Moneybeat: The state of commercial real estate

JENNY ROUGH, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN: Well, good morning Nick, good to be with you.

EICHER: David, I noticed a story in The New York Times, interesting trend piece on trouble for commercial real estate. And it goes along with the trend of remote work and people dropping out of the labor force to quote the Times, “leaving some once-bustling office buildings largely empty.”

Reporter Jeanna Smialek called it a slow-burning crisis. And for banks holding a big chunk of America’s commercial real estate debt, it’s placed them in the hot seat.

I know you pay close attention to the real estate market overall, is this a big story?

BAHNSEN: Well, we pay probably more attention to commercial real estate than we do even residential because commercial real estate is such an investable asset class. And it is a discussion that I think needs to happen. I think there is so much bad information. This story for The New York Times was hilarious in the sense that it’s kind of a cut and paste of an article that was written a year ago, two years ago, two and a half years ago.

But let’s just start with the obvious thing. Commercial real estate is a very unhelpful term. Are we talking about data centers? Are we talking about multifamily like apartment buildings? Are we talking about industrial warehouses, retail shopping centers, hotels? Which is a space I’m heavily invested in. And we do a lot on behalf of clients. Are we talking about office space? All of that is technically commercial real estate. Self storage is another example. I would argue that each one of those is entirely different. And then if you just talk about the office, are you talking about Class A office? And if you’re talking about Class A, are you talking about New York City? Are you talking about San Francisco? New York City last year had the most leases signed over $100 a foot in history. But these are really nice Class A offices. The Class B and Class C, the kind of lower quality older, has a much higher vacancy than it’s used to having. San Francisco is in a very different position than Houston, Texas is.

Now all of it is impacted by interest rates, of course. So then you have to distinguish between that, where loans have a fixed rate that lasts a little while longer, and those that are about to have a rate that will reset. But Nick, I’ll tell you what we’re seeing over and over, is lenders don’t want the keys back where borrower is in trouble. They over borrowed and have a high rate and the cash flows of the building won’t cover debt service. They’re amending and extending is the term we use. Amending and extending terms to avoid a default. There are still some defaults. There always have been. Is it a systemic crisis? Not even close.

This week, that story about the New York Community Bancorp that is running into issues with some of its lenders. It happens to be a Community Bancorp that focuses on lending to rent stabilized apartment buildings where the landlords have seen costs go up and they can’t raise the rents. I think that says more about the folly of government forced rent stabilization programs than it does about the current lay of the land. This will shake out further. We’ll see where things go with the Fed tightening and what the aftermath ends up being. But I would say that certain aspects of commercial real estate are doing better than they’ve ever done. Some parts are struggling and others are just subject to laws of supply and demand. Apartment buildings, for example, were flourishing. Rents were going up way too much. Now costs have gone up and I think they overbuilt in certain cities. There’s probably a glut of new product and so it’s going to be very, very diverse how this plays out in different pockets of the country.

EICHER: One of the Federal Reserve banks that tracks these numbers issued a report last week saying that as of last year, Mexico officially surpassed China as the number one exporter of goods to the United States. That was a position China occupied for two decades, so that’s a change. How do you assess this trend?

BAHNSEN: Well, I think it’s already happened that we were impacted, wanting more from Mexico than from China. I think with total trade now, export import combined, Mexico has passed. And it’s, again been known for a while and anticipated, but the only thing I would say that’s significant is it’s going to grow even more. I mean a significant amount of the attention at disintermediating China in our supply chain. A significant amount of deglobalization is leading not to Ohio and Arizona, but to Mexico. And so there that’s on the margin better at national security. Depending on what the product is, the labor cost in Mexico maintains the advantage that China had in labor cost many, many years ago. And so they’re still again, trying to sell a significant trading partner. But it shouldn’t be a surprise that a lot of the replacement has moved to Mexico. And there’s a lot of agricultural advantage. And of course, just on the cost, people can imagine, doesn’t cost as much to ship something from Mexico to the United States as it does from China. So those are the factors that play in there Nick.

EICHER: Alright, speaking of global trade, David, let’s close out with an appropriate Defining Terms for this week.

BAHNSEN: I want to talk about the term Forex, foreign exchange. It gets said all the time in the context of currency, and so Forex is obviously just a shorthand for foreign exchange, and particularly the foreign exchange of currency. The reason I bring this up, is that you hear people say a lot, the dollar is going down, or the dollar is going up. But of course, that doesn’t make any sense apart from the exchange. The dollar doesn’t go up or down, the yen doesn’t go up or down, the euro doesn’t go up or down, apart from its relationship to another currency. And that’s what Forex means is the exchange rate. You know, one dollar for one euro is an even exchange rate, that’s real simple. But when all of a sudden it’s $1.20 to get one euro, then you’ve got a different value across two currencies. And those things fluctuate. They go up and down, based on all sorts of different market circumstances. And I think that when people think about a strong dollar or a weak dollar, they ought to keep in mind that by definition, currencies have value relative to one another. And that’s what Forex, foreign exchange means.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. David’s personal website is Bahnsen.com. His Dividend Cafe each week you can find at dividendcafe.com.

Thank you, David!

BAHNSEN: Great being with you, Nick. Thanks so much.

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