The Commercial Real Estate Future: Bankruptcy, Foreclosure, Workout, Value Added Reinvention and Redevelopment

Over the past few decades, the most successful commercial real estate investments have involved owning property in exactly the wrong place at exactly the right time – as long-term structural changes in the U.S. economy and society altered the distribution of businesses and people on the ground. These investments were solutions to the problems of their time.  That raises a question.  Where are the wrong places today, and when will it be the right time?

It is now the wrong time for the limited types of real estate in the limited number of places that have soared in value over the past 20 years.  It is generally acknowledged that the world is in an “everything bubble,” driven by the concentration of income and wealth in fewer hands, and extensive government intervention in the market to keep asset prices high.  Regardless of the income available to support those asset prices, and the consumer spending power available to support that business and investment income.

For real estate and equities, the acronym of the moment is TINO – with one third of the investment grade bonds in the world carrying a negative yield, There Is No Alternative.  While bullishness is generally thought of as optimism, however, it is now actually pessimism, as it presumes low future investment returns, and even losses, are the best that are and will become available.

That is the conclusion one reaches based on the financialization of real estate, as if it were a stock or bond, and not a home, a place, or a service business.  A look around the country, however, shows that today most places are wrong places, and at least some are waiting for the right time.  The end of this post will celebrate the three best examples of creating right places from my 15 years of chronicling commercial real estate.


This is a qualitative look back at what I have learned over those years, while writing research reports on the regional economy and commercial real estate markets for metro areas across the country, analyzing and summarizing economic and real estate data, and reading and summarizing about 1,000 pages of articles, blog posts and reports per quarter.  And also writing a state and local government public policy blog, focused on public finance, land use planning and transportation, in my spare time.

Along with some thoughts on some possible threats to current assumptions underpinning the current pattern of commercial real estate investment, and where I believe things might shift in the next few decades.   I’m interested in long-term structural change, not short-term cyclical change, the kind of change that has led to a shocking reversal in the relative value of suburban and urban real estate over the past four decades, at least in a handful of the most prosperous metropolitan areas.

Broadly speaking the U.S. economy is becoming an unstable inverted pyramid, with investment and development directed toward a limited, high-end slice of the housing market, a limited, high-end slice of the retail market, a small number of growing retail companies, a limited number of fast-growing, oligopolistic firms in a small number of industries, a limited number of “superstar cities” and booming metro areas, and special niche markets driven by the availability of debt-supported spending (student housing) and/or government-funded spending (medical office).   The result has been soaring property values in a limited number of locations, and limited interest elsewhere.

Following the herd means possibly (probably) overpaying and overbuilding, to the point where even the continued prosperity of that demographic, that sector, that company, or that area may not be enough to avoid a failed investment.  These are “crowded trades.”  For example, the super-rich are doing fine, and yet in New York City the price of high-end residences is plunging below what it has cost to build new luxury towers.

On the other hand, admittedly, expanding to invest in now-neglected places, for new firms and new types of businesses, and for non-affluent people, could mean a long wait for a future that may never arrive.  It certainly worked for those who invested in places such as Brooklyn, NY and Wicker Park, in Chicago, in 1980.  But it requires both very low entry prices for property, and cash investment, which together allow creativity and patience without the press of monthly payments.

A review of real estate types – and qualitative risk and opportunity factors – follows.



No type of commercial real estate has taken a bigger hit over the past 40 years than office buildings.  Following the speculative development bubble of the 1980s, when a large share of today’s suburban and Sunbelt inventory was built, average rents fell 40 percent, after adjustment for inflation. With some cyclical variations, and improvements in just some parts of some metro areas, overall office rents and vacancy have never recovered.

That bubble was associated with the financial crisis in the Savings and Loan industry, after it was allowed to broaden its lending from residential to commercial and financed development on an unprecedented scale.   While office development has been restrained and targeted for the 30 years since, however, demand has subsequently fallen due to a reduction in office space per worker.  In part due to information technology and paperless business, in part due to the falling status of college graduates, in part due to an increase in working at home.  The office vacancy rate has remained in double digits virtually everywhere in the country since the year 2000, and in many markets effective rents are lower now than they were then, even without an adjustment for inflation.

If office rents are rising at all, given high overall vacancy, it must be that a large share of the vacant inventory is, in effect, out of the game. Particularly in aging suburbs, and in the exurbs, where large corporate campuses were built during the urban flight era, and are now aging themselves.  Broker reports have begun to provide vacancy rates for “prime Class A” separately from the overall market, to show that for at least some types of space there is demand.

Investors appear to value suburban office buildings, in effect, at zero, basing what they will pay for a property almost exclusively on the value of the current lease(s), amortized as a bond, and the creditworthiness of the tenant(s).  Not only in Frostbelt metros with stagnant populations, but also in Plano, one of the fastest growing suburbs in the fastest growing metro area in the country, the DFW Metroplex.

J.C. Penney moved its headquarters to a corporate campus in Plano from New York City in 1992. Since then, the area has boomed, attracting other big-name tenants and adding thousands of units of housing and millions of square feet of retail.  J.C. Penney took advantage of Plano’s growing popularity in 2014 by selling 240 acres of land around its campus which had greatly increased in value.

Even so, the company that now owns that headquarters might not be able to refinance its loan, and the property is facing possible foreclosure.

Underwriting an office building with a struggling retailer as a major tenant is tricky because prospective lenders have a hard time evaluating and pricing the risk, said Manus Clancy, Trepp’s senior managing director. Uncertainties include whether or not the retailer will survive through the term of the lease and whether or not they could be replaced if they vacated early.

