the bill for the next guy who moves in.

    • Leo says:

      Let the broad losses on CMBS start and soon Fed will be buying CMBS as well! Then all office towers will also be backed by US taxpayers!

      So many mispriced assets in corporate balance sheets. Most of office towers must be marked atleast 50% down as WFH is sticking despite layoffs. Infact, fewer people in office after layoffs!

      Seems like our assets are shifty and debt is real. No wonder Fed is not controlling inflation to inflate the debt.

      • JL Chicago says:

        Gawd. I wish the Fed would stick to buying just short term Treasuries and leave the rest to the marketplace

      • Wolf Richter says:


        I know you’re just kidding.

        The Fed has never bought office CMBS. Even during the HUGE buying spree in 2020, when it bought $3 trillion in Treasuries and MBS in no time, it only bought government-guaranteed multifamily CMBS, and only $10 billion of them. That buying spree was a once-in-history event, now much regretted.

        Now there’s inflation, and the Fed won’t be buying anything. Least of all office CMBS, which are doomed.

        • kramartini says:

          So happy to know that at least the Fed didn’t make THAT particular mistake. Baby steps…

        • phleep says:

          With all possible due respect,
          (1) I wonder how many government buying sprees that were “a once-in-history event” turned out to be merely the beginning of at least a prolonged occurrence of something (like ZIRP), and
          (2) as to whether the Fed will be “buying anything” in a contingent future state, I believe the Fed is now a combined system of radar for looming (feared) systemic asset runs and contagion anywhere in the economy, bolted to a post-hoc insurance system to back-fill or at least slow various slides or sinkholes that may show up anywhere, in the digital-speed-everything-connected landscape. I think a collapse (even a feared one) will erase a lot of regret for last time’s questionable solutions.

        • Dave D'Rave says:

          Doomed. That’s right.

      • Cas127 says:

        “Seems like our assets are shifty and debt is real.”

        This is the story of every bankruptcy in history…when push comes to shove, balance sheet asset valuations frequently turn out to be more theoretical than real…but holders of balance sheet liabilities expect every penny.

        “Equity” goes poof.

        (Real estate “appraisals”…snort).

      • Einhal says:

        I hope so. The Fed’s job is to protect the stock markets and holders of risky investments. No good God-fearing American should ever wake up and not find his STONKS up 1% at a minimum.

        Think of all the pension funds, insurance companies, and banks that depend on every penny of their CMBS investments being returned. No one should ever take a loss. Why not?! All we have to do is print a few trillion more, and everyone can have a white unicorn.

    • Dave says:

      Congratulations. If Casa Grande continues growing you may want to sit on your building while counting the money flowing in monthly for years to come.

    • NARmageddon says:

      >>Renewed half the property at $13.50 + NNN last week.

      That per year?

  2. dang says:

    OK, but I think we should examine the root cause of the critical path that led us too this incredibly, interesting, point in time. For instance we veered off when. my favorite villain, Ronald Reagan was elected. Others may have a different perspective, but it’s like a Gibb’s free energy of formation it’s path independent. We got here, what do we do now ?

    Commercial real estate is becoming a potentially losing bet that requires payment from those swashbucklers that strode the earth during the time that someone correctly labeled it as an era of ” consensual hallucination”.

    • Augustus Frost says:

      Presidents don’t control policy, whether you like the person or not. They are representative of the time. Marginal influence at most.

      Reagan nominated Greenspan, but he wasn’t responsible for the deranged monetary policy starting with him.

      Reagan also started what later turned out to be unsustainable deficit spending and growth in the debt, but he didn’t continue it. Yes, marginal tax rates are lower now, but not much change in the effective tax rate. The government’s revenue as a pct of GDP hasn’t changed much over time, regardless of the headline rates.

      The policies starting under Reagan were the beginning of the financialization of the economy and fake prosperity, but without both the US economy would have crashed into a depression at some point in the last 40 years without both. You and everyone else would be complaining about that had it happened.

      Do you actually think the prosperity (“growth” and “wealth”) of the last 40 years is entirely real?

      This is only two factors and though bad policy contributed to the current state of the country, it’s not the only cause.

      I’d attribute it to cultural and social decay. This is the real source behind the policies which contribute to the change. Politics and policy don’t exist in a vacuum.

      • Cas127 says:


        Mostly agree, but I would say that the pusher (the G) is just as guilty as the junkie (the “voters”).

        Papering over/lying about the nation’s fundamental economic problems isn’t some sort of public service…it is just a sleazy political ploy to claw one’s way through the next election.

        Rinse repeat.

        For decades.

        The quality of political/business classes in Weimar America make you wonder how nations ever manage to *succeed*.

      • Apple says:

        So Ron gets credit for the good stuff and a pass on the bad stuff?

        • Jon says:

          Congress writes the budget, not the president. That’s in the Constitution.

        • Harrold says:

          Under the Budget and Accounting Act of 1921, the president is required to submit his proposed budget to Congress for each government fiscal year.

          Budget is not mentioned in the Constitution.

      • Einhal says:


        Ultimately, we get politicians who promise this stuff because we have a voting electorate that is ignorant and myopic. That’s exactly what happens in every democracy when you let everyone with a pulse vote.

        • VintageVNvet says:

          Correct as far as you go Ein:
          And EXACTLY why our founders found the ”guts” to make USA a ”Representative Republic” instead of a ”democracy”…
          IMHO, they, the founding folks, knew full well after experiencing the only ”true democracy” at least in USA,,, other than some dreams,, , in the various and sundry ”town councils”, etc. in ”NEW” England, that actual democracy was not only messy,,, but also VERY HARD to CONTROL… as has been proven many times since those old folks…
          IMHO, actual and truly ”DEMOCRACY” WILL become the norm worldwide sooner and later because of the very very important impact of the VAST communications impact of the web…
          At least WE the PEEDONs can hope so,,, eh???
          Meanwhile, until then, WE Peedons can continue to HOPE for more and more clarity from various and sundry and ALL so called ”regulators.”
          In spite of those regulators now apparently just one step away from the folks, their former employers, who have continued to screw WE the PEEDONs…
          And gotta add,,, that has been the ”norm” since at least old King Richard the 3rd…

        • Cas127 says:


          In general agree but…

          1) I don’t know that our senators/Fed judges (least democratically influenced) have really performed any better than the horde of used car lot sociopaths in the house. (Note: Maybe it is time to retire the used car salesman trope…could swap in college presidents…)

          2) It all goes back to the question of how countries/gvts manage to *succeed* (which seems incomprehensible given the last 60 years of DC swamp life). Unlikely that some other era’s pols were comprehensively less venal, stupid, and shortsighted…hell, they were much more hidden *pre-internet*.

