This is an audio transcript of the Unhedged podcast episode: ‘Where’s the commercial property meltdown?’
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Katie Martin
This time last year, all the cool kids were worrying about a commercial real estate crash. We just had a US banking crisis no less, and massively higher interest rates. And so the big concern was that it was all gonna 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. Thanks for joining us.
Joshua Oliver
Thank you, Katie.
Katie Martin
I promise this won’t hurt a bit. No. We are gonna 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?
Joshua Oliver
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.
Katie Martin
Right.
Joshua Oliver
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. And so if there are kind of similar signs and symptoms people like default to, oh my God, it’s gonna be exactly the same.
Katie Martin
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 gonna happen again, is it?
Joshua Oliver
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? So, commercial property or residential property can have as many problems as it like. And this 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.
Katie Martin
Right. Yes. So let’s flesh that out a bit, right, because you have people like whoever the owners are, they’re institutional investors or they’re private equity companies, I mean, who are they?
Joshua Oliver
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. Whole other story. You know, super-rich people own loads of property.
Katie Martin
They’re just not selling the property.
Joshua Oliver
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 and 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 gone up in value, might be a good time to move. You’re probably in the last year thinking, oh, actually, I’m probably not gonna get a very good price this year. Let’s wait until next year or the year after when I feel like I’m gonna get a good price. And that’s basically the same logic as the commercial property market, right? If you don’t think you’re gonna 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, 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, right, the debt is not being paid down incrementally over time and you’ll just have one big refinancing at the end. And so, you know, we have seen, you know, I think trickle seems to be the word that has been accepted in the property market as the appropriate, you know, responsible vocabulary for the amount of distressed property coming to market, certainly in London.
Katie Martin
And what sort of prices are they achieving?
Joshua Oliver
So to give you an example, great big office building in Canary Wharf went under offer.
Katie Martin
So that’s like London’s big City district, right? All the big gleaming towers.
Joshua Oliver
Big gleaming tower, very large, swank-looking office building went under offer at a 60 per cent discount to the previous price and then didn’t sell. The 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 wanna buy it. Most of these sales have been pulled and they’re but a few. It’s actually because the seller is thinking, hmm, 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 close to the bottom market? Or actually, we don’t know if it’s the bottom of the market. Maybe it’s gonna get better, maybe it’s gonna 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.
Katie Martin
Those guys.
Joshua Oliver
And so, those guys, they are really busy. And so if you’re, you know, if you’re that profile, right, you’ve got a family office, billionaire, whatever.
Katie Martin
I can relate.
Joshua Oliver
Yeah. You know, it was a couple of billion between friends, I would do it too. You don’t have to take debt, right? And you can just buy a £20mn, £30mn, £40mn, you know, 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.
Katie Martin
No way. They’re not going to hold. (Laughter)
Joshua Oliver
Little bugger is getting nothing. (Laughter)
Katie Martin
No, just yet.
Joshua Oliver
Hypothetically, say if you were gonna endow this to your children, 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 gonna be doing what we consider bigger deals in property. And so for the bigger stuff, it’s specific subsectors that are doing OK, like hotels — been a few deals — super luxury retail — so like Bond Street, you know very posh fashion streets. There have been bits and bobs that are OK. But in the mainstream, like if you wanna sell a big office block in London, just wait. Just don’t do that. That’s a bad idea right now.
Katie Martin
Yeah. So deal volume in Europe has fallen to what is 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 gonna be fine tomorrow thing?
Joshua Oliver
Mostly the latter. I mean, hope springs eternal in real estate, I always say, and this is the most optimistic bunch of people you’re ever gonna hope to meet. But that’s also partly because, you know, the brokers wanna 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, right? So when we were looking at the first quarter numbers, which recently came out, you know, there have been a lot of people trying to kind of push the OK, ‘24, you know, 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. So, you know, it is still getting worse. I think, you know, the real estate market has now oriented itself towards the rate cut, right?
Katie Martin
Well, I was gonna ask, is it rate cuts that we need to break this cycle of crapness?
Joshua Oliver
I think it might be rate cuts and is the thing, you know, because people are oriented towards the rate cuts. So part of the problem why things are getting crapper is because the rate cut has been pushed out from where we thought it was gonna be at the beginning of the year, so everyone was a bit more optimistic at the beginning of the year.
Katie Martin
And that’s the same whether you look at US, UK; Europe’s bit of an exception here, but yeah, it’s all been pushed well out since.
Joshua Oliver
I mean it’s the Fed, right? And maybe just a lesser extent, the Bank of England and where is Europe.
Katie Martin
We’ve got to pretend that we’re important too, Josh.
Joshua Oliver
Yeah. But because that’s the next turn and everyone’s sort of mind about where the market’s gonna go. But, you know, when they come out and cut about a quarter or half a per cent or whatever they do and whatever time they do it, it’s not like it’s gonna 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. So I think this could be quite protracted. And it’s not as if, you know, the 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 wanna buy office buildings? You know, it’s gonna take a few rate cuts and some other stuff before maybe that changes.
Katie Martin
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 gonna be sort of generally meh for ages.
Joshua Oliver
I thought one of the rules of Unhedged podcast was that I didn’t have to make falsifiable predictions about the future.
Katie Martin
Sure. But just for argument’s sake. (Laughter)
Joshua Oliver
(Laughter) Let’s say we were journalists.
Katie Martin
(Laughter) Meh, you reckon?
Joshua Oliver
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. There just aren’t enough of them and population’s growing.
