A weekend topic starting with the Globe and Mail. “China’s housing woes have been exposed by the liquidity crisis at Evergrande. The collapse of the company is not being ruled out as Beijing cracks down on the excessive leverage that fuelled the building orgy of Chinese developers. It was China’s urbanization drive, coupled with a relentless demand for steel to cover the landscape with apartment and office towers and infrastructure, that turned the world’s iron ore producers into fabulous wealth-creation machines. The slowdown in the Chinese property market threatens to end the party. The product that glittered like gold for them for so long is suddenly looking a bit less shiny.”
The New York Post. “Midtown Manhattan is suffering worse than any other neighborhood in the city when it comes to vacant storefronts. Nearly 30 percent of storefronts in New York’s prime business district are empty. A ‘devastating’ lack of office workers means there’s not enough customers to keep retailers up-and-running, according to the Real Estate Board of New York.”
The Commercial Observer. “The pandemic’s impact on New York City’s office market might be worse than anyone thought. The coronavirus erased years of growth in the city’s office sector, and, along with it, $28.6 billion in market value and more than $850 million in property taxes in the city’s 2022 fiscal year, according the New York State Comptroller. A $28.6 billion drop represents a 16.6 percent decline from the full market value of New York City office buildings in the 2021 fiscal year, the first dip in total office property market values in 20 years.”
The Washington Post. “City leaders had hoped that the hustle and bustle of downtown D.C. would be back by July 4. Then it was Labor Day. And now, well into fall, a report questions whether that traditional office culture will fully return and if the pandemic might have permanently altered the heart of the nation’s capital. Office vacancies hit record highs, dozens of restaurants remain closed, and less than 25 percent of employees had returned to their downtown buildings by mid-September — up less than 2 percent from July. In a telltale sign of hard times in downtown Washington, it is difficult to find a shop open for coffee after 4 p.m.”
“The property tax revenue from large office buildings fell by approximately $121 million, caused by a 9.7 percent drop in large office building assessments, according to the report.”
From Bisnow Washington DC. “‘Growth isn’t a given,’ Fivesquares Development principal Andy Altman said. ‘There’s a sense of, ‘Oh, look at the cranes everywhere, this will just go on. We’re now at 700,000 people and it’s just this straight line that’s ascending.’”
“That sentiment is a misguided one that forgets D.C.’s history over the past three decades, said Altman, who served as D.C.’s planning director. In the late 1990s, D.C. agencies were under court-appointed receivership and the city had a junk bond rating, Altman said. ‘There is a danger in not recognizing history can repeat itself,’ Altman said.”
From The Ladder. “Silicon Valley is looking less and less like the booming playground of its heyday. ‘What I hear anecdotally from friends is that it’s pretty much a ghost town now,’ said Max Wesman, chief operating officer of employment screening company GoodHire. Although the region is associated with high salaries, Wesmen believes the cost of living made a permanent move a no-brainer for some. ‘Usually in downtown San Francisco at night, things were pretty dead. But during the day, things were more vibrant. Now, without office workers there during the day, things are going under.’”
The Orange County Register. “A California Association of Realtors consumer survey showed that 35% of home sellers are moving out of state and fewer than 15% were moving to a home in the same county as their last residence. Price gains have been in the double digits for the past two years, rising 11.3% in 2020, with a projected gain this year of 20.3%. The median price of an existing single-family home has risen more than $200,000 during the past two years, or almost $2,000 a week.”
From Everything Lubbock in Texas. “As Lubbock finishes its peak home-buying season, local houses sold for 34 percent more than in the same period five years ago. The average selling price for Lubbock homes in September 2021 was $247,000, more than $70,000 more than the average home price. In September 2016, the average home sold for $184,000. ‘I’ve never seen a market like this,’ President of the Lubbock Association of Realtors Teresa Smith said. ‘It’s shifted to a seller’s market, meaning we’re low on inventory and we have more buyers than we have homes to put them in.’”
From The Week. “This should be China’s ‘hour of reckoning,’ said Megan McArdle at the Washington Post. The reason China is littered with these ‘ghost cities’ is because ‘Chinese savers have few good places to park their cash except for real estate.’ China needs a more open financial system and a more balanced economy even if getting there is ‘brutal.’ China’s situation is dire, said Paul Krugman, and bears ‘a striking resemblance’ to Japan’s in the late 1980s. There, ‘prices of many assets, above all commercial real estate, went completely crazy’ — and then everything crashed.”
The Western Producer. “The looming bankruptcy of a Chinese property developer might not seem to amount to a hill of soybeans, but what happens to Evergrande Group, and all that could follow, might mean a heck of a lot to all Canadian crop and livestock prices. Regardless of low world supplies of many crops, a bad fate for Evergrande could see world commodity demand suddenly shrink, along with commodity prices.”
“‘The Next Real Estate Crisis Could Come from China,’ noted one Oct. 1 headline. That’s scary, because if we throw our minds back to 2007, we might recall the financial crisis that erupted after the United States subprime mortgage market went into freefall and all sorts of banks, investment funds, insurance companies and pension plans around the world faced ruin from what had seemed an obscure part of the market.”
“How does that feed into commodity and agriculture demand? It’s a potential killer of general demand — around the world. One of China’s main economic engines has been homebuilding, which consumes much more of the country’s capital investment than countries like Canada. The industry employs millions, and the personal wealth of tens of millions of Chinese homeowners depends upon the health of its housing market.”
“If Evergrande goes bust the whole industry, which more and more seems like a house of cards, could collapse. That would be bad for demand for steel, coal, copper and other industrial commodities used in construction. If property developers like Evergrande go broke, that would be bad for Chinese banks and investors. If those financial institutions and investors slide into trouble, or just get scared, they could suck in all their credit and capital from all sectors and leave the Chinese economy gasping for air.”
“That sort of thing tends to cause a financial crisis, and those have tended to spread worldwide since the late 1990s, because investors around the world, including everybody’s pension plans, are often knee-deep in dodgy foreign ‘assets’ like Evergrande. The domino effect of one bad debt causing many others to fail is known as ‘contagion.’ And that tends to see even surviving companies slash investment, cut jobs and become very conservative. That’s bad for commodity demand. And millions of people lose their jobs, which tends to lead to much less consumer consumption of goods, services and even food.”
“It’s the sort of contained risk that can become uncontained pretty fast and wipe away all those juicy ag commodity prices that are making the future look so nice right now.”