Several months after WeWork’s failed IPO — resulting in a bailout from SoftBank, the international money-losing office-sharing company leased just four new sites for a combined 184,00 sq. Ft. of space in 4Q19, marking a 93% plunge from its quarterly average rate of 2.54 million sq. Ft. over the last four quarters, according to data from real estate firm CBRE shared with CNBC.
The abrupt slowdown in leasing activity comes as the WeWork’s valuation imploded last August after it shelved its IPO and ran out of cash a month later, forcing its largest investor, SoftBank, to conduct an emergency bailout to rescue the company.
With a questionable business model and no plans on turning a profit, WeWork’s valuation plunged from $47 billion in late 2018 to $8 to $10 billion by 4Q19.
In 4Q19, WeWork had to cut costs, lay off workers, and scale back operations across the world to avoid going bankrupt. In return, the company lost the top spot in the flexible office leasing space to Regus, which in 4Q19, increased lease footprint by 11% to 284,916 sq. Ft.
CBRE showed that industrywide, there was a significant pullback in office space leasing, mainly due to WeWork’s implosion.
Data shows office sharing operators declined to 1 million sq. Ft. in 4Q19 from 4 million sq. ft. in 3Q19.
Manhattan was the top city for office sharing space, even though new space leased dropped 82% to 187,078 sq. Ft., on average, the prior four quarters. Activity in Chicago, Boston, and Los Angeles also saw notable declines over the period.
“We had seen this coming right after the IPO news,” said Julie Whelan, senior director of research at CBRE, who warned it could be a bumpy ride for WeWork and other office space sharing companies in 2020.
(Ryan McMaken) Not every square inch of the planet earth is suitable for a housing development. Flood plains are not great places to build homes. A grove of trees adjacent to a tinder-dry national forest is not ideal for a dream home. AndCalifornia’s chaparral ecosystemsare risky places for neighborhoods.
This is nothing new. While people many Americans who live back East may imagine that something must be deeply wrong when they hear about fires out West, the fact is things are different in North Americawest of the hundredth meridian. The West is more prone to extreme temperatures, hundred-year droughts, and fires in the wilderness. Many of these ecosystems evolved with this fire risk.
It’s also not enough to blame the growing devastation of recent wildfires solely on climate change, researchers said. While drier, warmer conditions have lengthened the fire season and likely increased the severity of the blazes, wildfires are only destroying more homes today than decades before because of rapid growth in rural areas.
It’s not that fires are more devastating in the natural sense. The problem is that human beings insist on putting their property in places where fires have long destroyed the landscape, over and over again.
The Bee continues:
[T]he fires aren’t getting closer to us — we’re getting closer to the fires. “We’re seeing wildfires that have always been a part of the landscape that are now interacting more and more with us…”
Strader studied wildfire history in the western United States going back three decades, then mapped population growth in areas where fire activity had ranged from medium to very high. His research determined there were 600,000 homes in fire prone areas in the West in 1940. Today, that number is around 7 million.
So, why do people keep building homes in these places? Part of it is natural populations growth, of course. But the manner and rapidity with which this development expands out into the fringes of metro areas is also partly due to government policy and infrastructure.
In an unhampered market, it would be very expensive to extend a new neighborhood out into ever-further-out regions near metro areas. In order to reach these places, housing developers would need to find a way to finance both the new housing construction and the roads that give access to them. Certainly, developers often provide part of the funding through development fees demanded by governments. But these roads are often also subsidized by state and local governments, especially in the form of ongoing maintenance. Once a road to a new semi-rural community is built, governments will often maintain it, while spreading the cost across all the jurisdiction’s taxpayers.
This system of subsidy allows more rapid and more dispersed development. Unsubsidized roads would tend to force more close-in and more dense development.
The federal development also subsidizes the construction of larger and more sprawling residential property through the FHA insurance programs and government-sponsored enterprises like Fannie Mae. By purchasing home loans on the secondary market, the GSEs push more liquidity into the home loan market, making loans cheaper, and pushing up demand for larger, sprawling developments.
Many conservatives often speak of density in residential and commercial development as if it were some kind of left-wing conspiracy. It is assumed that few people would opt for density were there not left-wing urban planners to force it on everyone.
But the reality is that in an unhampered market, density levels would be higher than they are now, because sprawl would be (all else remaining equal) much more costly to consumers than is now the case.
