COVIDnomics 101: Commercial Real-Estate's Looming Collapse

Highly leveraged REITs and extinction-level events don't mix.

By Cory Doctrow / pluralistic.net

Commercial real estate is in *biiiig* trouble. Malls - already under threat before the plague - will be full of empty storefronts. Offices, oy. They'll lose tenants when their businesses collapse. 

Surviving tenants will take advantage of higher vacancies to negotiate lower rates.

Those tenants won't need as much space anyway: between layoffs and mass, permanent work-from-home (which will let employers seek the cheapest labor, anywhere in the world), demand is gonna fall *off a cliff*.

That's really really bad news, because commercial real-estate is super leveraged thanks to Real Estate Investment Trusts (REITs), the favored vehicle of overseas money-launderers seeking to clean their corrupt gains, as CZ Edwards explained last year.

The REITs borrowed titanic sums on grossly overinflated valuations based on absurdly optimistic occupancy projections. As Randall Head explains in a post on Dave Farber's Interesting People list, this leaves their creditors - the banks - vastly exposed.

Here's the bottom line: "A middling-sized bank which in Jan had twenty billion dollars of commercial loans, secured by liens against $25B of office towers and shopping malls now has twenty billion dollars of commercial loans secured by liens against $18B of real property."

That $25b valuation was based on the assumption of 80% occupancy. After the Comet Covid's extinction-level event (exacerbated by gross mishandling, from epidemiological ineptitude to deficitphobic austerity), $18b is generous.

Banks that loaned to plutes cleaning money for crooks? Dead. They'll need bailouts, nationalization, or wreaths.

Head: "If you thought it was fun bailing out the Federal Savings and Loan Insurance Corporation, you're gonna LOVE bailing out the FDIC, especially when every other economy is bailing out its banks."