          3) Ditto the rise of China…run by actual deep-dyed, largely unanswerable autocrats…who are so poorly trusted that a lot of wealth gets smuggled out of the country. Yet China has been thoroughly kicking US ass for 30 yrs.

          It is a strange stew.

        • eg says:

          Except, Einhal, fully half of the American electorate does NOT vote — so merely having a pulse doesn’t appear to be determinative.

    • SpencerG says:

      Ronald Reagan was the GOAT of Presidents… at least of my lifetime. I roll my eyes every time a Baby Boomer President thinks they are accomplishing something by raising income taxes by 4.9% or lowering them by 3%. Indexing tax brackets to the inflation rate was such an obvious move that only one presidential candidate has tried to run on overturning that policy… and he lost 49 states!

      And Reagan’s understudy… the FIRST George Bush… was the LAST competent president that this nation has had.

      • Isaac S. says:

        re “the FIRST George Bush… was the LAST competent president that this nation has had”

        that is too biased to be taken serious. Bush was pretty good on competency, but Clinton ran the Economic/fiscal policy better than of them as I recall. I mean, he slashed gov spending and got the only annual budget surplus. So, what was incompetent about Clinton?

        • Einhal says:

          Don’t you people ever get tired of the lie about 42’s surplus? I’m repasting my comment from the other day.

          This misleading meme is getting really tiresome. First, he did not balance any budget, or even create one. All the President can do is sign or veto the budget sent to him by Congress. He signed the “balanced” budget that Newt Gingrich’s House of Representatives sent to him.

          Second, while it’s true that the U.S. didn’t borrow money that one year by issuing treasury bills directly to investors, it DID borrow money from the Social Security trust fund to fund general operations. The trust fund had a huge surplus because the boom generation was at the peak of their earning years, and a bubble economy heading into the .com collapse was generating a lot of earnings and tax revenues.

          In other words, the supposed surplus was due to a set of factors unlikely to repeat anytime soon.

          So if the implication of your post is that all we need to balance the budget is for the evil Pubs to get out of the way and let those saintly and wise Dems into full power again, and all will be well on the fiscal post again, it’s extremely disingenuous.

          It’s very much like the stupid meme that blue states “subsidize” red states.

        • Randy says:


          You sound pretty knowledgeable.

          The stock market was wonderful to those who had a lot more $$ to invest in it than me in the last half 1990s. Nasdaq the big winner, but the S&P did okay too.
          1995 thru 1999 returns:
          37.4%, 23.0, 33.4, 28.6, 21.0.

          So per my calculator by the end of
          1999 it had made a 3.51 times gain
          Of course the dot com bust negated some of those gains. 2000 thru 2002 returns: -9.1, -11.9, -22.1.
          By the end of 2002 you are at 2.19 (119% gain) times your 1995 investment (these calculations include dividend payouts, not just index change).

          Per calculations: 1995 thru 2002 eight years annualized S&P gain: 10.3%.
          Not bad for having gone thru the tech crash. Nasdaq crash worse than S&P but its 95-99 gains considerably more too so don’t know which came out ahead.

          Ah but to your point: the government probably took in really nice capital gains from 96 through 2000. (Yes including 2000 as selling in 2000 created really large gains).

          My guess is residential real estate didn’t do nearly this good even minus a significant crash. Even Seattle RE guessing up 7 to 8% and that was its heyday.

        • VintageVNvet says:

          Clinton absolutely SOLD OUT WE the Working folks to China for billions of dollars into his and his spouses ”campaign donations” accounts…
          BOTH ray gun and the clintonistas should be pilloried on every possible accounting of their time in office…
          Ronnie Ray Gun was the very epitome of the sorry ass politicians,,, EVER,,, to sell out the actual working folks who make and do real things,,,
          Try to bee clear,,, RR was a ”performer” following orders from his masters from when first elected GUV of CA, until his last breath…

        • Jon says:

          Isaac, spending got cut because Republicans took control of Congress in 1994.

          Congress is ultimately in charge of the budget.

        • SpencerG says:

          First off, Bill Clinton actually shut down the government rather than sign the 1995 Budget that the Gingrich Congress sent him… because according to him (at the time) you couldn’t balance the Federal Budget in seven years without causing too much harm. When it was balanced four years later he simply stepped up and took the credit.

          Secondly, Bill Clinton continually kissed up to China. It is absolutely appalling to read his administration’s reasons for granting China PERMANENT Most Favored Nation trading status. America has been paying for that mistake ever since.

          And let’s not forget his ignoring Osama Bin Laden while simultaneously getting us tied up in meaningless conflicts like Somalia and Kosovo.


  3. 2banana says:

    So…are you saying that buying the dip might be a bad idea?


    “At this point, no one knows what anything is worth.”

  4. Tbv3 says:

    Jim Grant’s latest podcast on CRE includes some riffs on LA’s (and San Fran’s?) new transfer tax.

    I see Winston & Strawn’s webpage explainer on the “Massive New Los Angeles Transfer Tax” (Jan. 23, 2023) says :

    “For example, if a property is sold for $20 million, the total transfer taxes will be $1.212 million ($112,000 for the current transfer tax plus $1.1 million for the new transfer tax). These thresholds are adjusted annually according to the Consumer Price Index.”

    A transfer tax of $1.212 million on a $20 million property = 6.06%. Ouch.

    Transfer tax increases will likely come to Chicago too, after the new mayor takes office in May.

    • Wolf Richter says:

      Landlords have been subsidized forever by the biggest tax breaks and government support, including GSE guarantees on multifam mortgages. THE Fed even bought CMBS in 2020 and still has them on its books, which is a scandal. It’s time to zero out ALL tax breaks for RE and remove ALL government support of RE, and tax landlords sufficiently when they sell the property.

      This constant coddling of landlords is pure corrupt BS.

      • NARmageddon says:

        >>This constant coddling of landlords is pure corrupt BS.

        Amen to that.

      • Flea says:

        And a 15% tax on stocks isn’t,people are super rich on stock market appreciation. Now retired they just spend dividends . Ponzi

        • kramartini says:

          But stocks are double taxed. At least officially. Best policy is to crack down on tax breaks but leave rates alone…

      • BENW says:

        And yet, that’s the Modern Monetary Theory world we live in today.

        The Fed & Congress are completely out of control.

        Markets don’t correct asset bubbles anymore.

        The Fed & Congress will just backstop to whatever extent is necessary to keep asset prices rising.

        • Wolf Richter says:

          Now we have inflation, which changed everything. The free money turned out to be very expensive. The Fed will not let this inflation run wild. It might not do enough to curtail inflation, but it won’t restart QE and it won’t cut rates to 0% as long as there is inflation like this. And it might not do QE again because it now sees how much it cost. You have to reset your expectations. MMT was before inflation. Now we have a big difficult-to-deal-with problem.

