Look out below! Social media has been lit this week with dire predictions of an imminent global financial collapse because the world’s most valuable real-estate investment firm, Evergrande, is bankrupt. But I think it might actually be a good sign. Anyway, you might be seeing social media hot-takes like this Exhibit A:
Before we talk about China, let’s first see what’s happening here in the States. Let me show you a few recent examples, although there are
many. Our next exhibit is the Washington Business Journal’s unsurprising story yesterday headlined, “
Rosslyn office building acquired for a fraction of its last sale price.”
TIAA paid $145 million for the 300,000-square-foot, 19-story Washington D.C. Xerox Building in 2011. It just sold on January 5th for $25 million. That’s quite a discount.
It’s not only happening in D.C. The commercial real estate fire sale
is ongoing in New York, as well. Just one example from Forbes, in December:
It’s on sale coast to coast on commercial! On the Left Coast, last August
the Daily Mail ran a story reporting that downtown San Fransisco commercial real estate has been marked down to a striking 70% discount:
The “going out for business” sale is even happening, to a somewhat lesser degree, in bright-red states like Florida, where other types of real estate remain sky-high:
I hope it is clear this is nothing unique to China. But now let’s look at the infamous Chinese super-mega investment firm, the MechaGodzilla of Chinese commercial real estate investment. The New York Times ran a story on the Firm’s bankruptcy yesterday:
First of all,
this story is nothing new. Evergrande has been languishing in the slough of default for
two years now, and
last August filed for bankruptcy in the United States. On Monday, a Hong Kong court ordered Evergrande to wind up operations and liquidate the company.
The company’s debt exceeds its assets by over $300 billion in U.S. dollars. At those figures it looks like the second-biggest bankruptcy in history (after Lehman Brothers imploded in 2008 leaving over $600B in unpaid debt). Evergrande still could be the biggest bankruptcy in world history, depending how things shake out.
It was a poorly-kept secret that Evergrande was essentially a subsidiary of the Chinese Communist Party, which has been enthusiastically dabbling in quasi-fascist capitalism the last few decades. The company’s bankruptcy is spreading not just amongst its investors and banks but to odd political contacts, like Harvard, which lost a $115M grant that Evergrande had pledged
for Harvard’s help covering up Covid’s lab origins.
One suspects its those political losses troubling corporate media the most.
It’s the pandemic, stupid. Evergrande defaulted a year into the pandemic. The now-cratering commercial real estate market in the United States followed closely behind. Both can be blamed on our germaphobic experts, who legalized lockdowns and required remote offices and leveraged the laptop class because, while isolating humans might be terrible for a whole lot of reasons, it sure cuts down on transmissible disease.
The idea was you can’t transmit any disease if you don’t contact anybody. No contact, no trace. Simple in concept. Impossible to execute.
Once they prioritized reducing transmissible infections above everything else, the death of the commercial real estate market was a foregone conclusion. It’s one more thing we have to thank the CDC and the other covid “experts” for.
Always look on the bright side. Here’s the thing. One of my commercial litigation practice’s specialties is chapter 11 commercial bankruptcy. It is a complex and high-stakes world of its own. But it is also a miraculous part of our incredibly resilient economic system. Here’s how it works.
Take for example the Xerox building in Washington, DC. In times of major financial disruption, an asset like the Xerox building can get temporarily “stuck.” At the time of sale this month, the Xerox building was at least 40% unoccupied. It was not even earning enough to pay its bank loan. Worse, they couldn’t get any replacement tenants because the rent was too high, which it needed to be to pay the bank loans.
The building couldn’t attract new tenants with lower rates, because then its existing tenants would demand lower rents too, and it would be a financial death spiral.
But a bankruptcy, or a fire-sale liquidation, resets the whole price matrix. A new owner comes in and buys the building for a fraction of the previous price. The new owner can then charge tenants a fraction of the previous rent. This creates opportunities for smaller businesses to move up to locations that used to be financially inaccessible.
Or lower rents could resuscitate the big firms from their work-from-home comas, since the cost of maintaining a commercial office might fall dramatically. Even if not, even if the work-from-home revolution is permanent, we’re seeing a new trend to convert commercial office buildings into residential condos and apartments.
Through the fire-sale process, a “stuck” asset can be converted into a useful, profitable one.
So the Evergrande meltdown, which is not unique, is not new, and is happening in nearly every commercial market, will ultimately spur a good economic result. I’m not saying it will be painless, but I don’t see a global collapse. It could even lead to an improved recovery.
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