Meta spends $181M to get out of lease at vacant London offices
theregister.com
theregister.com
Commercial real estate is a significant threat to banks and the overall economy. It will be interesting to see how it plays out and if lenders are left holding the bags or if the losses will be, yet again, subsidized and passed on to taxpayers.
Whose?
Who is saying this?
One, it doesn’t make sense: interest payments are part of the budget. If we ask when interest will become the largest budget item, it’s around 2045 [1]. (For larger than discretionary, it’s early 2030s.)
Fundamentally, interest as a fraction of GDP is high but precedented [2]. It’s trending worryingly. But it is not proximately dangerous.
[1] https://www.crfb.org/papers/interest-payments-federal-budget
Regardless - I do agree that the debt and deficit situation is getting a little out of hand. We're running deficits in late cycle which is quite dangerous.
Also your [1] link is hilariously out of context from what has happened in the past year, interest rate on treasury bonds is 4+% and on bills/notes is 5+%. [2] Makes it seem like things are alright but we're in late cycle and we should be saving money for a downturn instead of taking on more debt at higher rates.
I rented an apartment in São Paulo 3 months before the pandemic. During the pandemic I kept paying my rent, even though I went back to my parents house (we thought it would be over soon). 6 months later the bank I was working for put us all in home office forever; so i had to terminate my contract with the company that rented me the apartment. The "fine" for terminating it before the 1.5 years in contract was R$ 7.000,00.
Based on what I make and what Meta makes annually, I've spent way more, haha.
I’m not saying I’m better or worse, I just think that hearing different situations is interesting.
It’s still up there.
Melbourne is giving it a good run for its money, and will soon overtake Sydney in population size.
Australian cities are confidently and regularly in the most liveable and most expensive cities in the world.
1. Breaking leases usually incurs those costs + the remainder of the contact with some edge cases (e.g VIC[1])
2. Again VIC, rents increased on average by 5-15%, depending on th demand of the area[1] . 25-35% has probably happened, but isn't common.
I don't know what circles you are involved in but 25-35 % is consistent with for many of my cohort in Sydney. Although this is an anecdote, 35% from a right skewed distribution with median 14% is very possible.
The system is breaking and harming the most vulnerable
I'm unsure how showing the percentage increase would be a downplay? I was pretty clear they are increasing, and at almost double inflation. This is very bad.
> I don't know what circles you are involved in but 25-35 % is consistent with for many of my cohort in Sydney.
Absolutely, Sydney is an abhorant place to live and always has been. You spend a lot of money on transport, rent, food - everything. I'm not sure that those living in Sydney though - the most expensive capital city in the country - would cross the venn diagram with our most vulnerable.
https://www.rta.qld.gov.au/breaklease
https://www.sa.gov.au/topics/housing/renting-and-letting/ren...
The point was breaking a lease did not incur the full cost.
I also never said ‘on average’, https://www.sbs.com.au/news/article/how-much-has-rent-increa... suggests an average of 11% - this is an _average_ not a maximum percentage. Im sure if you look hard enough you’ll find a place that’s reduced rent and another which was increased 1000%.
No, not beyond the normal ways most people benefit (super, investments, etc). I don't work with or contract for the real estate industry.
> The point was breaking a lease did not incur the full cost.
That's interesting. I did look up Victoria and it was as I expected. I've rented all over the country (quite a while ago), so seeing that from SA and QLD was a surprise from me. I looked up the rest for fun:
WA (landlords discretion): https://reiwa.com.au/the-wa-market/resources/articles/can-yo... NSW (you pay X weeks based on percentage served as of 2020): https://www.fairtrading.nsw.gov.au/housing-and-property/rent... NT (landlords discretion): https://nt.gov.au/property/renters/moving-out/breaking-a-lea... ACT (landlords discretion): https://www.acat.act.gov.au/case-types/rental-disputes/termi... TAS (unclear, landlord must make reasonable efforts to find new leasee, but there appear to be a lot of loopholes): https://www.cbos.tas.gov.au/topics/housing/renting/ending-a-...
I'm not sure I agree with "most Australian states" here - by number or by population count - but there's definitely a trend in that direction.
> I also never said ‘on average’,
I know, but it was a bit misleading. I'm sure in low occupancy times there were places that increased rent by over 100%, but cherry picking it wouldn't be reflective of reality. I was simply clarifying to the non informed reader that the rent increases we're seeing - whilst high - are not as bad as that.
Every office turned into an apartment opens up space both by increasing remote workers and tenants. Convert enough, and both the newly-remote employees and those with jobs which require in-person get a virtual pay increase from decreased rent.
(I get in some sense that offices can't just be turned into apartments: you need to change the layout, install sound-proof walls and furniture, and there will be rooms without windows which presumably can't be rented. But also, many people are desperate for some kind of place to stay, so it seems like an office-cheaply-converted-into-suite would suffice)
Office building floors are concrete, usually. You cannot dictate where plumbing goes. Drain pipes are ruled by the iron fist of gravity. And down is technically in your downstairs neighbor's space.
Skyscrapers are much more difficult to convert (there's an NYT article on it).
Midrise buildings might be the best bet, but even then unless you allow "basically slumlord" conversions, it's probably simpler to knock and rebuild, even if you disguise it by leaving the outer walls up or something.
But the taller office buildings are much harder to convert, not impossible, and can lead to some stunning excesses (like really high ceilings with horrible heating costs) that wouldn't be possible in a direct for residential build.
> , some of them even make the plumbing added look more of an industrial design
This was probably out of necessity rather than aesthetics, but again, hipsters (especially rich ones) love this stuff.
