A CRE Bailout Is Coming
I touched on old, low occupancy office buildings in yesterday’s CSGP/CRE note. The question becomes what to do with these old, low occupancy office buildings.
If one were to knock down an old building and replace it with new, there is a high probability that the new property would fill with corporate tenants. However, that comes with cost. Who is going to want to absorb the cost of buying an old tower, knocking it down and building new? Doing so may extend the payback period by 25-50% depending upon the project. How much value are we talking about? In a $3 Trillion Office sector, if 10% of the buildings are in this predicament, that’s $300 billion - a big number. The cities can’t afford this.
The market would see these buildings remain largely vacant until prices got so cheap that someone would buy the building only to knock it down and build new. My bet is that the U.S. Treasury (under Trump), will set up a CRE Office fund where the American Taxpayer will share the cost of refurbishing and/or rebuilding select old, vacant office buildings. Perhaps something on the order of a $250 billion bailout. The next bailout is around the corner, and it will be CRE-related.
In a perfect world there would be no bailouts. Companies would work through tough situations without taxpayer assistance. This includes the banking system. Banks would be allowed to fail. Even J.P. Morgan and Bank of America. There are consequences to actions and no company is immune.