'The buildings don't go away ... but the owners do': Warren Buffett and Charlie Munger warn that a storm is brewing in the US real estate market -- here's where they'll seek refuge

[mahatmakanejeeves]

Moneywise

‘The buildings don’t go away … but the owners do’: Warren Buffett and Charlie Munger warn that a storm is brewing in the US real estate market — here’s where they'll seek refuge

Vishesh Raisinghani
Sat, October 21, 2023, 7:00 AM EDT· 3 min read

Charlie Munger, Warren Buffett’s business partner, has been growing increasingly worried about commercial real estate. He believes a storm is brewing in the sector that could engulf the banks and impact the broader market. … “The buildings don’t go away,” Buffett said at the May 2023 Berkshire Hathaway (NYSE:BRK.A) shareholders meeting. “But the owners do,” Munger chimed in.

“I think that the hollowing out of the downtowns, in the United States and elsewhere in the world, is going to be significant and quite unpleasant,” Munger said, adding he believes that the U.S. economy will weather the storm eventually but that commercial real estate will eventually “involve a different set of owners.”

Munger’s bear case

Munger and Buffett’s concerns could be based on the fact that foot traffic near stores in metropolitan areas is 10% to 20% below pre-pandemic levels while office attendance is 30% lower than before COVID, according to a recent report by the consulting firm McKinsey. The report predicts that, because of these trends and other factors, demand for office space could still be almost 20% lower in 2030 than it was in 2019.

That’s bad news for commercial landlords. It’s worse news for their lenders. Munger said in an April interview with the Financial Times that the U.S. banking sector was “full of … bad loans” in the commercial real estate sector. Eventually, higher interest rates, lower rental income and resulting lower property values could send some of these loans underwater — meaning that the outstanding balance will be greater than the value of the underlying properties.

{snip}

[SWBTATTReg]

1. Interesting. And w/ the Internet, markets have somewhat shifted their focus, to support their

online business models, that is, they have warehouses instead of retail outlets (to support online sales which is where most, if not all, sales occur).

Thus, I do agree that not all of these structures are reused, thus, leading to lower property values, lower rents received, etc., driving values downwards.

I wonder if tRUMP is hurting...I don't see him crowing about his property business so much, so I suspect that this is probably the case. After all, tRUMP has shown repeatedly how poor of a businessman he is.

[Haggard Celine]

17. I'll bet Trump is hurting.

Well, in the properties he actually owns he's losing money, but he's losing a lot of money from the properties who rent his name as well. They don't want to use his name anymore because his 'brand' is toxic, at least with people who aren't MAGAts. He is probably pretty stressed out these days. Hope he has a stroke!

[marble falls]

26. Well there is that bright side of it.

[elleng]

2. *

“I think that the hollowing out of the downtowns, in the United States and elsewhere in the world, is going to be significant and quite unpleasant,” Munger said, adding he believes that the U.S. economy will weather the storm eventually but that commercial real estate will eventually “involve a different set of owners.”

Munger’s bear case

Munger and Buffett’s concerns could be based on the fact that foot traffic near stores in metropolitan areas is 10% to 20% below pre-pandemic levels while office attendance is 30% lower than before COVID, according to a recent report by the consulting firm McKinsey">>>

[LuvLoogie]

3. I hope the private equity firms buying up residential

property get burned.

Fuck their ponzi scheme and tax shelters.

[jmbar2]

10. +100!

[rubbersole]

11. Residential is gold compared to commercial.

The equity firms are cash rich and preying on sellers hurting from high interest rates. Getting government to level this playing field will only be addressed after a massive blue tsunami in '24. Don't hold your breath.

[LuvLoogie]

13. My wife and I got lucky.

We had a forbearance during covid, then finalized a refinancing before the higher rates started kicking in.

Our roof leaks in 3 places and we have debt besides the house, but it's home. My older daughter is in college. They gave her half. The three of us are coming up with the other half with monthly payments directly to the school.

No school loans yet.

I have two pairs of shoes I wear regularly. One is going on three years. The other is from about 10 years ago. I dug it out of the closet and put it into rotation on days I don't have to walk much.

I just made dinner for my younger daughter and myself with a tomato (home grown) garlic and onion salad I made a couple weeks ago, but sat untouched in the fridge. It was fine. I cooked it down with a good amount of olive oil. Added herbs paprika and some kalamata olives that were also lingering in the fridge. Threw in some cooked corallini that I made a few weeks ago. Stored in a plastic container after tossing in a few tablespoons of olive oil.

It was all fine. Thankfully. And it didn't rain that hard this week.

Oh did I say, fuck private equity?

