Towering Giants Are Falling



According to Bloomberg the commercial real-estate (CRE) crisis is likely to be much, much bigger than what you hear most people talking about—bigger than they want to even think about. Bloomberg states that the collapse in value of CRE as people abandon office and retail space all across the nation plus the diminished value of bank reserves due to Fed tightening, and the higher rates of interest that CRE has to refinance at are likely to cause HUNDREDS of banks to crash.

To give you an example of the scale of troubles in CRE right now, one new study says that, within just four years, fifty percent of the downtown office space in Pittsburg could be empty! That’s halfway to a ghost town. As cities like Pittsburg board up that much office and retail space, more people move out of residential space, and more restaurants go out of business, so the collapse spreads. With the municipal tax base eviscerated, law enforcement reduced to meet caving budgets, and fewer people watching over things, vandalism and other crimes grow. The worse things look and the more dangerous they are, the fewer people want to live or visit until major US cities may start to look like ghost towns of an apocalypse less than a decade from now.

Another example comes from a separate story in today’s news that says the tallest tower in Brooklyn is going into a foreclosure auction. The Brooklyn Tower (see photo above), sometimes called the Eye of Sauron, is 1,066-feet tall (93 stories). So, financially, it is a falling Goliath — one of the largest to be foreclosed on due to the crash in commercial real estate.

Of course, there are always counter forces. Cities don’t want to die, so municipal Governments create bold redevelopment programs. Buildings get repurposed. But all of that is hard to do when the whole city’s tax base is badly damaged, and it is very hard to issue bonds to finance such projects when crashing bonds are right at the center of the problem. In the very least, it requires massive write-downs of rents to attract in new customers and massive write-downs of prices that buildings sell for in order for them to finance. So, the banks go under either way because they absorb those financial losses.