Can Change the Faith, Cannot Change the Faith
According to Wall Street Journal (Sep 26, 2023), commercial real estate insurance costs have risen 7.6% annually on average based on Moddy’s Analytics data, and it creates an over the top of risk and loss to the current property owners because the insurance renews annually, and all the other factors, which impacting the profits and losses, do take a longer cycle than the insurance policy (Putzier). In addition, some property owners are impacted by the rising insurance rate even higher than the rising interest rate (Putzier).
Some experts say that the landlords can pass through their insurance expenses going along with the other expenses such as taxes and operating costs; however, if tenants are bankrupt, and go out of the lease, does that still mean the pass-through expenses save the landlords? This is well supported by the recent case that Rite Aid went bankrupt due to the excessive lawsuit cost, and more than 2,100 stores throughout the U.S. will be closed down (Gladstone and Scurria). The corresponded landlords can recover their damages by whom has never been mentioned in the new articles. Retail spaces are not tenanted by in a few months except the extraordinary case.
The insurance cost is not the only one factor surprising the landlords who have been tried to maintain their income stream. According to Wall Street Journal (Shifflett, 2023), New York City has one of the first and most expensive carbon taxes, and landlords of large buildings beginning next year has to pay a fine of $268 for every ton of carbon dioxide emitted beyond certain limits. The tax bill for 128 properties analyzed could add up to more than $50 million during the first five-year enforcement period. Based on Wall Street Journal’s expectation on potential impact of the taxes will cause more serious issue because the building owners borrow money from the Wall Street investors by using mortgage-backed securities. Still empty building, more greener buildings, and less fund liquidity. The office market should be recovered, but it looks it will be tough still.
Those three recent add-up rises: the insurance cost, future carbon emission tax liability, and higher vacancy rate will not only affect the operating margin, more concisely the operating cost nowadays, but also will affect the current valuation on the properties. The cap rate will be more likely to rise unless the income is significantly low (generally); thus, the value will decrease, which less attract the potential buyer who is looking for their income from the real estate investment.
Even though some big real estate players such as Blackstone and Vornado take the leadership role in the industry, it is too small to make the internal and external environment for the general market situations or economics. According to Wall Street Journal (Grant, 2023), Blackstone and Vornado Realty Trust has recently invested $250 million to develop Manhattan’s first major production-studio complex on a Hudson River pier. Despite the effort, people still want to work at home even though many big companies push their employees to come back to the office. Many people prefer online shopping. This is not only the case for New York and The U.S., if we take a look at China’s case, it is far worse than the U.S. situation according to Wall Street Journal.
Howard Mark at Oaktree said in this interview with Bloomberg that richer is getting richer simply because home price is higher and wages are higher. This can confuse the view on the real estate market because this is I would say it is more focused on the residential market concentrating on an individual income. However, the office real estate sector is exception, but I suppose that this changing income distribution phenomenon can be leveraged out through a big players’ investment like the giant Wall Street investors’ involvement in real estate buyout or investment. I would assume it will be more effective if they buy class B and class C office buildings to reposition to more income generating asset class. The big tenants’ roles are crucial being observed in the recent cases including Google’s new office in West Pier in Manhattan and Disney’s new office in the Lower East Side in Manhattan.
It will be not realistic if we seek only for all good, then the real estate as a main vehicle between Wall Street and Main Street will lose its power to distribute people’s wealth.
-Written in Oct 2023-