Scott Rechler, an executive who also serves on the board overseeing the New York Federal Reserve warned on Twitter of potentially systemic problems in the real estate finance market and called on the industry to work with authorities to avoid things getting out of hand.
$1.5 trillion in commercial real estate debt is set to mature in the next three years, Rechler, CEO of RXR, a property manager and developer, tweeted: “The bulk of this debt was financed when base interest rates were near zero. This debt needs to be refinanced in an environment where rates are higher, values are lower, & in a market with less liquidity.”
Rechler said he’s joined with the Real Estate Roundtable “in calling for a program that provides lenders the leeway and the flexibility from regulators to work with borrowers to develop responsible, constructive refinancing plans.”
“If we fail to act, we risk a systemic crisis with our banking system & particularly the regional banks” which make up over three quarters of real estate lending, which will in turn put pressure on local governments that depend on property taxes to fund their operations,” Rechler wrote.
The executive weighed in amid concern in that aggressive Fed rate hikes aimed at lowering high inflation will also break something in the financial sector as collateral damage to the core monetary policy mission.
The Fed nearly held off on raising its short-term rate target on Wednesday after the collapse of Silicon Valley Bank and Signature Bank. The failure of Silicon Valley Bank was linked to the firm’s trouble in managing its holdings as bonds repriced to deal with higher Fed short-term interest rates.
Fed rate rises have hard hit the real-estate sector, and commercial real estate has also been hobbled by the shift away from in-office work during the pandemic. Also weighing in via Twitter, the former leader of the Boston Fed, Eric Rosengren, offered a warning on real estate risks, echoing a long-held concern of his dating back several years.
He pointed to significant real estate investment index declines, saying, “many bank lenders will be pulling back just as leases roll, with high office vacancies and high-interest rates. Regional bank shock and troubled offices will be negatively reinforcing.”
Speaking at a press conference Wednesday following the Fed’s quarter percentage point rate rise, central bank leader Jerome Powell said, “we’re well aware of the concentrations people have in commercial real estate,” while adding, “the banking system is strong, it is sound, it is resilient, it’s well-capitalized,” which he said should limit other financial firms from hitting the trouble that damaged SVB.
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One useful and practical way to avoid a financial crisis in the commercial real estate sector is to repurpose commercial real estate that is under utilized or vacant. These buildings could be converted into affordable and low income residential housing, job training centers, affordable educational centers, and housing for currently homeless people, and for mental therapy centers, rehabilitation centers, ex-prisoner housing and job training centers, and for more locations for disabled children and adults who need specially designed housing, care centers, recreational centers, and job centers. There are so many uses these buildings could provide and endless benefits that could be achieved for more people.
In California, it is easy to see office buildings, shopping centers, older warehouses, and manufacturing buildings sit vacant or under utilized, and many commercial leases are not being renewed or businesses are down-sizing to smaller offices as more people work from home. This is a fantastic opportunity, not a crisis. More people working from home means less traffic on roads, thus reducing the need to expand roads, which saves taxpayers millions of dollars, which could be allocated to convert under utilized commercial buildings to affordable housing.
In California, we do NOT need to build brand new low-income housing when these buildings could be converted to uses that could achieve societal goals to elevate more people into better living conditions, while also providing job training and even actual jobs within those buildings. These commercial buildings are usually located near major public transportation routes, which is another benefit for people who may not have easy access to a car, and some of the converted commercial buildings could be used as affordable car rental and car sharing agencies, which could be staffed by employed people who live in the affordable housing.
Many states have an affordable housing crisis, and many developers have been using the low income housing shortages to charge ridiculously (criminally?) high costs to build brand new low income housing, which is NOT a low cost for taxpayers. In fact, taxpayers are getting fleeced, spending far more than is necessary to provide low income housing.
Some cities have seen developers bidding prices of $500, $1,000, and even $2,000 per sq. ft. to build low-income housing, when regular housing is in the range of $300 to $400 per sq. ft. It’s a scam, and taxpayers should be furious that they funds are being wasted while commercial buildings sit empty and financial instability is rocking the markets.
Converting existing commercial buildings to other needed uses could be a spectacular job training opportunity for low income people who need a job and who likely need to broaden their skill sets. These people could be trained to assist in converting those buildings, which would provide good paying jobs for them for many years and an impressive resume to seek out employment in the future.
Financing for affordable housing must allow for longer terms, with 50 year loans, 75 year loans, and even 100 year loans. The issue for most people seeking to own their own home comes down to affordable monthly payments, and longer terms for loan payoffs would provide much easier homeownership opportunities than 15 or 30 year loans provide. Why are we so stuck on loan terms that do not work for so many people?
Most people want to give a hand up to those who are struggling to get afford housing, but the resentment grows when taxpayer funds are wasted on building brand new housing and ridiculously over-priced housing, which greatly benefits some developers but does little to achieve affordable housing goals. Furthermore, most middle income people do not own brand new homes, as most people buy used homes, and, yes, those older homes often need to have repairs done and even to be remodeled. The same can be done for these commercial buildings. Even appliances do not need to be brand new; repaired and refurbished appliances are more affordable, serve their purpose, and provide more job opportunities for people who could be trained to repair appliances, or to repair cars, etc. Most people have bought used items at some point in their lives, and we need to stop being such a wasteful, throw away society, and we need to repurpose and reuse as much as we can.
Repurposing under utilized commercial buildings would help stave off a financial collapse in the commercial real estate sector or even prevent a collapse, while also making affordable housing for many more people at a fraction of the cost and at a faster pace because commercial buildings have already had permits done, which can take many years, and conversion permits for those buildings would go much faster than building brand new housing.
Developers need not worry because they will still have jobs, likely many more jobs, because converting existing buildings will require their skills, and taxpayers will be much more likely to support those projects because their tax funds will be more wisely spent.
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