      • gametv says:

        Run for office Wolf. I will vote for you.

        • phleep says:

          Wolf and Matt Levine. Maybe keep Dimon around as the figurehead.

        • Cold in the Midwest says:

          I would vote for Wolf as well. But remember that people with a strong understanding of economics and finance are frequently not popular in Federal or State governments.

          They tend to propose things that would actually make a difference but do not offer the immediate gratification desired by the voters. Politicians well know it is difficult to get elected with such controversial proposals. Ask any candidate who has proposed to seriously reform Social Security.

          California has a fascinating example of such a person with Brad Williams, who was once an economic forecaster for the state. After a deep analysis of the state’s income tax revenue distribution, Williams pointed out that California is overly dependent on the wealthy for tax revenue. Particularly when a high level of IPO activity is in play, for much of this tax revenue is from realized capital gains.

          He also stated that is why California’s income tax revenue is more volatile than many other states – when the economy is up, CA’s tax revenue tends to go WAY up. But when the economy is down, just the opposite occurs – they’ll have a substantial revenue decrease that leads to a budget shortfall. And these severe revenue swings are not good for the state.

          Williams recommended multiple reforms to stabilize state income tax revenues. These included flatter income tax rates that were spread more evenly among the income categories.

          In the words of the Wall Street Journal, “his proposals failed to gain any traction with the legislature.” California’s democrat-controlled house would not consider any tax increases on the middle class. Long story short – Williams resigned. He was tired of being ignored.

          I suspect Wolf’s experience would be similar if he went to work in a government role. I also think he would eventually resign in disgust.

        • Carlos says:

          The bitter irony is that smart people don’t get into politics

      • peter says:

        Do not forget the massive wealth transfer *to* already richer homeowners who got low rate mortgages and refis in the middle of a pandemic! Pure insanity on the part of both monetary and fiscal policy. Qui bono?

        • Sandman says:

          It’s a crime real estate investors were able to refinance entire portfolios at sub 3% rates. They are cash flowing for eternity on this properties as long as they’re residential 30 year loans. I know at least 10 investors cash flowing over 1,000,000 a year due to this. They bought cheap and refinanced even cheaper. Just insanity the amount of wealth real estate investors have been able to make if they bought in early 2022 or earlier.

      • eg says:

        I love it, Wolf — you know your Henry George!

    • dang says:

      I’m sorry, but only a fool would complain about paying too much in taxes unless you make less than 60 or 70 grand prt year.

      Someone has to pay the civic rent that attracts the developmental growth.

      • Augustus Frost says:


        This is equivalent to paying “protection money” to the mob.

        There are other ways to deal with that.

      • Enlightened Libertarian says:

        “only a fool would complain”

        I complain because of all the fraud, waste, graft and corruption in government spending.
        And I am going to continue to complain.

        • The Duke says:

          And a lot of that fraud, waste, graft, and corruption along with interference in markets happens in uni-party states that have entrenched one party control (Democrats) for years.

          Hawaii, California, Illinois, and New York are good examples.

          Take Hawaii for example.

          It seems that every year here the government adds new taxes to real estate especially rentals and takes away owners’ rights.

          We are a high cost state because of our location and the state makes it even worse with their policies.

          Hawaii has beautiful weather and some very nice beaches, but paradise is being ruined. We had some of the dumbest restrictions during covid as well. One was that only one person from a household could go the beach at one time.

          Any person contemplating buying real estate here had better do their due diligence with emphasis on real estate taxes, rights, and the nutty wealth tax some politicians are talking about.

          Paradise has a high price especially in Hawaii.

        • Wiley says:

          Not over yet. Bubble still deflating.

        • Robert Hughes says:

          To Duke
          Spot on
          Owned condo on maui for years. No matter how much we rented it each year was a loss. Taxes, insurance, hoa and repairs, replacement stuff, mgt fees and so on and on. Finally 45k assessment for sea wall repairs and we said good bye.
          Will not even comment on “costs” of all kinds if you actually live there.

      • Carlos says:

        With good governance, federal taxes could be cut by 70% and you would not notice the difference in your quality of life.

        But we have terrible governance.

      • Happy1 says:

        Government spending at the Fed level is more than half entitlements. This does nothing for “developmental growth”. Skepticism about taxation is prudent and is part of the DNA of our nation.

    • polistra says:

      Normal people pay 6 or 7% sales tax on normal purchases. Why should real estate be exempt?

      • Bs ini says:

        Stock sales are not taxed and real estate falls more into an asset vs goods and service. I personally don’t like the idea of tax on real estate sale.

      • Augustus Frost says:

        I have a better question for you.

        Why does the government have to spend so much money where all these taxes exist at current rates?

        You don’t need to answer. It’s not a real question.

        • Einhal says:

          Because we have a huge underclass that can’t support themselves without government handouts.

          “A government that robs Peter to pay Paul can always depend on the support of Paul.” – George Bernard Shaw

      • MM says:

        “Normal people pay 6 or 7% sales tax on normal purchases.”

        Normal people? You do realize there are entire US states with no sales tax, right…?

  5. Leo says:

    Big corporations in Seattle and Silicon Valley are shutting down existing buildings that they own to save on utilities and building maintenance costs. Sick with 20% attendance, they are now packing employees that are coming to offices in 20% of the buildings that they can run on higher occupancy and so save money on building shutdowns.

    This can unfortunately cause office attendance to drop futher as
    1. higher occupancy will result in higher infection transmission.
    2. People are not used to overpopulated buildings for few years now!

    It’s not that these corporations are planning to sell the shutdown buildings because they know that they won’t fetch any decent offers.

    • GoneFromIL says:

      Beware the law of unintended consequences. Same goes for the new transfer tax.

    • Seen it all before, Bob says:

      I think smart companies sold or sub-leased their office space during the pandemic when everyone was working from home. Selling at a peak generated corporate revenue.

      The problem now is that return-to-office means that there is not enough room for everyone to return. Shared cubes, employees working in noisy conference rooms is not very productive.


      1) Companies will start leasing again to find room for employees causing more expense to the corporation but helping reduce the office glut.
      2) Companies will embrace WFH for as long as possible until rent/prices becomes cheap again and then expand.

      This assumes that the company is profitable and not running on disappearing VC money.

  6. Leo says:

    These buildings are useless now for foreseeable future:
    1. Malls? No, they are already dying.
    2. Residential? No windows, plumbing issues.
    3. Warehouse? Floor hieght too low.
    4. Industry to bring manufacturing back? Floor height too low. Labor cost too high.
    5. Hospitals? Too many buildings available, too few doctors and fewer paying patients!

