Where’s the commercial property meltdown?

0:06Pushkin. This time last year, all the cool kids were worrying about commercial real estate crash. We just had a US banking crisis, no less, and massively higher interest rates. So the big concern was that it was all going to fall apart and end in tears. Well, we are still waiting. Today on the show, we're asking, it's kind of creaking, but is commercial property actually fine? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the Financial Times in London, and I'm joined by crypto tormentor and property market supremo, Joshua Oliver.

0:49Thanks for joining us. Thank you, Katie. I promise this won't hurt a bit. No, we are going to talk about crypto a little bit towards the end of the show. So stay tuned for that. But first of all, yeah, dude, where is my property crash? I feel as though for the last year, I have been an informal counsellor to various people in the FT and elsewhere in terms of their anxiety about the coming commercial property crash. Right. Because everyone has the same question. Where is it? Partly this is right about 2008 and I think people are very, very, very inclined to fight the last war in markets as in everything.

1:30And so if there are kind of similar signs and symptoms, people like default to, oh my God, it's going to be exactly the same. Yes, bad things happen in banking. and then the price of my primary asset in my life, the most expensive thing I own, falls to the floor. So you think, hang on, that's not going to happen again, is it? And you have these sort of related but not quite the same issues of residential property and commercial property, which are very much tied together, but it's not exactly the same story. The thing about property, right, is what is the price of something until it has been sold?

2:03So commercial property or residential property can have as many problems as it like and the sort of theoretical price can move around. But there is no way really of knowing until deals get done. And there have been like very, very, very few commercial property transactions by historical standards last year. Yeah. So let's flesh that out a bit, right? Because, yeah, people like whoever the owners are, they're institutional investors or they're private equity companies. I mean, who are they? Absolutely everybody you can imagine, right? So institutional investors, your pension fund, dear listener, probably owns a bunch, would like to sell a bunch, but it can't because it can't get the liquidity because there are no deals.

2:42Whole other story. You know, super rich people own loads of property. They're just not selling the property. Well, it's the same as if you have your house, right? You know, in the last year, the housing market in the UK, at least in most countries, has been a bit crap. So if you were thinking about, you know, if you've been thinking, oh, maybe I should sell my house. It's probably got up in value. Might be a good time to move. You're probably in the last year thinking, actually I'm probably not going to get a very good price this year. Let's wait till next year or the year after when I feel like I'm going to get a good price.

3:12And that's basically the same logic as the commercial property market, right? If you don't think you're going to get a good price and you can afford to wait, you will wait. And that is primarily what's been happening. Obviously, you know, the fault in that strategy is if you can't afford to wait and, you know, if you have some reason that you need to sell your house or you have some reason that you need to sell your office building. Those reasons are usually debt related. And obviously, most commercial property carries debt on it. Most of the time, unlike your mortgage, the debt is not being paid down incrementally over time.

3:42It will just have one big refinancing at the end. And so we have seen, I think trickle seems to be the word that has been accepted in the property market as the appropriate, responsible vocabulary for the amount of distressed property coming to market, certainly in London. And what sort of prices are they achieving? So to give you an example, a great big office building in Canary Wharf went under offer. So that's like London's big city district, right? All the big gleaming towers. Big gleaming tower, very large, swank-looking office building, went under offer at a 60 % discount to the previous price and then didn't sell.

4:18The didn't sell bit actually is interesting because it sounds like bad news where it's like, you know, it was already so cheap and then they didn't even want to buy it. Most of these sales have been pulled and there have been a few. it's actually because the seller is thinking looks like those interest rates might get cut I might wait so this is the same thing right unless you literally have to why would you sell at the bottom of the market or post the bottom of the market or actually we don't know if it's the bottom of the market maybe it's going to get better maybe it's going to get worse but that is basically the story what's been powering the amount of volumes that we have had in commercial property has tended to be smaller deals that are being done on the buy side by basically private money, you know, really, really rich people.

5:03And so those guys, they are really busy. And so if you're that profile, right, you've got a family office, billionaire, whatever. I can relate. Yeah, you know, if it was a couple billion between friends, I would do it too. You don't have to take debt, right? And you can just buy a 20, 30, 40 million pound building in London for cash. Must be nice. and that is probably a really good investment because the values are in the tank. So, you know, when you turn around in 25 years and pass this building down to the next generation of the Martin dynasty. No way. They're not getting old. Little bug is getting nothing.

5:46No chance. Just hypothetically say if you were going to endow this to your children. Sure. That's great. That's a generational buying opportunity. Hooray. Those buyers generally have an upper limit in terms of what they can do because without the debt and with the sort of scale of those fortunes, there's relatively few who are going to be doing what we consider bigger deals in property. And so for the bigger stuff, it's specific subsectors that are doing okay, like hotels with a few deals, super luxury retail, so like Bond Street, you know, very posh fashion streets. There have been bits and bobs that are okay, but in the mainstream, like if you want to sell a big office block in London, just wait.

