The coming crisis in commercial real estate

[MillCreek]

https://www.theatlantic.com/ideas/archive/2023/06/commercial-real-estate-crisis-empty-offices/674310/

The multi-state healthcare system that I work for has been shedding office space like mad by cancelling or not renewing leases and selling buildings.  Most of the 'knowledge workers' are now working from home most of the time.  I went to MBA school with a guy who works for CALPERS, and he says a whole lot of retirement plans have large commercial real estate holdings and any crash in those holdings will impact government's ability to pay pensions, and affect the rest of us who have our retirement savings in funds with commercial real estate exposure.

[French G.]

Been watching this slow motion train wreck since rona Times. AI will make it worse, defund dem cities will make it worse and even with bosses demanding in person work the companies are waking up to the fact that Omaha or some little midwestern hick town has nice offices with good internet and low rent. I am far enough from retiring that I buy more commercial real estate funds.

[MechAg94]

The part of the article I could read mentioned vacancy rates of 25%.  That sounds about right for my employer at the corporate office.  They eliminated a couple floors of office space during COVID.  No assigned desks unless someone has an office.  I think 2 to 3 days a week in the office is what they want.  I think even the managers were reluctant to go back to 5 days a week commuting.  My employer owns the building and leased out the extra space.  I don't know if it in use or not. 

My main question is how much of this is due to the work from home trend and how much is due to the economy.  I would also be curious if there is any location data on vacancies; meaning out in the suburbs or in crowded urban areas.  If I was commuting hours each way to work, I would be switch jobs to avoid commuting again.

[AZRedhawk44]

My main question is how much of this is due to the work from home trend and how much is due to the economy.  I would also be curious if there is any location data on vacancies; meaning out in the suburbs or in crowded urban areas.  If I was commuting hours each way to work, I would be switch jobs to avoid commuting again.

Or the inverse of that.

One of the fastest growing towns in the PHX metro area is Queen Creek.  It's barely even in Maricopa County, and parts of it sprawl into Pinal County.  And Maricopa County is larger than many Eastern Seaboard States.  People commute from Queen Creek in to jobs in Tempe and Phoenix, and it blows my mind why they do that rather than buy a house closer in, in Chandler/Gilbert/Mesa/Tempe.  It'd be one thing if they're getting land and a more rural lifestyle out of it, but they aren't.  Postage stamp lots, cookie cutter homes, planned communities with so many neighborhoods per Walmart and Home Depot and strip mall.

They spend an extra $250 a month in gas, lose an additional 20+ hours a month on commute time, all to avoid a mortgage that might be $100-$200 more a month by buying more expensive property in more central towns.

Arizona has recently banned any more massive masterplanned communities state-wide unless the developer can cite the water source for the community other than aquifer, Colorado River, or Salt/Gila River systems.  Queen Creek already has large sections of town that have water drama.  There's an outfit out there called Johnson Utilities that is apparently just dreadful to be a customer.  A decent sized community north of Scottsdale (Rio Verde) along the Verde River just got told they can't buy Scottsdale municipal water any more and they have to source their own water system, and have been out of pressurized municipal water for months.  There's an ad-hoc system involving trucking water in, but even then there are hold out communities that think that is too expensive and are isolated from the trucked-in water because they don't want to pay what it costs.

Honestly, reading about the Rio Verde situation is kind of comical.  If you go visit the community, it is a bunch of million dollar homes wrapped around a large country club and golf course.  Those poor suffering folk are having to shower at the country club instead of at home!  The horror.

I'm slowly coming to the conclusion that Phoenix is about at max capacity for people (at least for suburbia), barring a major revolution in water distribution processes like bridging the Mississippi and Colorado River systems, or California yielding their Colorado River Compact rights due to a breakthrough in desalination.

Between some folks working from home resulting in less office demand, and inability for new developments to source water, I suspect the next phase in our metro area's development could be renovation of unused office buildings into condos and apartments, increasing urban density and making use of the water allocations given to the established unused commercial buildings.

[MechAg94]

That area is a bit of a special case, but I see it happening in other dry areas as the populations get more dense.  People like the weather as long as they don't actually have to live a desert life. 

[JTHunter]

Hawk, in reading your post, it makes me wonder about the area up around Sedona.  My grandparents used to live in Oak Creek, just off of Jacks Canyon Road and just outside of the Coconino Natl. Forest.  There is the river Oak Creek there and a few miles to the east is the natural spring called Montezuma's Well in Rimrock.  Have you heard of any water problems up there?