In light of the increasing fire danger to homes, many left-wing advocates favor changing California’s housing development patterns. But they can only point toward more restrictive government regulations. The Los Angeles Times editorial board, for example, complains that “Land-use decisions are made by local elected officials and they’ve proven themselves unwilling to say no to dangerous sprawl development …”
But government prohibitions aren’t necessary. If people insist on building and selling homes in fire-prone areas, let them be the ones to cover all the costs. This includes the cost of fire mitigation and rebuilding after fire. This in itself would limit development in these areas.
And yet, while California pundits are complaining that policymakers aren’t doing enough, California politicians are actively taking steps to keep the market from correcting the excessive building in fire-prone areas.
The state said its moratorium applies to about 800,000 homes, and more areas are expected to be added.
A state law passed last year allows the California Department of Insurance to require insurers to renew residential policies for one year in ZIP Codes that have been affected by declared wildfire disasters.
Previously, insurers had to renew policies for homeowners who suffered a total loss. The current law extends to all policyholders in an affected area, regardless of whether they experienced a loss.
Not surprisingly, many homeowners in fire-prone areas of the state are having problems finding fire insurance for their homes. And they often pay handsomely when they do find it. That’s too bad for the owners, but this fact doesn’t justify handing down state mandates that insurance companies continue to cover people who have taken on unacceptably high risk.
By stepping in to force insurance companies to cover these homeowners, California politicians are doing two things:
They’re continuing the cycle of encouraging home buyers to buy homes in areas likely to fall victim to wildfires.
At the same time, regulators are increasing the costs incurred by insurance companies, and this will likely have the effect of driving up the price of fire insurance for homeowners who more prudently declined to purchase a house in fire-prone areas.
We’re now seeing a similar type of moral hazard at work in California.
In a more sane political environment, however, those who insist on living in the way of wildfires would have to assume the risk of doing so, rather than demanding politicians force the cost on insurance companies and taxpayers.
A darkening outlook for China’s economy continues to materialize week by week.
New data from commercial property group CBRE warns the country’s office vacancy rate has just surged to the highest since the financial crisis of 2007–2008, first reported by Bloomberg.
CBRE said the vacancy rate for commercial office space in 17 major cities rose to 21.5% in 3Q19, a level not seen since the global economy was melting down in 2008.
Sam Xie, CBRE’s head of research in China, said the recent “spike” in vacancies is one of the worst since the last financial crisis.
Catherine Chen, Cushman & Wakefield’s head of research for Greater China, toldFinancial Timesthat soaring commercial office vacancies in China was mainly due to dwindling demand, but not oversupplied conditions.
“Contributing factors included slower expansion of co-working operators and financial services companies, and a general cost-saving strategy adopted by most tenants given ongoing trade tensions and economic growth slowdown,” she added.
Henry Chin, head of research for Asia Pacific at CBRE, told Financial Times that macroeconomic headwinds relating to the trade war between the US and China were also a significant factor in rising office vacancies.
As shown in the Bloomberg chart below, using CBRE data, Shanghai and Shenzhen had the highest office vacancies than any other city, and both had around 20% of office spaces dormant.
And with the global economy in a synchronized slowdown, global growth estimates are now printing at 3%, the slowest pace since the financial crisis. The Chinese economy will likely continue to slow, and could see domestic growth under 6% this year. This suggests that China’s office space vacancies will continue to rise through year-end.Office Vacancies In China Hit Decade High Amid Economic Turmoil
We are living in an age of records in the financial world. The stock market is in its longest bull market in history and near all-time highs. The world has more debt than ever before while interest rates are near record lows, and some are negative in many countries for the first time ever. Nick Barisheff, CEO of Bullion Management Group (BMG), is seeing a dark ending for the era of financial records. Barisheff explains,
“I have been in the business for 40 years, and this is the first time we have had a simultaneous triple bubble, a bubble in real estate, stocks and bonds all at the same time. In 1999, it was a stock bubble. In 2007, it was a real estate bubble. This time, we’ve got a triple simultaneous bubble. So, when we have the correction, it’s going to be massive. Value calculations on equities say it’s worse than 1999, and in some cases worse than 1929. The big problem is this triple bubble is sitting on a mountain of debt like never before.”
What is going to be the reaction to this record bubble in everything crashing? Barisheff says, “I think you are going to be getting riots in the streets. It’s already happening in California. CalPERS is the pension fund administrator for a lot of the pension funds in California. So, already retired teachers, firefighters and policemen that are sitting in retirement getting their pension checks all got letters saying sorry, your pension checks from now on are going to be reduced by 60%. How do you get by then?”