6:25Just don't do that. That's a bad idea right now. So deal volume in Europe has fallen to what is it, the lowest in 13 years or something. So that's like the immediate aftermath of the financial crisis, which was not a good period for property markets. But the people that you speak to, kind of the brokers in the market, are they like sobbing into their lattes and crying down the phone at you about how terrible their lives are? Or are they doing that kind of real estate kind of, oh, it's all going to be fine tomorrow thing? Mostly the latter. I mean, hope springs eternal in real estate, I always say.

6:55And this most optimistic bunch of people you're ever going to hope to meet. But that's also partly because, you know, the brokers want to talk up the market. So, you know, people have been telling me it's going to be great in the next half of whatever year I am currently in since the downturn began. And it keeps on getting worse. When we were looking at the first quarter numbers, which recently came out, there have been a lot of people trying to kind of push, okay, 24, recovery, year, now, down again, getting worse. Even on the really tough comparables of the previous year, which was really crap already, it's even crapper.

7:26So it is still getting worse. I think the real estate market has now oriented itself towards the rate cut, right? Well, I was going to ask, is it rate cuts that we need to break this cycle of crapness? I think it might be rate cuts and is the thing, you know, because people are oriented towards the rate cut. So part of the problem of why things are getting crapper is because the rate cut has been pushed out from where we thought it was going to be at the beginning of the year. So everyone was a bit more optimistic at the beginning of the year. And that's the same whether you look at US, UK, Europe's a bit of an exception here.

7:59But yeah, it's all been pushed well out into the future. I mean, it's Fed, right? And maybe to a lesser extent, the Bank of England and where is Europe? We've got to pretend that we're important too, Josh. Yeah. But because that's the next turn and everyone's sort of mind about where the market's going to go. But, you know, when they come out and cut about a quarter or half a percent or whatever they do in whatever time they do it, it's not like it's going to turn the taps back on immediately. Right. Because the debt still has to come down some ways. The values are still going to be a bit crap.

8:30So I think this could be quite protracted. And it's not as if, you know, first rate cut, then all of a sudden everything starts to get, you know, really, really busy in property. I think people are sort of not talking about around the corner of what happens after a rate cut. And, you know, does that mean that people suddenly want to buy office buildings? You know, it's going to take a few rate cuts and some other stuff before maybe that changes. Yeah. So again, going back to your counselling role for people who own property or think about property, is a crash coming or is it just going to be sort of generally meh for ages?

9:09I thought one of the rules of Unhedged Podcast was that I didn't have to make falsifiable predictions about the future. Sure. But just for argument's sake. Let's say we were journalists. Meh, you reckon? I think, you know, there is a lot more facing up to reality that has to happen in the real estate world. To bracket house prices for a second, because in the UK, you know, there is the shortage, the fundamental underlying shortage that will really support house prices. Right. There just aren't enough of them. The population is growing. Over on the commercial side, there are much more complicated factors in play.

9:45And commercial properties is always a bit of a mistake to talk about in general, which we tend to do. Yes, yes. If you've ever walked down the street, you may have noticed quite a lot of buildings around. Different types of buildings. Yeah. Imagine that. But, you know, sectors like office, which is big. I mean, office is traditionally like, you know, is one of the big three sectors. It's a huge weight in a traditional portfolio. You know, there are big questions about fundamentally the usage and demand for offices. Whereas if you own a data center, you are cashing in. You are going to be a happy person.

10:15Yes. If you own a data center, everybody, you know, is mad for that. They're mad for labs. Yeah. They're reasonably mad for hotels. Yeah. They're beginning to think that shopping centers might be cheap enough, that they could be interesting, which has been a long time since anyone's been able to say that. And then logistics, which is sort of warehouses and linked to the whole e-commerce story, still trucking along decently well, but has already become quite expensive. So there is a mixed picture. And it also depends on the actual business of different lines of real estate and whether anybody wants to be in them.

10:48Confound you with your detailed, knowledgeable answers. That's still what we're looking for at all. I do think big picture, right? Yeah. There's still a gap between where if everybody was forced to sell every building today, where the price would probably come out, you know, and what marks are on people's books at property funds. Yeah. And so it's kind of like what quite a lot of people really, if they're honest, you know, in their confessional moments, are hoping that they just never have to recognize what the value would be today. And that by the time anything has to happen, the value will come back up to somewhere a little bit more comfortable.

11:24And, you know, the valuations in the UK are tougher than they are in, for example, continental Europe, but they still give you a little bit of room for maneuver compared to the literal, okay, you've got to sell it tomorrow, mate, price. And, you know, if people can afford to wait for the market to come back and save them, they definitely will. Yeah. This has been an interesting chat. And we've used the word crap, I think, more than in any other Unhedge podcast. And we haven't even started talking about crypto yet. I apologize for lowering the tone. But we're going to talk about crypto in a minute in long short.