[zahc]

I'm worried this could be very, very big. This could make 2008 look like a joke. In fact, it seems like this is provably happening and I don't see any evidence to the contrary. Mostly it's like yeah, there's a huge systemic financial bubble that has been brewing since the mid 20th century and we don't see any way out of it. The "good" news is we don't know when it will burst.

[AZRedhawk44]

Hawk, in reading your post, it makes me wonder about the area up around Sedona.  My grandparents used to live in Oak Creek, just off of Jacks Canyon Road and just outside of the Coconino Natl. Forest.  There is the river Oak Creek there and a few miles to the east is the natural spring called Montezuma's Well in Rimrock.  Have you heard of any water problems up there?

I haven't heard of water problems, but Sedona and Oak Creek are miserable to visit nowadays.  Hwy 89A between Sedona and Flagstaff is damn near a parking lot on weekends.  Quaint rural properties border the highway as it winds its way along Oak Creek and through the mountains, and it's going to ruin the value of the area if the road is widened to accommodate the traffic load.

It doesn't really seem that visitors and tourism alter water consumption that much; the big ticket items are agriculture, industry, and residential sprawl (and in that order of priority).  AZ has just recently rescinded a water permit for an alfalfa hay outfit that was owned by Saudi Arabian interests, using AZ water to grow hay to ship to the Middle East.  You'd think they'd go to Africa, the Urals, or India for something like that.  They'd been doing it here in AZ for decades and we finally hit our water threshold and told them to go elsewhere.

One of my big wants in property I'm shopping for right now is a quality aquifer.  The leading town I'm looking at has the best aquifer in the State, and is located in a high altitude basin receiving runoff from two different ranges that tower another 2500-3000 feet above and direct a good bit of their rainfall down into the town's valley.  Doesn't hurt that there's also a seasonal creek running nearby too, that does go dry part of the year but also could be mistaken for a good river for a couple months as well.

[charby]

Or the inverse of that.

One of the fastest growing towns in the PHX metro area is Queen Creek.  It's barely even in Maricopa County, and parts of it sprawl into Pinal County.  And Maricopa County is larger than many Eastern Seaboard States.  People commute from Queen Creek in to jobs in Tempe and Phoenix, and it blows my mind why they do that rather than buy a house closer in, in Chandler/Gilbert/Mesa/Tempe. 

I'm kind of curious how much faster growing it will be with the latest water issues in PHX? Might make existing property even more valuable and potentially fill up the commercial spaces?

https://www.npr.org/2023/06/01/1179570051/arizona-water-shortages-phoenix-subdivisions

[JTHunter]

I haven't heard of water problems, but Sedona and Oak Creek are miserable to visit nowadays.  Hwy 89A between Sedona and Flagstaff is damn near a parking lot on weekends.  Quaint rural properties border the highway as it winds its way along Oak Creek and through the mountains, and it's going to ruin the value of the area if the road is widened to accommodate the traffic load.

It doesn't really seem that visitors and tourism alter water consumption that much; the big ticket items are agriculture, industry, and residential sprawl (and in that order of priority).  AZ has just recently rescinded a water permit for an alfalfa hay outfit that was owned by Saudi Arabian interests, using AZ water to grow hay to ship to the Middle East.  You'd think they'd go to Africa, the Urals, or India for something like that.  They'd been doing it here in AZ for decades and we finally hit our water threshold and told them to go elsewhere.

One of my big wants in property I'm shopping for right now is a quality aquifer.  The leading town I'm looking at has the best aquifer in the State, and is located in a high altitude basin receiving runoff from two different ranges that tower another 2500-3000 feet above and direct a good bit of their rainfall down into the town's valley.  Doesn't hurt that there's also a seasonal creek running nearby too, that does go dry part of the year but also could be mistaken for a good river for a couple months as well.

Thanks for the info.
A question about 89A - is that the road that goes past Sliderock and up the "switchbacks"?  If it is and what you said about "parking lot", all I can say is "Good grief!".

[AZRedhawk44]

Yup, goes up by Slide Rock and the West Fork Oak Creek Trail.

Pretty worthless as a motorcycle road because of all the Sedona worshippers doing 15mph looking for a bed and breakfast to stop at.  89A is worthless any more as a transportation route or as a spirited recreational ride on a bike or in a sportscar unless you're south of Sedona a good ways, towards Cottonwood/Jerome/Prescott.

[JTHunter]

I loved Jerome!
There used to be a restaurant there in the old schoolhouse with all sorts of books on the walls.  You could "exchange" books freely and they had some good old books.  I believe that this eatery closed and the building has been "rehabbed".