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Billionaire investor Warren Buffett and business partner Charlie Munger see long-term distress in commercial real estate, which could spell trouble for lenders and opportunity for investors. “The buildings don’t go away,” Buffett said.
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The “Oracle of Omaha” is concerned about the ominous outlook for downtowns.
The long-term outlook for foot traffic and a return to the office is expected to stay below pre-pandemic levels for the foreseeable future, according to a recent study by the consulting firm McKinsey.
Warren Buffett and business partner Charlie Munger said they expect turmoil in commercial real estate as a result of the new analysis.
“The buildings don’t go away,” Buffett said at the May 2023 Berkshire Hathaway shareholders meeting, according to Yahoo! Finance. “But the owners do,” Munger added.
The legendary investors are among a growing number who are concerned about the status and outlook of the real estate industry after a decade of growth.
Joe Harvey, CEO of the investment firm Cohen & Steers, said his firm is preparing money to target distressed buildings. But Harvey isn’t ready to buy just yet.
Prices are still falling and are expected to fall even further, Harvey said on a call with investors last week.
“Our expectation has been that prices need to decline 25 percent to 30 percent. To generalize, we believe that we’re about halfway there,” Harvey said, according to a transcript of the company’s earnings call.
“As private real estate furthers its price correction,” Harvey added, “we expect buying opportunities to open up in 2024.”
Cities across the country are facing the highest vacancy rates in 30 years, according to CBRE, paired with the highest interest rates in 22 years. Together, the forces have helped drive down the value of commercial real estate, particularly for office buildings in less desirable submarkets and those without modern amenities.
Meanwhile, the loans for about 1 out of 5 office buildings are coming due by 2026, according to Yardi Systems. In Atlanta, more than 1 out of every 3 office buildings has a loan maturing between now and 2026. More than 1 in 4 buildings in Pittsburgh, Denver and Los Angeles has a loan that’s coming due in the coming years.
The value of many office buildings is falling, and some of those buildings were purchased at a higher price than they’re worth following the market correction. That’s providing an upcoming opportunity for investors with cash to buy low.
Downtowns continue to see major businesses offload space in buildings. On Tuesday, the tech giant Dropbox announced it would pay $79 million to drop 165,000 square feet of space in its San Francisco headquarters, according to a CoStar report.
Munger added that with the “hollowing out of the downtowns,” the country would withstand the ongoing downturn but that current owners will be forced to sell, according to Yahoo! Finance.
The only question is who will be able to buy, as the industry is still slogging through a tight lending environment.
“Lenders aren’t going to want these buildings on their books, and they’re going to want to sell them at a massive discount,” Stream Realty Managing Director Phil Geiger said at a recent event held by Bisnow.
That, in turn, creates an opportunity for investors who are positioned to pick up discounted buildings, he added.
“There’s going to be a lot of people making a lot of money on these buildings in five to seven years,” Geiger said.
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