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2023-11-08 07:00 by Karl Denninger
in CommercialRE , 386 references
[Comments enabled]  

In a negative real rate environment all sorts of insane things, when analyzed objectively, "work."

As soon as that ends, and end it always must, all those firms either have sufficient operating cash flow and can cover financing at market (that is, positive real rates) or they go out of business.

Fundamentally putting all manner of larded up "pretty" on shared office space is a loser.  MCSNet had its first actual commercial space in a "shared building" environment but there was no tarted up nonsense; the "common areas" were the hallways and elevators, basically.  The office (and what was a bare open-space room we turned into the computer room) spaces were it and as such the overhead for things like the bathrooms (down the hall), hallways and elevators were modest.

The sort of "flexibility" allegedly offered by setups like WeWork is also a liability; with that flexibility comes cost, and then when you add in the "amenities" it gets entirely out of hand.  Never mind the problems generally with offices which the pandemic exposed and remain unresolved; during the pandemic not a care in the world was paid to things like homeless junkies shooting up all over the place because nobody was working downtown.  Well, now people don't want to come back -- not only did they like working at home but in many cases they arbitraged their work situation and moved to lower cost areas as well.  How this tension will resolve is not yet known -- but WeWork was definitely on the wrong side of that equation, both during the pandemic and now.

Given what I'm seeing in the office space situation in most larger cities these guys may well by a canary -- but they're not the only folks in trouble, and exactly how the large cities will deal with the disruption in the office market and its tax implications is a long way from being resolved.

This ride is likely to be a bit bumpy.

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