    • Bs ini says:

      Yes buildings designed for office towers have specific design requirements that govern occupancy levels weight restrictions for content electrical and mechanical requirements. Much more efficient use of the the land and location to remove the building and start from scratch.

    • Seen it all before, Bob says:

      Back in 2008, dying strip malls were converted to:

      1) Startup churches.
      2) DMV government branches
      3) Local libraries
      4) Boutique/Specialty stores.
      5) Local gyms

      They could do the same for larger buildings.

      Rents would have to fall like they did back then.

      • rusell1200 says:

        You also got that when the various Walmarts and grocery store chains moved to bigger boxes. Eventually, the empty boxes got filled. But in general, I wouldn’t say the result was an economic upgrade: front, pushing edge of economy to backfill.

  7. Prairie Rider says:

    Barney’s New York Building at 115 Seventh Ave.?

    “If Argentic can actually sell the building for $30 million, it would be a 40% haircut.”

    I do recall Mick Jaggar’s similar situation, in ‘Shattered,’ “I can’t give it away on 7th Avenue.”

    • dang says:

      I’ll take a look, one never knows, hell may freeze over. The asset value deflation in the commercial real estate market seems to be consistent with a classic bubble deflation, subject to later adjustments.

      • The Duke says:

        If the Fed can wipe out around $7 trillion in asset values in the economy to offset the huge increase in the balance sheet things might just offset each other…..

    • Petunia says:

      I use to shop at Barney’s there and across the street at Barnes & Noble. The location was terrible 40 years ago, a transportation dead zone, I just walked over from the east side. Doubt anything much goes on there these days.

  8. Bruce Kellogg says:

    Can’t wait for the CMBS crisis to arrive. Kinda boring so far…….

    • dang says:

      Personally, I dread the economic retribution that lies ahead, as the risk of holding long term assets is increasing.

      Hadn’t really thought about a drastic decline in the market value of CMBS, leading to default, and the propagation of the shock wave through the markets.

      I don’t hope for disaster. I can only try to anticipate it.

      Definitely, tsunami potential.

  9. Mike Smith says:

    Cry me a river, can’t even frame a 10×10 room for the down n out . Got some swell deals in Turkey, couple of grand kickback and we get an approved permit with a waiver. Funny thing is big guys never take the loss, someone always passes the buck , mostly to the deficit of Uncle Sam or some sap paying taxes on 42 grand a year feeding five mouths.

    • dang says:

      Mike, buddy, your invective seems disjointed.

      More like a litany of perceived transgressions against you, as opposed to the clarity that we insist of those that have their finger on the button.

      • Jay Cee says:

        As usual government creates the problems they intend to fix with your tax money to bailout the wealthy owners of assets that “privatize profits and socialize losses’

        Uniparty groupthink on financial crisises and multiple wars causes dollar devaluation and inflation.

  10. Jane says:

    Was part owner of a prominent address just off Union Square in SF which was sold a few years ago. I wasn’t happy. I thought “why? why let this premier property go?”s NOW I know. Perhaps the managers saw “the writing on the wall” and we all did alright by selling “too soon” as Rockefeller famously said.

  11. nick says:

    So wells fargo is selling a tower for about $50m, while median house in sf area is about $2m, if I am not mistaken.


    • Bay Creature says:

      Yes, quite a dichotomy.
      550 California St is 332,672 sq. ft. $53 Million is a $159/sq. ft. asking price.
      Current median list price/sq. ft. for residential units in the Financial District is $1,029/sq. ft.

  12. Pilot Doc says:

    Were they intentionally buying inflated value, refinancing the equity out, then sticking the bagholders?

  13. JimW says:

    What US cities have to watch out for is population loss. That can result in a Rust Belt dynamic of abandoned buildings as real estate goes below zero FMV. As long as population remains stable obsolete properties get redeveloped eventually. When cities start to lose population rot starts to set in.

    • Wolf Richter says:

      Yes, if you throw population decline into the mix, the math gets much tougher. A lot of these office properties — especially the big fat towers of the 1980s and later — will have to be torn down because they can’t be converted into residential. Converting to residential only makes sense with some types of buildings, and in cities where condo prices and rents are high.

      • Robert Hughes says:

        Since you live in San Francisco would in a separate article it be possible that you could comment on the real conditions there. We read in news and anecdotal stories about the crime, the drugs, the graffiti, the merde stuff on the streets, the lack of safety, lack of arrests so on and so forth, but how real is this. Is it only in certain districts like Soma or Mission or is it all over. I know you focus on finance and the emphasis is on economics, but perhaps you could consider giving us some real insight as to the conditions in San Francisco. Thanks for all the great writing you do.

        • Wolf Richter says:

          Not wasting my time with this clickbait shit being circulated by some braindead morons. They can pleasure themselves with these right-winger fantasies all they want in the privacy of their homes. But not here.

          The City of Tulsa, the other city I lived in for a long time, had 68 homicides in 2022 and 78 in 2021. The city is half the size of San Francisco.

          San Francisco had 56 homicides in 2022 and also in 2021.

          Tulsa’s homicide rate per 100,000 pop is 2.5 to 3 TIMES the rate of San Francisco’s:

          City of Tulsa homicide rate per 100,000 pop: in 2022 = 16.5 and in 2021 = 18.9.

          City of San Francisco homicide rate per 100,000 pop: in 2022 = 6.8 and in 2021 = 6.8.

          San Francisco is one of the safest major cities in the US – that’s what the actual data shows. In addition, most of the homicides occur in three relatively small homicide pockets. If you don’t go into these small pockets, homicides are very rare.

          No one ever sends links around about assaults in Tulsa, or murders in Tulsa though has three times the homicide rate of San Francisco, but it’s a right-winger city in a right-winger state, run by right-wingers.

          It’s just when you can stick “San Francisco” into the headline that it goes viral among braindead idiots. This clickbait bullshit really gets old.

          Tulsa has this high crime rate even though people rarely walk around on the street. I have no idea why Tulsa is so unsafe. It always baffled me. I lived there off and on for over two decades. In San Francisco, there are lots of people out on the sidewalk and in parks. And we love it! We walk everywhere at night when we go out.

          Your statement falls right into this moron fantasy category. Normally I delete this BS, but I just left it up to whack you over the head with data.

  14. roddy6667 says:

    When the real estate market tanked in 1988, the first shoe to drop was commercial real estate. Residential followed. High end, like Greenwich led the way and starter homes were the last to drop. Many towns in CT dropped 50% and took a full 10 years to retrace to the 1988 starting point. I am prepared this time, but so many people don’t believe it can happen again. Most are too young to remember.