[rubbersole]

20. Yes, you mentioned that.

But were way too kind. The greedy motherfuckers on Wall Street have monetized and made commodities out of everything in American life. Including politicians.

[LonePirate]

4. Geez. How many times do these people need to be told to convert these buildings into homes/apts?

We have a significant residential housing shortage. Why not reduce that problem by converting some of the excess commercial buildings?

[mahatmakanejeeves]

6. You seem to be of the belief that that is easy to do.

Please enlighten us with your experience carrying out such projects.

Thank you.

[LonePirate]

8. It's certainly not impossible and an occupied building brings in more revenue than an empty one.

The lack of willpower to make these conversions is #1 problem.

[SouthernDem4ever]

15. It depends. Making older buildings into condos is costly

Usually, they are sold for a premium price. If I were a developer, looking at the interest rates, I would not venture into that market right now.

[LonePirate]

18. They can adapt or go out of business. It's economic darwinism and they would rather complain than act.

[Scrivener7]

28. A major mall near me is being converted into residential and

mixed use spaces. I'm watching with interest.

[PlutosHeart]

31. They would rather tear them down.

Then it seems something worthless goes in its place many times like high rent condos or poorly made cheaper ones that all look the same. Oh and don't forget the lower level shops again.

[Scrivener7]

27. Was that really necessary?

And PS, it IS a logical answer and is beginning to happen in some places.

[marybourg]

9. Because most office buildings don't lend themselves to easy conversion to apartments.

Office buildings are deep with most of the space not near a window. Windowless offices are ok; windowless apartments are not.

[IbogaProject]

14. Many issues with office to residential conversions

First is the zoning. Even more serious is the plumbing is usually centered around the elevators or a few stacks. Another issue is the windows often don't open, and that is often not up to housing code. Other items have been mentioned already. Conversions will be the solution but the market has to bottom out before that is a serious option. The high interest rates are going to basically lock up the real estate market for awhile. This transition along with the Boomer generation ending their investment phase abruptly en mass, rather than in waves is going to place downward pressure on all investments over the next while. This is the beginning of a very slow economic growth period, and the building climate catastrophe is going to risk it becoming a period of economic contraction. Our economic system can't handle contraction things are going to get very hectic to put it mildly.

[marybourg]

19. Why is the boomer generation ending its investment

phase abruptly en mass?

[IbogaProject]

23. Retirement

Plus with the older cohort they are required to take at least minimum distributions. That generation's investment phase contributed to the strong stock returns. The following generations have a lower percent of net investment, so on balance the demand for equities may decline. This is before any consideration of the effect the rapid hike of interest rates, after a long phase a relatively low mortgage rates.

[marybourg]

24. I don't think people generally cash in their investments abruptly the day they retire.

Retirement goes on for many years and most people continue to be invested through their retirement, although they may favor more conservative investments. Required minimum distributions likewise go on for one’s entire retirement, and many people simply deposit their RMD into their taxable investment accounts. Life (and the stock market) will go on.

[IbogaProject]

30. Net investment is slated to decline

Even a small amount of total net decline in net investment will put pressure on equities. The younger generation is paying rent, and paying off student loans, they aren't saving as much, there is a high income cohort who are, but the amount of people investing has declined over the last few decades.

[usonian]

21. California just enacted a law allowing the upzoning of strip malls to residential.

I think this overrides local intransigence to do so. Not sure of the details but it's a win.

[LonePirate]

22. That is a step in the right direction. We need more of this.

[bucolic_frolic]

5. Nice how Yahoo Finance recycles May's news as current. How many times is this?

[mahatmakanejeeves]

7. Slow day. They had to find something.

And good evening.

[mahina]

12. Convert it to housing.

Yeah, plumbing, rubbish, electrical, parking = $input needed. But what better use?

[Wonder Why]

16. 'm putting my money into Trump's properties. They're undervalued by a lot! Pfffttt!

[Farmer-Rick]

25. Seems downtown real estate keeps getting hit

First comes Wal Mart and malls that take away most retail stores from downtowns. Then as some downtowns get their store frontage back, COVID hits and people realize office space is inefficient and downtowns lose another big chunk of their foot traffic.

Downtown real estate has to become something else. The only thing left is residential.....unless you can farm it....

[IronLionZion]

29. There have been reforms put in place since 2008

so this is unlikely to take down our whole economy as badly as last time. (Thanks Obama/Dems) Banks have to do stress testing for this sort of thing. Many of them stagger their commercial real estate loans or extend some of them so they don't all default at once. Real estate investment funds should be diversified enough that the money they make from residential property should more than cover the losses from commercial.