Curious what impacts any small business owners are seeing on here? Are you seeing lower margins? Hiring freeze? Business is booming?

Brought this commercial office space crash up during the covid era and was assured that commercial is on long term leases and everything would be fine, and not to worry about it.

Got no idea how we haven't seen a commercial crash yet.

Add that to the list of cascading failures once this thing gets kicked off.

southernskies said:

---

Curious what impacts any small business owners are seeing on here? Are you seeing lower margins? Hiring freeze? Business is booming?

---

Im in real estate multifamily. Higher interest rates are frustrating as we cant pull out as much equity as we used to after big capital intensive projects. Fed had to do it, but it still sucks. Margins are about even, labor and materials are more expensive, but rent is going up fast too.

Malibu2 said:

---

Commercial:
Balloon payments due
Meager rent rolls
DCR constrained loan values due to high interest rates

Residential:
Skyrocketing rent increases
Low inventory
Low vacancies

Theres an obvious solution to both of these problems which is rezoning commercial to residential / mixed use. Yes, operators will have to pay to convert existing space, but the alternative is massive defaults.

---

Yep. I agree with you on this.

I own a specialty retail business. Our YOY transactions are down ~25% but due largely to inflation, our sales are up 5% YOY. Our lower-end product is barely moving but the high-end side has remained on fire. We've cut back on all planned capital expenditures for now as it seems inevitable we'll eventually feel it.

Diggity said:

---

the cost of converting commercial space to residential ain't cheap. Residential leases are also shorter term and not typically as lucrative.

I get "desperate times" and all that, but if my solution to the lender is to pump more money into a venture and the end game is lower rents and shorter terms, I think they'll just take back the property.

---

Of course, Im not trying to trivialize the cost of conversion nor the fact that most commercial operators are going to have some bad news for their REIT investors or LPs. But they cant change that WFH or hybrid are enduring paradigm shifts and that demand aint coming back. If the bank takes the property, theyll have the same problem as current owners.

I get that, and it might make sense in certain cases (you occasionally see conversations if the numbers pencil) but the other issue is demand. In super dense CBD's, it wouldn't be a problem, but I would argue (the majority of) residents in (most) cities don't necessarily want to live where the commercial space typically sits.

One thing is certain, property owners will have to get creative on their uses. Especially those with aging Class B assets.

Agree completely.

My retail business is down, but that is expected due to the current conditions. Sales volume is down. We cut back on unnecessary expenses. Costs on stock items are up due to inflation and freight costs. Lumber costs are creeping back down slowly. We are hiring, but only part time to replace a full time position that left.

The manufacturing business is up. We need to hire and spend on new equipment, but we are being careful as money is not a cheap as it was. Our backlog on this side is probably about 3 months (it was difficult staying busy before).

I'm in real estate. Multifamily is killing it everywhere. Deals are starting to slow down due to debt markets but operations are strong. Retail has been tough. Traffic for new retail has slowed this year. Our office portfolio is primarily Dallas, San Antonio and Atlanta. It has been surprisingly strong. We have very few tenants leaving although many our giving up space on renewal. New leases are surprisingly strong. Office is definitely hit or miss depending on the location and age.

The demise of commercial office space is greatly exaggerated. I work in DFW (obviously a great market to be in relatively speaking) and June was one of the busiest months I've seen since COVID. Here are some recent market stats for Dallas.

- Q1 saw nearly 3.1 msf of leases transacted, an increase of 8.7% year-over-year.
- Overall vacancy rates continued their downward trajectory, decreasing another 10 basis points from the previous quarter, down to 21.6%
- Asking rental rates have increased in DFW, rising 3.8% year-over-year to $27.93/sf
- Construction on new office products continues in DFW with nearly 4.8 msf of space under construction
(All favorable signs)

Goldman just announced an 800,000 sf lease in uptown for 5,000 employees and Wells Fargo is consolidating 4,000 in a new building in Las Colinas. Two massive investments in the future of office space.

Spaceship said:

---

The demise of commercial office space is greatly exaggerated. I work in DFW (obviously a great market to be in relatively speaking) and June was one of the busiest months I've seen since COVID. Here are some recent market stats for Dallas.

- Q1 saw nearly 3.1 msf of leases transacted, an increase of 8.7% year-over-year.
- Overall vacancy rates continued their downward trajectory, decreasing another 10 basis points from the previous quarter, down to 21.6%
- Asking rental rates have increased in DFW, rising 3.8% year-over-year to $27.93/sf
- Construction on new office products continues in DFW with nearly 4.8 msf of space under construction
(All favorable signs)

Goldman just announced an 800,000 sf lease in uptown for 5,000 employees and Wells Fargo is consolidating 4,000 in a new building in Las Colinas. Two massive investments in the future of office space.

---

Spot on. Commercial real estate fundamentals are as strong as they've ever been. Are there going to be a lot of loser properties out there, particularly 4 story suburban offices? Sure. Properties always go obsolete eventually and COVID accelerated this for many older vintage office. Some commercial operators / owners will lose out. However most are so ridiculously in the money over the last few years.

Will there be a 15-20% pricing correction across commercial properties over the next few quarters? Sure. Again, that's down 15-20% from a 60% increase over the last 3-4 years.

I get that it's not doom and gloom out there, but it seems like commercial real estate fundamentals being "as strong as they've ever been" while at the same time saying there will be a 20% haircut across the industry in the next 6 months doesn't seem to jive.

Proposition Joe said:

---

I get that it's not doom and gloom out there, but it seems like commercial real estate fundamentals being "as strong as they've ever been" while at the same time saying there will be a 20% haircut across the industry in the next 6 months doesn't seem to jive.

---

Fundamentals: supply, demand (record low vacancies for MF and industrial with in-line historical vacancies for office), rent growth outlook, etc.
Pricing: 15-20% off peak pricing, about 2/3 of which is driven by cost of capital (interest rates). Again, this peak pricing is 60% higher than it was 3 years ago. Unless you bought a property in the last 12 months, your values have still gone way up.

Also, lender balance sheets are far healthier than they were during the GFC. Also helps.

Got it. I understand that anyone in it last 3-5 years (and possibly longer) has made more than enough to offset some bad years, just didn't think a large correction like that didn't come without some "well, maybe these numbers were a bit over-inflated for a while".

Theres a WSJ article out today that looked at office card swipes from March 2020 to today. Of the major metros Houston and Dallas are the healthiest recovery at ~50% of March 2020. Given that most leases are 5-10 years, unless those numbers improve I dont see how come renewal time most companies dont decide to downsize their SQFT to match utilization.

Whats the data on lease renewals currently saying? Are companies mostly signing the same leases or are they downsizing? Since most companies are probably still stuck with Pre-Covid leases, my hypothesis is that were still 2 years away from this getting really ugly, but if the data shows Im wrong, then perhaps commercial is undervalued by folks like myself.

right, what we have been seeing in Houston from what I can gather is the old "flight to quality". Companies that value office space are moving to nicer buildings with better amenity packages but generally taking less space then before. The 70's-80's vintage stuff is having more trouble.

If Goldman has 200K in leases that are rolling over in the next few years and decide to consolidate to 80K, while good for the new owner, it isn't a positive sign for the market. Not saying that is the case, but giving an example.

The $/sqft numbers can be misleading as well because things like TI concessions are much higher than in the past, which will reduce the net income for the owner.

Medical just as busy/busier but income essentially fixed while every other costs keeps rising.

VRBO/Short term rental down with the economy.
Long term rental hotter than ever.