It’s true that the $/sq ft value of post-conversion will be lower than pre-conversion but the idea that the building is negative value is nonsense. Sell each floor as a single unit unrentable condo for $1M, and let the new occupant put whatever floor plan they want in.
Office buildings have very few structural walls because companies frequently change floor plans.
Most of the articles I’ve seen saying the above is hard assume that building that the current owners of the buildings must turn a profit.
Similarly, they assume building codes are immutable. The buildings have safe fire exit routes, and adequate light. So, relax window requirements for individual rooms on the condition that each unit’s perimeter is at least N% window.
https://podcasts.apple.com/us/podcast/what-it-really-takes-t...
It is from this interview that I learned that the plumbing often has to be entirely redone.
So it just makes more financial sense to find a smaller building to upsize or one in more disrepair to demolish and rebuild than to convert a perfectly fine office building.
What?? Not saying the conversion is cheap but come on, the building is already there.
Residential: Bah; Dormitory: Yay!
In brief: [Charlie Munger—billionaire vice chairman of Warren Buffet's Berkshire Hathaway] has offered UCSB more than $200 million to build this dorm to his designs, which will cost an estimated $1.2 billion. The structure is a giant block in which almost none of the rooms have windows.
https://www.architectmagazine.com/design/buildings/the-munge...
Also, the Munger interview here is pretty funny: https://www.architecturalrecord.com/articles/15378-exclusive...
Then there's other code considerations like windows and fire exit distance requirements that become harder to meet once you start adding walls.
If you have to move all the floors, walls, utilities, elevators, and exits, how much of the original building are you actually leaving intact? Often times, even after doing all that, a conversion still isn't viable because there's just too much floor area and not enough windows to make any layout that isn't a 10k sqft single room studio viable.
They’re probably worth less per square foot than a bunch of smaller apartments, but they’re still worth way more than a typical N bedroom apartment.
You can always build rooms out of dividers, etc to break up the space.
The solution is dorm-style housing. Shared bathrooms to reduce plumbing requirements. Waiver of window requirements for internal rooms, possibly even units.
New York has a couple of these left, and they’re popular with young people first moving to the city. (Shared bathrooms. Units without windows are also popular, but they are illegal.) Unfortunately, it’s largely against code, and not for safety reasons.
And commercial buildings are often just knocked down and a new one built because that's cheaper.
It's lack of natural light and the size of the typical floor plate for offices that often render the projects impossible without significant structural rework.
This building in manhattan is in the range of ~$400/500/sqft to renovate existing offices to apts [1]. ANd that's with concessions from Adams in NYC to allow for windowless office rooms in the space.
Still likely better economics than a ground up rebuild, but likely only because the project can be completed and permitted much faster than a ground up project in big cities.
1 - https://gothamist.com/news/the-countrys-biggest-office-to-ap...
If one office among many is closing down, that puts these homes right in the centre of the action. That might make for a good residence and justify the cost. But if swaths of offices are closing down, as suggested earlier, there won't be any nearby work left. Why would people want to live in those converted buildings?
"the building is already there" can be said about any ghost town. Hell, in those ghost towns, many of those buildings are houses already. There being a building isn't a compelling enough reason to want to live somewhere.
If housing prices are still unnaturally high (putting pressure on other industries) then solve all the other issues beyond zoning: pro-NIMBY municipal policy, fire any politician/counselor who uses the phrase "rent control", eliminate height restrictions, streamline inefficient/byzantine development regulations and licensing, modernize and reform unions that slow housing development to preserve the original intended societal benefits of unions without the legacy cruft generating all the negative baggage, etc.
is the only thing stopping better housing ideological aversion to subsidizing landlords?
If the landlords cannot find economical ways to turn offices into residential apartments, they won't do it. Therefore, it is in the city's interest to make such a subsidy.
The landlord attempts to sell at a small enough loss to avoid bankruptcy.
If that fails, the lender (which should be collecting enough interest or holding enough insurance to absorb the shock) forecloses and sells at auction to the highest bidder.
The new owner effectively received a subsidy, since they bought way below cost.
Incompetent real estate holding companies and banks go under, increasing future economic efficiency.
If all this is so bad to lead to economic contagion, the government can bail out the retail investors and institutions that got swindled by the wall street folks.
That bailout is some tiny percentage of the cost of bailing out the real estate holders, since all the fiscally irresponsible companies that went under act as ablative shielding.
However, this will take years, if not a decade or two. The reason being that the real estate companies knows this is possible, and so is likely diversified, and therefore, can absorb the losses for a long time (as long as they have income elsewhere to make up for it), and hope for a reversal of demand for offices, or wait for organic growth to catch up.
They will not willingly bankrupt themselves and take a loss for no good reason - that's just stupid.
So in the mean time, the offices aren't being used efficiently. If the city is really keen on making good use of the space by making it residential, they can speed this process up by subsidizing.
Commercial leases are usually 10 year deals. Tenants who don’t walk will shrink and have leverage to negotiate.
Real estate ownership has more direct and indirect subsidies than any business other than oil. Their greed shouldn’t be rewarded.
Let the government bailout the bank by buying and auctioning off the distressed asset.
If they do move out, the demand of real estate in the center anyway goes down
Older, prewar buildings are a totally different story.
Basically wherever you see a bunch of mostly empty glass buildings, half of them need to be demolished.
I wonder whether they’d sublet a bunch of rooms to my startup…
Convert your empty office into a data center.
Boom
Also, most of the megacorps running their own datacenters are looking for locations with inexpensive power, inexpensive space, and the potential of outside air cooling. London can do outside air cooling some of the year, but not all of it, and doesn't offer inexpensive space or power as far as I know.
I appreciate entertaining the thought.
Seems like "hey? people need house ng, here are empty spaces..." yeah, not my own thought.