What happens if the meltdown picks up speed and casualties? Barisheff says,
“I think the only option will be for the government is to print more money and postpone the problem yet a little bit longer, but that leads to massive inflation and eventually hyperinflation. Every fiat currency that has ever existed has always ended in hyperinflation, every single one. Since 1800, there have been 56 hyper inflations. Hyperinflation is defined as 50% inflation per month. That’s where we are going and what other choice is there?”
So, what do you do? Barisheff says,
“In the U.S. dollar since 2000, gold is up an average of 9.4% per year. In some countries, it’s up 14% and so on. If you take the overall average of all the countries, the average increase is 10% a year. Every time Warren Buffett is on CNBC, he seems to go out of his way to disparage gold, but if you look at a chart of Berkshire Hathaway and gold, gold has outperformed Berkshire Hathaway. . . Everybody worships Warren Buffett as the best investor in the world, and gold has outperformed his fund in U.S. dollars. I would not disparage gold if I were him. I’d keep quiet about it.”
There is a first for Barisheff, too, in this financial environment. He says for the first time ever, he’s “100% invested in gold” as a percentage of his portfolio. He says the bottom “is in for gold,” and “the bottom is in for silver, too.”
Barisheff contends that with the record bubbles and the record debt, both gold and silver will be setting new all-time high records as well in the not-so-distant future.
Join Greg Hunter of USAWatchdog.com as he goes One-on-One with Nick Barisheff, CEO of BMG and the author of the popular book“$10,000 Gold.”
(ZeroHedge) In a stunning rebuke, echoing very closely our own concerns, Boston Fed President Eric Rosengren has – without naming-names – called out the WeWork business model as being a systemic risk to the US economy.
Two weeks ago we asked (rhetorically)…
What happens to the US CRE market when We files for bankruptcy
While the collapse and/or bankruptcy of WeWork would hardly lead to a personal finance disaster – SoftBank’s Masayoshi Son is already Japan’s richest man and with a net worth of over $20 billion can easily stomach losing billions on WeWork (and Uber) – it would send shockwaves across US commercial real estate, as the company is already the single biggest tenant in New York City, as well as Chicago, Denver and central London.
In fact, with over $47 billion in lease liabilities, WeWork is already one of the world’s largest lessees, trailing only oil exploration giants Petrobras and Sinpec, an astonishing feat for the flexible office space provider “which was founded less than a decade ago, bleeds cash, and doesn’t plan to become profitable any time soon.”
As Bloomberg recently noted, “anyone weighing whether to buy shares in WeWork’s IPO cannot ignore the fact that the company will have to find $47 billion from somewhere in coming years to meet its contractual obligations – including about $10 billion in just the next five years. Right now, its own very negative cash flows won’t cut it.”
Mr. Rosengren noted the risks posed by commercial real estate, which have long been a concern of his, as a possible vector to amplify trouble.
Without naming any firms, Mr. Rosengren noted the particular concerns posed by co-working companies. He made this comment as the parent of office-sharing firm WeWork postponed its initial public offering amid investor doubts about its valuation and concerns about its corporate governance.
Office-sharing firms are particularly exposed to risks should the economy run into trouble, and could wound landlords in the process, Mr. Rosengren said.
“In a downturn the co-working company would be exposed to the loss of tenant income, which puts both them and the property owner at risk if they cannot make lease payments to the owner of the building,” he said.
“I am concerned that commercial real estate losses will be larger in the next downturn because of this growing feature of the real estate market, which could ultimately make runs and vacancies more likely due to this new leasing model,” Mr. Rosengren said.
“The fact that the shared office model relies on small-company tenants with short-term leases, combined with the potential lack of recourse for the property owner, is potentially problematic in a recession. This also raises the issue of whether bank loans to property owners in cities with major penetration by co-working models could experience a higher incidence of default and greater loss-given-defaults than we have seen historically.”
Of course, he is right.As we concluded more explicitly,in a bankruptcy, all those obligations would be frozen and squeezed among all the other pre-petition claims, which of course means that the commercial real estate market of cities where WeWork is especially active – like New York and London (and Rosengren’s Boston) – would suddenly find itself paralyzed, as a deflationary tsunami is unleashed among one of the strongest performing markets since the financial crisis.
(Nathanael Johnson) California is facing yet another real estate-related crisis, but we’re not talking about its sky-high home prices. According to newly released data, it’s simply become too risky to insure houses in big swaths of the wildfire-prone state.
Last winter whenwe wrote about home insurance rates possibly going upin the wake of California’s massive, deadly fires, the insurance industry representatives we interviewed were skeptical. They noted that the stories circulating in the media about people in forested areas losing their homeowners’ insurance was based on anecdotes, not data. But now, the data is in and it’s really happening: Insurance companies aren’t renewing policies areas climate scientists say are likely to burn in giant wildfires in coming years.