Over on the commercial side, there are much more complicated factors in play and, you know, commercial property’s always a bit of a mistake to talk about in general, which we’re going to do. If you’ve ever walked down the street, you may have noticed quite a lot of buildings around.
Katie Martin
Different types of buildings.
Joshua Oliver
Yeah. Imagine that. But, you know, sectors like office, which is big. I mean, offices 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.
Katie Martin
Whereas if you own a data centre, you are cashing in.
Joshua Oliver
You are gonna be a happy person. Yes. If you are a data centre, everybody, you know, is mad for that. They’re mad for labs. They’re reasonably mad for hotels. They’re beginning to think that shopping centres might be cheap enough that they could be interesting, which is, you know, but it’s been a long time since anyone’s been able to say that. And then logistics are just sort of, you know, warehouses and, you know, the link to the whole ecommerce story. Still trucking along decently well but has already become quite expensive. So there is a mixed picture. And it also depends on, you know, the actual business of different lines of real estate and whether anybody wants to be in them.
Katie Martin
Confound you with your detailed, knowledgeable answers. They’re still what we’re looking for at all.
Joshua Oliver
But I, no, I do think big picture, right? 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 in property funds. And so it’s kind of like what quite a lot of people really, if they’re honest about, you know, in their professional moments, are hoping that they just never have to recognise what the value would be to them. And that by the time anything has to happen, the value will have come back up to somewhere a little bit more comfortable. And, 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 manoeuvre compared to the literal OK, 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.
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Katie Martin
Yeah. This has been an interesting chat and we’ve used the word crap I think more than in any other Unhedged podcast, and we haven’t even started talking about crypto yet.
Joshua Oliver
I apologise for lowering the tone.
Katie Martin
But we’re going to talk about crypto in a minute in Long/Short.
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Alrighty, 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?
Joshua Oliver
Do you know what, Katie? It’s about crypto.
Katie Martin
No. Shut the front door. (Laughter)
Joshua Oliver
I never thought I would say this out loud. I am long FTX customers getting some of their money back.
Katie Martin
Amazing scenes. Who knew they would actually get made whole after this whole snafu?
Joshua Oliver
Made whole, big asterisks. Made whole in huge comical air quotes.
Katie Martin
For anyone who’s been living on Mars for the past couple of years, FTX, massive crypto exchange, blew up horribly. Chief executive now imprisoned for the next 25?
Joshua Oliver
Twenty-five years.
Katie Martin
Twenty-five years. Yup, yup, yup. But the people who’d sent this exchange their money got it back.
Joshua Oliver
Well, will get back under certain conditions. 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 Sam Bankman-Fried’s own reckoning, as reported in the FT was . . .
Katie Martin
And oh, I believe you’ve written a book about it, Joshua Oliver, as well. You could buy it in all good bookshops.
Joshua Oliver
Yes, quite true. But the gap, the hole in the balance sheet was supposed to be $9bn.
Katie Martin
That’s a lot of money.
Joshua Oliver
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 know 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, 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 Bankman-Fried’s fault, which we don’t buy for a minute. The argument has been, right, was FTX illiquid or was it insolvent? And I was covering the trial last year and they were making, they were having this argument in federal court. Oh, it was only a liquidity problem. It wasn’t a solvency problem. So he wasn’t lying when he told everybody that the company was fine. At what point does illiquidity become insolvency, right?
Katie Martin
There was no money there, man. It had gone.
Joshua Oliver
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.
Katie Martin
But then you never would have written your book, which is available in all good bookshops.
Joshua Oliver
So, you know, there is such a thing as difference between liquidity and solvency. But like when you get to this kind of the scale, right? The fact that we are 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.
Katie Martin
We are long creditor recovery processes, short crypto bros.
Joshua Oliver
Yes. As always.
Katie Martin
Yes. That’s a good place to be.
Joshua Oliver
Where the money came from obviously is the question. So how do you fill a $9bn hole in a balance sheet? The way it works in bankruptcy is the claims are frozen in their US dollar value on the day that the company went bankrupt. Crypto moves around quite a bit. Recently moved up quite a bit.
Katie Martin
To the moon, to the moon.
Joshua Oliver
To the moon. So the assets, some of the assets that FTX, you know, 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, talking about some of these, you know, are up 10 times, more than 10 times. That really starts to fill the gap.
Katie Martin
Right.
Joshua Oliver
And then on top of that, you add a little bit of like just being organised. 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 on the back of the sofa — you know, bank accounts they 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. This is what bankruptcy professionals do. And then you put on top of that the other thing that then gets some crypto bros going, right?
Katie Martin
Everything gets these guys going there, Josh, I mean.
Joshua Oliver
Yes. Realising the investments from the Alameda Research portfolio. This is the hedge fund that was 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 you shouldn’t have been spent on at all. And those investments, some of them didn’t turn out to be really, really stupid, has in some way perversely started to sound like a vindication. But 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. You’re not getting back the investment gains that you would have made.
Katie Martin
And you paid a consultant.
Joshua Oliver
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 wanna keep on going in terms of the losses, right, equity investors get bugger all.
Katie Martin
All in all, just a bad situation.
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Look, it’s been a pleasure doing business with you. Because you’ve been long and short, we can wrap it up there.
Joshua Oliver
Have I stolen your thunder?
Katie Martin
That’s quite all right. Listeners, we’ll be back in your feed on Tuesday, so listen up then.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta 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/unhedgedoffer. I’m Katie Martin. Thanks for listening.
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What a potty mouth, that Josh Oliver.
Joshua Oliver
I’m sorry. I was just avoiding actually swearing.
Katie Martin
Unbelievable.