    • gametv says:

      The question is whether the our government will try to intervene to stop this. There will be intense pressure from rich investors like the Blackrock group, which would lose vast amounts of money, or maybe just go under. I am not sure if they have borrowed alot of money.

      • goomee says:

        Actually GT, I am hoping for a huge drop in SFH prices that BS and BR gobbled up making it harder for young buyers to acquire a home. I’d love to see them get spanked, hard!

  15. Petunia says:


    Bear Stearns issued ties to their bond salesmen covered with the BS logo.
    I never saw one, but these ties were legendary and highly sought after by the guys on the trading floors. Can’t feel sorry for anybody who bought crap from a guy wearing a BS tie.

  16. Cassandro says:

    The “efficient market” view is again confirmed as nonsense. The slide in commercial RE will take a long time to play out since so many leases have years to run, but few people inside the buildings. So “we ain’t seen anything yet” is the obvious view as the mistakes come into view. I think Class A buildings will have the biggest reset since they were sold / leased to sheep who gloried in a ‘nice new building”. Sales people often are focused on a status office, but shareholders are going to be punished for following along with the revenue trend madness.

    • 91B20 1stCav (AUS) says:

      …entropy is possessed of infinite patience…

      may we all find a better day.

  17. Michael Engel says:

    1) In Jan 2007 FFR was 5.25%, before plunging to zero rate, to teaser
    rates, ex a 2.4% hump in 2019. The 5.25% is resistance. Junk rates will rise to 9%/10%. Investment grade to 6%/7%. We are back to old normal.
    2) Junk might shift from old RE to other sectors. There are 100 million people over 55 years in this country. About a third of US population. They are not productive. They cost the most, lifting the GDP. The elderly interest clash with the interest of millennial and Gen Z.
    3) In the last few years many corporations used teaser rates to expand.
    They are squeezed by higher wages, higher overhead cost and higher
    interest rates.
    4) A debt tsunami might explode in the next three year according to
    Goldman. About $180B “B” rated and below will mature until 2026. About $20B in the next 12 months, $75B in the next 24 and about $180B in the next 36 months. BBB–>BB–>B–>CCC–>fallen angels. From zombies grades to to bankruptcies.
    5) Corp default are rising. BK filing might exceed the 2020 highs. Last month we discovered a banking system cancer. It was removed promptly.
    The privileged elite got their money. Thank God we are safe.
    6) The next debt deflation wave might send the unemployment rate above 14.7%, 2020 peak. Millennial and Gen Z will do nothing all day, besides fighting and protesting in the streets. The Fed might pump some money to mitigate pain, but if the negative feedback loop fail, wild osc will
    ensue, until US gov debt deflate by 30%/50%, for the benefits of millennial and Gen Z. Power will shift from the weak hands to their hands.

    • Escierto says:

      People over 55 are not productive? I was a software developer in charge of mentoring new hires at that age. I showed them everything I knew and everyone I knew (actually more important). I was a constant source of advice and help to devotees all over the company. I literally had people tell me, if you hadn’t helped me I don’t know what I would have done. It’s been six years since I retired and they STILL want me to come back. Your statement is complete BS! By the way I love Millennials and Gen Z!

      • Wolf Richter says:


        Don’t take his BS seriously, LOL

        • Jim Downey says:

          I am an engineer and an attorney(non prctising) . I received my last W2 at age 82. Sting living alone at 94.

      • goomee says:

        Thank you Escierto. I was going to be less kind to ME for his pigheaded, uninformed, ageist response.

      • ru82 says:

        Did anyone see the recent WSJ article titled:

        Bosses Want Hard Workers—So They’re Hiring Older People
        Some companies are recruiting seniors on the premise that age equals a stronger work ethic

        Mr. Conforti has grown weary of younger employees who, he says, arrive late for shifts, call out of work often and spend more time scrolling social media feeds than chatting with customers. About a year ago, he tried something different—recruiting people who are more likely to carry AARP cards than the latest iPhone.

        Older workers are in demand at a growing number of companies. Perceptions of generational differences don’t always match reality, but three-quarters of people 65 and older said in a Wall Street Journal-NORC survey of Americans’ values last month that hard work is very important to them personally. Among 18-to-29-year-olds, 61% said hard work is very important.

    • gametv says:

      Nouriel Roubini says that most banks are insolvent. I think that as the real estate bubble bursts, we will find that to be true.

      • Wolf Richter says:

        Roubini is making a stupid-ass statement. When some stupid-ass bloggers say that, fine. But he should know better. And I’m getting tired of people repeating this shit endlessly here.

        Nearly every company is insolvent if it has to sell all its assets in a fire sale to pay off all its liabilities. But that’s not what companies and banks do, and that’s not what they’re for. And saying this kind of stupid-ass stuff is just braindead.

        The value of a company is in its future cash-flows and in what it produces, not in the fire-sale value of its assets.

        Also, the majority of CRE loans are NOT held by banks, but by investors. People need to get used to that.

        • VintageVNvet says:

          Roubini just working the press to ”sell his book, OR perhaps in this case his reputation as prophet.”
          And to do that, he has to work to make it happen, eh

        • sunny129 says:


          “the majority of CRE loans are NOT held by banks, but by investors”

          Apparently, you don’t believe the dominant share of CRE is held by small lenders but held by Investors. Who? retail or Institutional? Hedge Funds? Ins Cos?

          But they keep pointing towards Small/Regional; Banks

          “Smaller banks are crucial drivers of credit growth, the fuel that powers the economy. Banks smaller than the top 25 largest account for around 38% of all outstanding loans, according to Federal Reserve data. They account for 67% of commercial real estate lending. (WSJ March 19, ’23)

          “CRE relies heavily on small and midsize banks for financing, which just so happen to be the most stressed financial institutions. Overall, the commercial property industry in the U.S. owes $1.9 trillion to these banks, or twice what it owes to large banks ($0.9 trillion), according to the Mortgage Brokers Association. Small and midsize banks are heavily exposed to CRE, which accounts for as much as 43 percent of their outstanding loans.

          Acording to a Seeking Alpha article written by EPB Macro Research founder Eric Basmajian, multifamily is only one debt holding. Smaller banks have a high exposure to non-residential property debt, especially office buildings. Those office buildings have been experiencing high vacancy rates. This could be a problem as debt on these properties matures.

          Guess, they all are Wrong!

        • Wolf Richter says:


          I have told you several times before, banks only hold only 38% of all CRE debt (investors hold the rest):

          1. Total CRE loans not including construction loans = $4.5 trillion (construction loans ca. $400 billion)

          2. Banks hold ONLY 38% of call CRE loans. = $1.7 trillion.

          3. If, as it has been asserted here, small banks (4,000+ banks that are not the top 25) hold ca 80% of that $1.7 trillion = $1.36 trillion spread over ca. 4,000 banks = less than $1 billion per bank on average.

