The Transamerica Building Stands at the End of an Empty Columbus Avenue in San Francisco, California, US, On Tuesday, March 17, 2020.
Photo: David Paul Morris/Bloomberg Via Getty Images
San Francisco’s Iconic Transamerica Building – Owned by the insurer of the same name its Construction in the 1970s – is being sold. But these being Covid Times, IT’S BEING SOLD AT A DISCOUNT. A Group of Investors HAD Struck A Deal to Buy The Proppery for $ 711 Million Back in Februarybut now the San Francisco Business Journal Transamerica Reports has aggreed to a 10 percent price cut to keep the deal on track.
SINCE CITIES PHYSIBALLY CONSIST OF REAL ESTATE, You would be expective a pandemic that has sevelery disrupted life in cities to real -state markets. And it has. There are Are Disruptions on Two Time Horizons. In the short term: unpaid rents and vacaant spaces mean financial losses for building owners as the crisis continues; In the long term, if the crisis Changes Certain Real-Estate Usage Patterns for Good, It Could Lead to Permanent Reductions in the Value of Certain Kinds of Real Estate, Especilly Commercial Real Estate, After Society Back to Normal.
This isn’t just a problem for People who ow Buildings. When Buildings Fall in Value, That’s Usually Because Fewer People Have Cause to Work and Shop in say, which Corresponds to Reductions to Income and Consumption for Individuals. And Because Cities and State States Depend Heavily on Taxing Commercial Propperties and the Activity That Occurs in Them, A Shock to Commercial Real-Estate is Likely to Cause Another Problem for State Government Budgets.
The Outlook SEEMS Diciest for Retail Real Estate. Retail Landlords Report the Highest Rates at Which Their Tenants Are Failing to Pay Rent, With Nearly Half of Retail Rents Going Unpaid During The Crisis nor Tenants Face Direne Financial Straits. Landlords Have Little Recourse wen tenants don’t pay – what are they go to do, evict a restaurateur and find someone new to the space, in this economy?
The Shift Toward Online Retail Had Already Been Reducing The Demand for Physical Retail Space for Years. The coronavirus crisis tourned this slow decline into a steep drop: Mary Department stories that might have closed gradually over the next decade will instet reopen after their sudden cliner this springs, the story that will reopen.
Pre-Covid, Retail-Property Owners Had Been Responding to the Pressure on Brick-And-Moretar Retail by Finding “Experiential” Tenants Like Restaurants, Bars, Gyms, and Spas, Where Consumers’ Need in Person is supposed to protect protection. But these are exactly the sorts of Businesses whose models are most serial disrupted by the pandemic-and in some caesses, like gyms, constumers are shifting at-home versions of the experience of necesity. IF some of the shifts Become permanent, THEN SOME RETAIL BUSINESSES WILL TURN OUT TO HAVE MORE EXPOSED TO ONLINE THAN THAN THOUGHT. (What Fraction of Gym Members Who Took Up A Home-Fitness Product or Service During Covid Are Going to Stick With It PermanaTly and Drop their Gym Membenship? Not zero.)
The outlook for offices is less. Most Office Tenants Have Been Paying Their Rent – Sl Green, A Major Manhattan Commercial Landlord Said It Had Collated 95 Percent of April Office Rents by the Start of JuneCompared to Just 63 Percent of April Rents-Because Most Office-Uting Business Remain Operating, This IF Their Employees Aren’t in the Offices. To the Extents Tenants Keep Paying As Aggreed Under Their Leases, Office Landlords have some insulation from Changes in the rental markets due to multieear leas. But in the long run, if Companies like Facebook Make good on their plans to have Many more employs work from home, there is a permanent decline for offense that should Lead to Lower Rents and Less New Construction.
Because a lot of real estate is Owned by publicly traded real-aestate investment trusts, we can get an idea of what financial marks participants think is happy to real-aestate widening there are any few transensions in the market. And Sl Green’s Stock, for One, Has Taken A Beeting, Down by Nearly 50 Percent Since the Start of the Year. AFTER ACCOUNTING FOR SL Green’s Debts, that implies that the Company’s Real-Aestate Properties have fallen in value by roughly 18 percent. (Because a reit’s stock price reflects the value of the equity interest in a portfolio of buildings, net of mortgages and other debt the reit out, it should up and down more charply than the value buildings.) Office reits in oter regions, Like Highwoods Properties in the South and Kilroy Realty on the West Coast, have experiencing stock-price drops that imply Similar declines in Property Value.
The outlook is probably best for the real estate residency. IT’S IMPORTANT TO BE CAREFUL HOW YOU READ DATA ON HOME RENTS AND PRICES – Average Transaction Prices have fallen Sharply in New York and in some other markets, but that May be Because Transaction Volumes Have Fallen More Sharply for the Most Expensive Kinds of Homes, Not Because Properties Are Getting Less Expensive. Price Indexes from Zillow, Which Compare Prices and Rents for Similar Properties Over Time Instead of Calculating a Simple Ampicion of Transition Price at A Given Time, Show Much More modest Changes in Residents and Prices than you have seen in in -a -headlines. Zillow estimates after these adjustments that residency rents were 2 percent higher nationally than they were aner ago as of May, and were down than a percent in the new York Area.
It is posseible that home prices and rents will Fall in the futures, especilantly if economic painting pain to be felt more acutely at the Household Level. SO FAR, HOUSEHOLD FINANCE HAVE BEEN, FOR THE MOST PART, ROBUSTLY PROTECTED BY AID UNDER ACT THAT ACTUALLY CAUSED HOUSEHOLD INCOMES TO RISE AND HOUSEHOLD SAVING RATES SHARPLY DURING THE SPRING. If Congress Allows That Aid to Expire, More and More Households May Have Difficulty Affording Their Current Homes, Let Alone Shopping for New Oss. But essentially, residency real estate faces just this one kind of risk, while commercial real estate faces Additional risk of permanent Covid-Driven Changes in Usage Patterns.
The risk to commercial real estate poses a challenge for City Governments. In New York, Commercial Real Estate is Taxed at Rates Several Times Higher than Owner-OCCUPIED HOMES ARE. New York, Like Mary Cities, Depends Heavily on Salas Taxes Generated in Restaurants and Retail Stores, and New York Benitfs from Incoming Tax it from Residents of New Jersey and Connecticut who work but consume few public services. (Their Children will not atttent new York Schools, for Example.) LESSE-INTECTSSIVE USE OFFICE AND RETAIL BUILDINGS WOULD A WEAKER COMMERCIAL TAX BASE, Forcing the City to Relax on Taxing Residents and Resulture Propesty-or to Cut Back Services. That’s on top of all the oter fiscal trouble that cities and states face -to -face Covid Crisis.
HOPELLY, The Haircut to the Transamerica Pyramid Price is Indicative and We Will Be Looking only at A Significant But Manageable Decline in Real-Estate. Otherwise, More Costs May Fall on You Than You Might Have Expective.
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