Are your vendor networks and back-office ready to handle the upcoming turmoil?
Foreclosure starts increased by/to 4% from last month, while completed foreclosures increase by/to 38%
IRVINE, Calif. – June 8, 2023 – ATTOM, a leading curator of land, property, and real estate data, today released its May 2023 US Foreclosure Market Report, which shows there were a total of 35,196 US properties with foreclosure filings – default notices, scheduled auctions, or bank repossessions – up 7% from a month ago, and up 14% from a year ago.
“The recent increase in foreclosure filings nationwide indicates a trend that has been observed throughout the year, and what we have expected to occur,” said Rob Barber, CEO – ATTOM. “This upward trajectory suggests the possibility of continued heightened activity, and with foreclosure completions seeing the largest monthly increase this year, we will continue to monitor the potential impacts this may have on the housing market.”
The Next Crisis Will Start With Empty Office Buildings
Foreclosure starts increased by/to 4% from last month, while completed foreclosures increase by/to 38%
Post-pandemic, kids are back in school, retirees are back on cruise ships, and physical stores are doing better than expected. But offices may struggle more than most casual observers realize, and the consequences for landlords, banks, municipal governments, and individual portfolios will be far-reaching. In some cases, they will be catastrophic. But this crisis, like all crises, also represents an opportunity to reconsider many of our assumptions about work and cities.
During the first three months of 2023, US office vacancies topped 20% for the first time in decades. In San Francisco, Dallas, and Houston, vacancy rates are as high as 25%. These figures understate the severity of the crisis because they only cover no longer leased spaces.
Most office leases were signed before the pandemic, and have yet to come up for renewal. Actual office use points to a further decrease in demand. Attendance in 10 largest business districts is still below 50% of its pre-COVID level, as white-collar employees spend an estimated 28% of their workdays at home.
Will Landlords Give The Keys Back To The Bank?
With a third of all office leases expiring by 2026, we can expect higher vacancies, significantly lower rents, or both. And while we wrestle with the effects of distributed work, artificial intelligence could drive office demand even lower. Some pundits point out that the most expensive offices are still doing okay, and that others could be saved by introducing new amenities and services. But landlords can’t very well lease all empty retail stores to giants, like Louis Vuitton and Apple.
With such grim prospects, some landlords are threatening to “give the keys back to the bank.” Over the past few months, the property giants RXR, Columbia Property Trust, Brookfield Asset Management, and others have collectively defaulted on billions in commercial property loans. Such defaults are partly an indication of real struggles, and somewhat, a form of calculated strategy. Most commercial loans were issued before the pandemic when offices were full, and interest rates were low.
The current landscape is drastically different: high vacancy rates, doubled interest rates, and nearly $1.5 trillion in loans due for repayment by 2025. By defaulting now, landlords leverage their influence to advocate for loan extensions or a bailout. As John Maynard Keynes observed: when you owe your banker $1,000, you are at his mercy, but when you owe him $1 million, “the position is reversed.”
Why Do Banks And Municipal Corporations Need To Worry?
Silicon Valley Bank, First Republic, and Signature collapsed in recent months – regional institutions like these account for nearly 70% of all commercial property bank loans. Pushing down the valuation of office buildings or taking possession of foreclosed properties would further weaken their balance sheets.
Municipal governments have even more to worry about. Property taxes underpin city budgets. In New York City, such taxes generate approximately 40% of revenue. Commercial property – mostly offices – contributes about 40% of these taxes, or 16% of the city’s total tax revenue. In San Francisco, property taxes contribute a lower share, but offices and retail appear to be in an even worse state. Empty offices also contribute to lower retail sales and public-transport usage. In New York City, weekday subway trips are 65% of their 2019 level – though they’re trending up – and public-transport revenue has declined by $2.4 billion.
Meanwhile, more than 40,000 retail-sector jobs lost since 2019 have yet to return. A recent study by an NYU professor and others estimated a 6.5% “fiscal hole” in the city’s budget due to declining office and retail valuations. Such a hole “would need to be plugged by raising tax rates or cutting government spending.”
Are The Days Of Office Buildings Gone?
Office buildings pose a threat to a variety of financial institutions. As more leases and loans come due, the bulk of the pain is still ahead of us. Over the next two years, many downtowns will find that dozens of buildings are no longer fit for purpose. Municipal services will likely deteriorate, and more people might leave.
The worst-case scenario is a return to the 1970s, with bankrupt municipal governments, rising crime, and the flight of upper-middle-class residents. Landlords like to point out that “New York always comes back.” But some cities – like Detroit or Pittsburgh – never recovered from the previous waves of technological change. And even in New York, a comeback may take decades. The consensus among economists was that as technology and media expanded, economic activity would consolidate within a select few superstar cities. The pre-COVID consensus wasn’t wrong, but the leading thinkers didn’t consider the full implications of their own theories.
Once the quality of online collaboration crossed a crucial threshold, the internet itself became the largest talent pool and the premier facilitator of human interaction. And once highly educated individuals could earn a nice living from anywhere, lifestyle preferences became more diverse. This does not mean that superstar cities are doomed, but it does mean that their previously captive audience now has more options.
Is There A Solution At Hand?
While it may seem like there is no solution to this arising problem, cities can lean into public-private partnerships. Such partnerships bring public and private resources together to finance, build, and maintain public facilities and spaces. When executed properly, public-private partnerships can inject billions into urban development without sacrificing the broader public interest.
Realistically, though, whatever resources cities can muster won’t be enough. The federal government will have to provide significant, ongoing assistance. State governments will have to chip in as well. Many states depend on their large cities, and have their own struggles. But local and state governments could coordinate to make better use of resources, speed up the approval of new projects, and pressure the federal government to provide more funding.
At IMS Datawise, we assist diverse businesses in the mortgage and allied industries by navigating such crises with a specialized team of offshore experts. By coordinating efforts, optimizing resource utilization, and devising innovative strategies, we can help you pave the way for sustainable growth.