          4. Office CRE debt is small: 17% of total CRE = $765 billion

          5. If all banks hold 38% = $290 billion

          5. If banks other than the top 25 hold ca 80% of office CRE debt ($290 billion), these 4,000 small banks hold $232 billion in office CRE.

          If you refuse to get it — that banks hold only 38% of CRE debt and that investors hold the rest — fine with me. But I’m done.

        • Maya says:

          “Nearly every company is insolvent if it has to sell all its assets in a fire sale to pay off all its liabilities.”
          If banks are like other companies then let them fail like other companies.
          Banks are a pure CON fidence play, levered 10:1 on depositors dime. This is because the government chartered them to loan fictional money. Can other businesses do that?
          Btw there can’t be runs on businesses because they don’t play with depositors money.
          Banks are cesspools of corruption and incompetence that are more similar to the government than private businesses.

        • VintageVNvet says:

          for Maya:
          RIGHT ARM M:
          Folks really don’t want to deal with the absolute corruption of ”THE BANKs” any more than WE want to deal with the now becoming more and more clear corruption of ALL or almost ALL of the corruption of our politicians and appointed GUV MINT folks.
          Clearly at this point BOTH of those categories of GUV MINT folks are SO corrupt that it begs descriptions.
          CANNOT CONTINUE,,, and WILL NOT.

        • gametv says:

          You should know that banks and other financial institutions are different than other types of companies. Banks make money on a relatively tight spread between the cost of capital and the income from capital. Their balance sheets can be blown up when they have systemic losses to principle, which can overwhelm earnings and equity rapidly. A bank that has assets worth less than liabilities cant maintain depositor confidence and will see bank runs. Earnings power will also rapidly deteriorate if banks have to access capital at much higher interest rates.

          According to a study released last week by the International Monetary Fund (IMF), Commercial Real Estate (CRE) exposure represents 50% of the outstanding loans at midsized and smaller regional banks.

          So it really does not matter whether investors own more of the pie than banks. What matters is that these banks are highly leveraged to CRE. And if banks start to default, it will cause bank runs on multiple banks, as depositors and investors run for the hills.

          If the type of losses you are suggesting above are going to be anywhere near the norm, there is just no way these regional banks can remain intact, unless the central bank decides to put the taxpayer at risk for these losses and actually backstops some of these losses, which would be highly unpopular with regular folks, but might happen in a financial crisis.

          The coming earnings period is going to be interesting as investors get information on how much capital has left the regional banks. The regional banks can get capital from the Fed backed by Treasuries at 100% face , but they cant get money against CRE loans that are going underwater. Unless things change.

          I stated above that he said “most” banks are insolvent. That is going too far. But many are looking very shaky.

        • Wolf Richter says:


          I’m getting seriously tired of these data-free BS about banks and CRE:

          Banks only hold only 38% of CRE mortgage (investors hold the rest):

          1. Total CRE mortgages not including construction loans = $4.5 trillion (construction loans ca. $400 billion)

          2. Banks hold ONLY 38% of call CRE loans. = $1.7 trillion.

          3. If, as it has been asserted here, small banks (4,000 banks) hold ca 80% of that $1.7 trillion = $1.36 trillion spread over ca. 4,000 banks = less than $1 billion per bank on average.

          4. Office CRE debt is small: 17% of total CRE = $765 billion

          5. If all banks hold 38% = $290 billion

          6. If small banks hold ca 80% of office CRE debt ($290 billion), these 4,000 small banks hold $232 billion in office CRE = $58 million per bank on average.

          People need to get a grip.

        • TFH says:

          1. CRE exposure represents 50% of the outstanding loans at midsized and smaller regional banks;

          2. Banks only hold only 38% of all CRE debt.

          Both of these statements can be true.

        • Wolf Richter says:


          Your statement is Exhibit A why all this is just twisted BS.

          1. It was stated correctly by sunny129 here, copy-and-paste from some source: “Small and midsize banks are heavily exposed to CRE, which accounts for as much as 43 percent of their outstanding loans.

          This means that one or a few of the 4,000 small banks have CRE loans that max out at 43% of their total outstanding loans, and the rest of the smaller banks have much smaller exposure to CRE loans.

          2. This was then twisted by gametv into “Commercial Real Estate (CRE) exposure represents 50% of the outstanding loans at midsized and smaller regional banks.” Which is a lie. You cite that lie.

          Do you see the difference??? Do you see how this endless twisted BS just keeps on festering in the comments as people just twist it further and further?

          When it comes to important stuff like banks, you cannot just make up all kinds of shit and post it here.

        • sunny129 says:


          Thank you. Your explanation is in more detail and numbers, than those. Yes. I got it.

  18. Rudi says:

    Thanks Wolf! Which companies would be impacted most negatively by a crashing commercial real estate market? Which ETF would do the worst? Not investment advice. Understood. Thanks

    • Bs ini says:

      These etf and reits would be easy to find for yourself. The commercial reits provide detailed listings of their real estate holdings. Then you can decide for yourself the impact to the discussion here. Good luck on your search.

    • Wolf Richter says:


      Office properties are spread all over the place, and the losses are spread all over the place too.

      CMBS are buried in various bond funds, pension funds, insurance companies, etc.. Retail investors generally have a hard time trading CMBS directly.

      Directly held (not securitized) office debts are buried on the balance sheets of banks, life insurers, pension funds, etc.

      The equity portions are spread around, as you can tell, such as PE firms (see Blackstone in the article), private investors, closed-end mutual funds (see Blackstone’s BREIT, the one that investors now have trouble getting their money out), and publicly traded office REITS, such as Boston Properties’ BXP. The publicly traded REITs have sold off by 40% to 70%.

      • kramartini says:

        I would greatly appreciate any insight into how the paper bond losses due to higher interest rates are affecting insurers–especially life insurers and annuities sold by life insurers.

        • Wolf Richter says:

          Generally, companies that provide life insurance and annuities essentially never sell bonds. They hold them to maturity. Life insurers use actuarial tables to determine on average their death-benefit payouts every year, and so the maturities are staggered to where enough bonds mature every year to cover the payouts. Excess mortality during covid — and therefore death benefit payouts that were moved forward — rattled some of their math, and so they had to deal with that and maybe sell some bonds. Annuity providers go through similar math to structure their payments.

          Unless insurers are FORCED to sell the bonds for some reason, higher interest rates will be good for them (same for other bond holders) because they can replace maturing low-interest-rate bonds with new higher-interest-rate bonds. Generally, bond investors who hold to maturity like these higher yields, because they signals an end to the low interest-rate hell they’ve been through.

