Commercial Real Estate: Too Much Debt, Not Enough Assets

glass walled high rise building

It’s hard to crack the headlines of the financial pages, what with short squeezes of GameStop, bitcoin, Tesla, and squeezes of one sort or another. There is a squeeze in commercial real estate that won’t shock anyone, or shouldn’t. That squeeze is tenants unable to pay owners and owners unable to pay lenders. 

It’s possible the pandemic will fizzle, someone will snap their fingers, and everything will revert to the precovid economy. But indications are that commercial real estate will take lumps, some that will be fatal. 

The Times reports that HSBC bank, employer of forty thousand people in the UK, occupying 3.3 million square feet at sixty-six locations, announced it’s cutting the bank’s real estate needs by 40 percent. 

Noel Quinn, chief executive of HSBC, told the Times the plan was “long term,” because there would be “a very different style of working than before.” You may wonder what the bank pays in rental costs. The Times describes it as “several billion.” 

Jes Staley, who runs rival Barclays, said last week that working from home was getting “old” for employees. Really? I wonder if he actually talked to any of his staff? Meanwhile, Shaun Dawson, head of insights at DeVono Cresa, sees it differently: “The pandemic has given more traditional office occupiers the impetus to change, and I think for those who are already adjusting to different working practices, it’s just giving them the drive to continue with rationalising floorspace.”

The market segment which has a jump on where the office market may go is retail malls. You know, those places where you used to go to buy things. Take for instance the Prizm Outlets mall, about a forty-minute drive south of Las Vegas, on the California border in what is known as Primm, Nevada.

The mall is less than 60 percent occupied, but last July the property appraised for $28.2 million. Last month the property only brought $1.525 million at auction. Bloomberg reported the mall was part of CMBX 6, a commercial real estate credit derivatives index with heavy exposure to shopping centers and malls. 

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