11:57Alrighty, it's time for long short, that part of the show where we go long, a thing we love, short, a thing we hate. It can be anything. Joshua Oliver, what have you got? Do you know what, Katie? It's about crypto. No. Shut the front door. I never thought I would say this out loud. I am long FTX customers getting some of their money back. Amazing scenes. Who knew that they would actually get made whole after this whole snafu? Made whole, big asterisk. Made whole in huge comical air quotes. For anyone who's been living on Mars for the past couple of years, FTX, massive crypto exchange, blew up horribly, chief executive now in prison for the next 25 years.

12:4425 years, yeah, yeah, yeah. But the people who'd sent this exchange their money got it back. Well, we'll get back under certain conditions. Right. So this has been very surprising to people because when FTX went bust, what, November two years ago, people really thought that the reported hole at that time in its balance sheet by the chief executive, of Sam Beckwith-Fried's own reckoning, as reported in the FT, was in and around. Oh, I believe you've written a book about it, Joshua Oliver, as well. You can buy an all good bookshop. Yes, quite true. But the gap, the hole in the balance sheet was supposed to be$9 billion.

13:19That's a lot of money. It is a lot of money. And so it's a little bit of a surprising result that now the professionals running the company in bankruptcy have turned around and said, we think we can pay back all the customers and actually pay them some interest. So you can get back more than you had. But if you've just heard that line kicked around, right, it's so much more complicated than that. And this has led to a regrettable series of hot takes in various corners of the Internet about how maybe the company wasn't really bankrupt and it was all unnecessary that it went bankrupt and it wasn't really Sam Beckman-Fried's fault, which we don't buy for a minute.

13:57The argument has been, right, was FTX illiquid or was it insolvent? and I was covering the trial last year and they were having this argument in federal court. Oh, it was only a liquidity problem. It wasn't a solvency problem. And so he wasn't lying when he told everybody that the company was fine. At what point does illiquidity become insolvency? There was no money there, man. It had gone. It had gone. And if they'd had the money, you would have known because they would have given it back to the customers when they were asked. And this wouldn't have ended up in a big, you know, giant court case.

14:29But then you never would have written your book, which is available in all good bookshops. So, you know, there is such a thing as the difference between liquidity and solvency. But like when you get to this kind of a scale, right, the fact that we're now two years on still talking about maybe they have enough money to pay back some of the people, some of the money. Right. This does not exculpate the previous management of the company for how they were running it. We are long creditor recovery processes, short crypto bros. Yes, as always. Yes, that's a good place to be. Where the money came from, obviously, is the question.

14:59So how do you fill a nine billion dollar hole in the balance sheet? The way it works in bankruptcy is the claims are frozen in their U.S. dollar value on the day that the company went bankrupt. Crypto moves around quite a bit, recently moves up quite a bit. To the moon, to the moon. To the moon. So the assets, some of the assets that FTX bankruptcy team had left are in crypto. Bits of it are Bitcoin, but actually mostly in some more obscure stuff. Solana, to the moon. and this stuff has gone up like crazy. You know, you're talking about some of these, you know, are up 10 times, more than 10 times.

15:36That really starts to fill the gap. And then on top of that, you add a little bit of like just being organized. And if you, it turns out right, if you hire every consultant that you could possibly find and pay them a load of money, they can track down some stuff that the people who were running FTX lost down the back of the sofa, you know, bank accounts that didn't know were there. this is a company that was just being run in a completely chaotic manner. And you give these people enough time. Once you get the consultants in, they will find the money. They've also gone after people to get money back that should be paid out.

16:11This is what bankruptcy professionals do. And then you put on top of that the other thing that then gets some crypto bros going, right? Everything gets these guys going, though, Josh. Yes. Realizing the investments from the Alameda Research Portfolio. This is the hedge fund that was sort of attached to FTX where they were taking the customer's money and spending it. In some cases on investments, not all of those investments turned out to be bad. And the fact that even some of the money that was taken without permission from the customers was spent on investments that it shouldn't have been spent on at all.

16:45And those investments, some of them didn't turn out to be really, really stupid. As in some way perversely started to sound like a vindication, which it just isn't right. Like you weren't allowed to take the money in the first place. and the fact that you've made a little bit of money back on some of those investments does not justify the whole enterprise. But that adds another slice to how do you fill up to the point where you've got enough money to pay out to the creditors. Bearing in mind also that, you know, these people, if you're a customer creditor, you've had to do without your money for a significant period of time.

17:12You're not getting back the investment gains that you would have made. And you've paid a consultant. You've had to pay consultants, which is very galling. You know, the interest is sort of what amount of interest we randomly decided to give you. and also, I mean, if you want to keep on going in terms of the losses, equity investors get bugger all. All in all, just a bad situation. Look, it's been a pleasure doing business with you. Because you've been long and short, we can wrap it up there. Have I stolen your thunder? That's quite all right. Listeners, we'll be back in your feed on Tuesday, so listen up then.

17:48Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

18:35What a potty mouth that Josh Oliver. I'm sorry. I was just avoiding actually swearing.