          It’s just when you FORCE banks to sell those bonds many years before maturity that it gets dicey. Otherwise they benefit from the higher rates too.

        • old school says:

          I don’t know much about other insurance companies, but Berkshire Hathaway has a table in the annual report that gives the affect of interest rate increase/decrease on portfolio value.

          Insurance is different than banks because they collect money up front and pay claims later and are not allowed to leverage up like a bank. I think they tend to get in trouble when their projections of future claims are wrong.

          I think in general higher rates can be good for insurance companies as their interest income on their holdings increase, but you probably have to dig under the hood of each company.

      • Harry Houndstoothh says:

        Pure wisdom dispensed daily. You can find more fluff, but never better stuff.

  19. cresus says:

    And yet there’s a construction wave of gigantic proprtions in Manhattan, from the Husdon yards to the newly rezoned Midtown east. All megatowers, all super luxurious. For whom? Mondays and fridays are dead as the office people “work” from home during those extended week ends.
    What bothers me a great deal also is that those offices remin fully lit during the night, for no reason other than to showcase the name buildings. What a giant waste.

    • Kurtismayfield says:

      Increasingly, those Manhattan condos were bought as “investment properties”. But an investment only works if others want to buy it eventually. If the music stops a lot of the value of the mega towers crumble.

      • Apple says:

        Lot of those condos went to foreign investors hidden behind LLC’s and shell corporations.

  20. LongTimeLurker says:

    This commercial real estate repricing always makes me think about how WeWork is going to fair. They purchased a lot of office buildings during the free money era. A few years ago they were having major financial issues and last year acquired a Texas coworking company, Common Desk. They have lots of office spaces (or as Wolf has called them in the past, “WeWork playpens”) in the same metros listed in this article. I can only think that the assets on their balance sheets do not look good and this is at a time when so many more companies are hybrid than before 2020 that, theoretically, these coworking offices can capture some tenants in a declining office market. This article also makes me interested in the next Status of the Office Glut article.

    • R2D2 says:

      Good report.

      Our midsized firm recently did exactly that. We moved out of a 1980s two-floor office into a 2020s one-floor office.

      The new office has more natural light, faster broadband, just enough desks, and rent is -30% less.

      There is definitely a flight to quality, smallness, and lower cost.

    • gametv says:

      The full WeWork market cap has fallen to 425 million. It probably should be zero soon. The supply demand curve for office space rental has been shifted by lowered demand, supply will eventually reprice at much lower rates.

  21. SkiGuy says:

    Good report. I can’t wrap my head around a modern building of any kind selling for $2.93 per square foot. (The AT&T property in St. Louis). Anyone have a metric for what the typical cost per foot is to put up a new building?

  22. SoCalBeachDude says:

    Whether you are looking to buy or sell a commercial real estate property, it’s important to be very clear on its value. Value is defined as the most feasible price the property could reasonably earn in an active, open, and competitive market when the transaction is approached fairly and knowledgeably by both buyer and seller. There are three different approaches that are typically used to appraise a commercial property and choosing the right method for your particular investment is essential to ensuring that it is priced correctly. Let’s look at these three approaches separately.

    The Income Approach

    Also referred to as the Income Capitalization Approach, this tactic is the one most commonly used in commercial real estate transactions. The value is established here by estimating the property’s income using the capitalization rate (commonly referred to as merely the cap rate). The cap rate is the net operating income of the property divided by its current market value (or sales price).

    An example might look something like this: Take a property with a gross potential income of $500,000, subtract a 10% vacancy factor of $50,000 and you will be left with an effective gross income of $450,000. Deducting from this the operating expenses of the property (we’ll say $150,000) will help you to arrive at a Net Operating Income (or NOI) of $300,000. Divide this by the cap rate (8%), and you will come to your fair market value price of $3,750,000.

    • gametv says:

      The problem is that the vacancy rates are staying much higher for much longer and it is likely that with WFH, even higher vacancy rates will hit the office property segment. So if you project a 10% vacancy rate and the vacancies are 40%, then what?

      Your bigger problem is that you are also assuming a specific rent per square foot, which is highly inflated in the current market. Current landlords wont cut the prices because they have paid so much for the building, they will just let it go into foreclosure. But once all the foreclosures hit, the new owners can rent out at much reduced rates and make money. So rental rates will take a huge hit.

      So now your building is generating a per square foot rate half of the current rate and only generates 250,000, with 150,000 of expenses, the NOI is 100,000 and the value is 1.25 million. But since a new owner is taking alot of risk that it might not rent, you only want to pay 625K.

      For decades interest rates were repressed. This is over. Now we see real economic relationships emerge. All of real estate is a huge bubble built on cheap money.

    • old school says:

      What if they have to roll debt at 8%?

  23. old school says:

    Nearly any investment you buy pencils out when t-bills are zero. It makes the stock market worth 5,000 or more. If 5% t-bills stick around for a couple years stock market could be at 2000 or less.

    Its nearly the same for any asset purchased during Zirp. Seems like in time nearly everyone is going to be OK getting 5% with no credit or duration risk til asset prices get marked to reflect new reality.

  24. CreditGB says:

    From time to time I hear that Commercial realestate loans are often never paid, just “rolled over”. What, if anything is lurking in the wings on this front in your opinion? Is there a second act coming, worse than the first?

    • Wolf Richter says:

      Many CRE mortgages are interest only, for example for 10 years, and then they have to be refinanced.

      This is similar to bonds. Companies and governments only make coupon interest payments, and when the bonds mature, the issuer pays them off with funds they obtained by issuing new bonds (these bonds are “refinanced”).

      And it’s similar to many commercial bank loans, where the borrower only makes interest payments and then has to pay off the loan in full when it matures, usually with funds obtained from another loan or from issuing bonds.

      Other CRE mortgages have amortizations that are much longer than the term of the loan, for example a 10-year mortgage might have a 30-year amortization, meaning that the borrower pays the interest and only a small portion of the principal, and the vast majority of the principal has to be paid off when the mortgage matures in 10 years (the balloon payment).

      There are two types of defaults with CRE mortgages:

      1. Payment default (borrower stops making payments)

      2. Maturity default (borrower doesn’t pay off the mortgage when it matures)

  25. Xavier Caveat says:

    I say ‘we buy the dip’ and sell seats uncomfortably close to the implosion of the doomed towers, in an attempt to recoup a scintilla or 2.

    • phleep says:

      I have a funny feeling we might all find ourselves strapped to the nose cone of a missile here. Best seat in the house. Sell tickets to any bagholders who can be located — why not?