If governments don’t step in, that kills mortgages, so what comes next? Only all cash buys? Seller financing? And if property values in these areas decline, as they ought to, bye bye local government budgets.
In some ways, this news is not surprising. According to a recent survey of insurance actuaries (the people who calculate insurance risks and premiums based on available data), the industry ranked climate change as the top risk for 2019, beating out concerns over cyber damages, financial instability, and terrorism. While having insurance companies on board with climate science is a good thing for, say, requiring cities to invest in more sustainable infrastructure, it’s bad news for homeowners who can’t simply pick up their lodgings and move elsewhere.
“We are seeing an increasing trend across California where people at risk of wildfires are being non-renewed by their insurer,” said California Insurance Commissioner Ricardo Lara in a statement. “This data should be a wake-up call for state and local policymakers that without action to reduce the risk from extreme wildfires and preserve the insurance market we could see communities unraveling.”
A similar dynamic is likely unfolding across many other Western states, according toreportingfrom the New York Times.
To understand the data coming out of California we can use my own family as an example: A few months after Grist publisheda story about how my parent’s neighborhoodis trying to fortify itself against future forest fires, my mom’s insurer informed her and my stepfather that they’d need to get home insurance elsewhere. For two months they called one insurer after another, but no company would take their premiums. So they turned to thestate program as the insurer of last resort— which costs about three times more than they’d been spending under their previous, private insurer.
My folks have spent a lot of money clearing trees and brush from around their house. They’ve covered the walls in hard-to-burn cement panels, and the roof with metal. But insurance risk maps don’t adjust for these improvements. Instead, insurance companies seem to have made the call that the changing climate, along with years of fire suppression, have made houses in the midst of California’s dry forests a bad bet, and therefore uninsurable.
“For us, because we’ve done good financial planning and our house is paid off, it’s just an extra expense,” said my mom, Gail Johnson Vaughan. “But we have friends who have no choice but to leave.”
Global real estate consultancy firmKnight Frank LLPhas warned that the global synchronized decline in growth coupled with an escalating trade war has heavily weighed on luxury home prices in London, New York, and Hong Kong.
According to Knight Frank’s quarterly index of luxury homes across 46 major cities, prices expanded at an anemic 1.4% in 2Q19 YoY, could see further stagnation through 2H19.
Wealthy buyers pulled back on home buying in the quarter thanks to a global slowdown, trade war anxieties, higher taxes by governments, and restrictions on foreign purchases.
Mansion Globalsaid Vancouver was the hottest real estate market on Knight Frank’s list when luxury home prices surged 30% in 2016, has since crashed to the bottom of the list amid increased taxes on foreign buyers. Vancouver luxury home prices plunged 13.6% in 2Q19 YoY.
Financial hubs like Manhattan and London fell last quarter to the bottom of the list as luxury home prices slid 3.7% and 4.9%, respectively.
Hong Kong recorded zero growth in the quarter thanks to a manufacturing slowdown in China, an escalating trade war, and protests across the city since late March.
However, European cities bucked the trend, recorded solid price growth in 2Q19 YoY, though the growth was muted when compared to 2017-18.
Berlin and Frankfurt were the only two cities out of the 46 to record double-digit price growth for luxury homes. Both cities benefited from a so-called catch-up trade because prices are lower compared to other European cities. Moscow is No. 3 on the list, saw luxury home prices jump 9.5% in 2Q19 YoY.
The downturn in luxury real estate worldwide comes as central banks are frantically dropping interest rates. The Federal Reserve cut rates 25bps for the first time since 2008 last month, along with Central banks in New Zealand, India and Thailand have all recently reduced rates.
The main takeaway from central banks easing points to a global downturn in growth, and resorting to sharp monetary policy action is the attempt to thwart a global recession that would ultimately correct luxury home prices.
“Sluggish economic growth explains the wave of interest rate cuts evident in the last three months as policymakers try to stimulate growth,” wrote Knight Frank in the report.
* * *
As for a composite of all global house prices, Refinitiv Datastream shows price trends started to weaken in 2018, and in some cases, completely reversed like in Australia.
House price growth for OECD countries shows the slowdown started in 2016, a similar move to the 2005 decline.
If it’s luxury real estate or less expensive homes, the trend in price has peaked and could reverse hard into the early 2020s.
Central banks are desperately lowering interest rates as the global economy turns down. Likely, the top is in, prepare for a bust cycle.