  26. Enlightened Libertarian says:

    I keep wondering what the effect of a 50% drop in commercial real estate evaluations is going have on:
    City property tax revenues
    Pensions that have invested in them
    City workers whose Pensions on dependent on those tax revenues.
    I have a feeling it is not going to be pretty.

    • phleep says:

      I think there are a few cities in the northeast that are already pilot programs for this.

    • Wolf Richter says:

      1. “City property tax revenues”

      We already know how that works. Some (or by now maybe all) of the largest landlords in San Francisco have appealed to the board, seeking a 50% cut of last year’s taxable assessments. I assume this is similar in other cities. In terms of tax revenues, this is going to be the next shoe to drop.

      2 + 3. Yes, this is going to be an issue, but depends on what portion of the funds are office CRE … which is generally small since office CRE isn’t that big in the first place (multifamily is the biggie).

      4. Yes, agreed

      • Enlightened Libertarian says:

        Wolf, as a multifamily investor, I see my biggest threat as [essentially] a government takeover of my property thru rent control and past, present and future tenant’s rights.
        Being a landlord gets less profitable and more unpleasant every year.
        I have a plan to convert my apartments to condominiums and sell them off/1031 exchange in the future.
        In the short run the city will get a little more property tax revenue but in the long I can see multifamily property taking a dive when no one wants to be a landlord anymore. Which is just going to add to the death spiral all the big blue cities are facing.

        • VintageVNvet says:

          the flower state in currently parsing legislation to preempt all local rules and regulations regarding landlord tenant relationships….
          FL legislature is under firm control of Republicans.
          surely you can figure where said legislation is heading, eh

    • CredtGB says:

      Beware trial balloons floated on taxing of unrealized gains on any assets owned.

      Outright confiscation of assets. In my opinion.

    • Sams says:

      Tax revenue depend on tax value of real estate. The valuation can change to a different cheme. Tax value can be last traded value, equal new build cost or whatever.

  27. Ist cousin Bubba says:

    Yikes, did someone actually say government needs to tax RE properly and fairly? Thats the funniest thing I ever heard. Lets do the opposite of Covid, force people to work in these buildings and not from home?

  28. BuySome says:

    Coming soon to an empty tower near everytown…Thrift King Megastores! No worthless crap older than the last decade. It was tired and old, now it’s Nu-2-U. Get it while we can still delay the rent! It’s all “Non-profit”!!

  29. Michael Engel says:

    65 and over in the labor force : 23%

  30. Michael Engel says:

    Talkmarkets top left : There is a wall of corp debt maturing ==> SF is the epicenter of this collapse.

  31. Roark Bjorn says:

    Wolf, i have been reading back through your posts trying to find where you might explain how Alan Greenspan’s lowering of rates , forwarded to 2008 , and now to 2023.

    Do you have any post/s that explain in detail that the fed has not been able to get rid of there long term treasuries etc off there books , and the result is the inverse of the yield curve etc.

    I am just trying to learn .

    i was at Charles Schwab and they told me that 2008 was 100% diffident and has nothing to do with what has/ is infolding with the banks here in 2023.
    They said 2008 was caused by viable are mortgages only.

    I don’t think the guy i was talking to understands what the actually causes have been and are .

    I would like to understand.

    Thank-you .

    • Wolf Richter says:

      “Do you have any post/s that explain in detail that the fed has not been able to get rid of there long term treasuries etc off there books…?”

      This is not a question but a statement — a wrong statement — with a question mark at the end. There is nothing to answer. That statement is simply wrong.

      This is a valid question:

      “How many billions of dollars in long-term Treasuries has the Fed gotten rid of since June 2022?”

      I answered THAT question every month in my QT updates.

      So if that is your question, I’ll answer it and include a link to my article and a chart from that article.

      • Roark Bjorn says:

        Sorry , english is not my first language . I am just trying to learn all i can about the foundation cause of all this financial mess with what appears to be atrifical low interest rates .

        i was at Charles Schwab and they told me that 2008 was 100% different and has nothing to do with what has/ is infolding with the banks here in 2023. It that true ?
        They said 2008 was caused by the variable interest rate mortgages only and there is nothing that happened in 2008 that correlates in anyway with what is happening now. It that true? If is it not, what is it that happened in 2008 and what not dealt with , has rising to the surface now?

        I don’t think the guy i was talking to understands what the actually causes have been and are .

        I would like to understand.

        Thank-you .

        • Wolf Richter says:

          There is a huge difference between 2008 and now:

          — Back then, the crisis was caused by loans (residential mortgages) blowing up because people stopped making payments and collateral values plunged.

          — Today so far, the assets are mostly in good shape, and the Treasury securities and agency MBS that banks hold are pristine with zero risk of default. So that’s kind of the opposite of 2008. But rising interest rates caused their market values to drop, which will reverse automatically no matter what happens to interest rates as these securities approach their maturity dates, at which point they will be worth face value. The risk here is that a run on the bank could force the bank to SELL those securities, rather than hold them to maturity, and then it has to deal with the loss. If there is no run on the bank, there’s no issue.

  32. sufferinsucatash says:

    This reminds me of the time Ari went office shopping on the down low. Only to be put on the spot and fired by his scary queens english speaking boss.

    Yes Entourage the TV show is a work of fiction, but it seems like a decent time to retell this tale.

    P.S. Victory!!

  33. Anthony says:

    This seems to be also an international problem, lots of commercial building debt out there round this sunny planet.

  34. longstreet says:

    “What Are Older Office Towers Worth …”
    When a former great city elects a mayor who wishes to place a “head tax” on commuters and transaction fees on exchanges? (Chicago)

  35. Franz Beckenbauer says:

    “Sell ir all – today”

    “But you are selling Something that you know hast No value”

    “I understand”

    “Do you ?”

    “Problem ist: the other Guys know too”

    “Call Jay”

  36. Candyman says:

    What will be the first mega tower to be dismantled?

  37. K. Marx says:

    The government should buy that property, refit it, and provide affordable housing.

    That will bring rents down, so more capitalist exploiters go bust and the government can buy more.

    Before you know it, you can rent an apartment in New York for $600.

    • paddy jim baggot says:

      the homeless could live there.
      a needle box in every restroom.
      value will plummet far below zero.

  38. paddy jim baggot says:

    i saw a video of 15 chinese 20-story buildings.
    collapsed into rubble in an instant.
    i thought that was (staggering !!!) wealth destruction.

    the wealth destruction I see above here is greater.
    Can it be measured with a Richter scale?

  39. paddy jim baggot says:

    flying planes into towers will be nothing compared to what is discussed here

  40. Lucky Larry says:

    It’s far simpler to ask the CIA to demolish them with explosives. It never hurts to take out an insurance plan too.

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