With regard to replacing tenants, I believe the downsizing of space per worker will eventually run its course, due to employer resistance to employees working at home, and employee resistance to ever-smaller workspaces.  But there are two other trends working against the owners of existing office buildings.

First, with weak fundamentals limiting the ability to finance new speculative rental office buildings in all but a few markets, large, profitable firms are developing their own, new, modern owner-occupied buildings, and vacating aging rented space.  I saw this happening all over the country during the past decade.

Second, with more and more industries dominated by a small number of oligopolistic firms, new business formation has fallen across the economy.

And remains low.

In the stock market, higher overall prices are being achieved based on the soaring valuations of a shrinking number of firms – just as had been the case in 1999.  This narrowing of sectors and firms is limiting options of existing office buildings.   In many markets firms such as Amazon, Google, Facebook, Twitter, and WeWork have accounted for a large share of net office occupancy growth over the past decade, even in the limited number of places where there has been actual net occupancy growth.  A reversal of the massive flow of money into this small number of firms could lead to substantial vacancy increase, from already high levels.


Amazon H2Q

This narrowing list of growing companies has concentrated in a narrow set of metro areas, and in those metro areas the cost of development and housing prices have soared.  As a result, rather than being thrilled by their top tier status, most people in those metro areas are being squeezed by a falling standard of living.

And yet high-paid creative jobs keep piling in to the very areas that many people are now desperate to leave.  If anything epitomizes this trend, it is’s H2Q.

Amazon had announced a number of criteria for its second headquarters, supposedly based on the reasons it needed one to begin with — soaring housing prices and congestion in its home city of Seattle, one of the few booming metros that high-end economic activity is collapsing into.  The firm, it claimed, wanted affordable housing, access to mass transit, and a skilled and educated labor force.  And good air service to the rest of the country, including Seattle.

Based on its criteria, I had predicted Amazon would locate HQ2 in Philadelphia, on a site it was offered right next to 30th Street train station, with transit connections to all of metro Philly.  The Philadelphia suburbs feature good schools, and housing that is cheap and becoming available as older people die off or move on.  The city of Philadelphia attracted more young Millennials, proportionately, than any other.  And 30thStreet station is a quick Amtrak ride to New York and Washington DC, with a slightly longer ride to Boston, plus a short commuter rail ride directly to metro Philadelphia’s airport.  Philadelphia has some tech employment, notably at Comcast, and otherwise Amazon is large enough to create its own environment.

Instead Amazon chose to spilt its new headquarters and locate in two of the already booming, crowded, trendy – and extremely expensive metro areas – New York City and Washington DC.  The median existing home price in the vicinity of Crystal City in Arlington, Virginia jumped $100,000 after the announcement, and Amazon faced political blowback in NYC, due to fears of further gentrification.  Recent reporting, moreover, implies the entire process was a farce, and Amazon was always to going to where everyone else was going, and was merely seeking to extract subsidies.

Decades ago every large, growing corporation thought it had to be in the suburbs, just like every other large, growing corporation.   At the time a large, multi-factor study of corporate headquarters location in metropolitan New York found that the most important factor was proximity to Greenwich Country Club.  Decades later, it seems that all has changed is the type of place those making the decisions believe they want to be, or have to be, to be in with the in crowd. If Philadelphia, on the Northeast Corridor, is not an option, what does that say about most of the country?



Like suburban office buildings, retail shopping centers are now apparently valued almost exclusively based on the capitalized value of existing leases, and the creditworthiness of the tenants, as if the buildings themselves have no value, and the land they sit on is not worth very much.  This is a product of decades of overbuilding new shopping centers, to the point where there is far more retail space per capita in the U.S. than elsewhere.   And, recently, the growth of e-commerce.

For more than a decade, in fact, the type of retail property that everyone seems to have wanted to own is national retailer, single tenant, net lease.  No work, no need to identify, nurture and (if necessary) replace independent businesses, just a financial asset – the lease.

The single tenant everyone wants is a super-drug store, because most of its money will be coming from the federal government via Medicare and Medicaid, and not from increasingly constrained consumer demand. Specifically Walgreens, the most successful super-drug chain, which has used its real estate muscle to control more and more of the market by building stores, and then selling them in leaseback deals.  For years it has been common for years for one, two or three of the largest single-property retail investment deals in a metro area over the prior 12 months to have been a 10,000- to 12,000-square-foot Walgreens.  Those Walgreens, or rather those Walgreens leases, have often sold for more than one million-square-foot shopping centers.

Today, with U.S. consumers increasingly indebted, new independent firms having trouble getting access to capital, and e-commerce (notably Amazon) taking more and more of the market, brick and mortar retail expansion is limited to a narrowing set of occupants.  And like Walgreens, firms such as Wegmans in the Northeast, HEB in Texas, Meijer in the Midwest, Dicks Sporting Goods, and Costco prefer with own, new, sometimes government-subsidized owner-occupied stores.

Otherwise, after a boomlet in “aspirational luxury” goods for those who couldn’t actually afford them in the 2000s, most of the retail growth has been in sellers of actual luxury goods in the small number of locations where the global .01 percent – the shrinking share of people who still have money to spend — goes to shop.  A narrowing share of customers.  That and freestanding dollar stores.

There are 83.1 million millennials who shop in a very different way to other generations. They are urban dwellers who tend to live in downtown apartments with limited storage. This is a lifestyle choice that values experience over possession – they’d rather live in the moment than invest in owning things. Retail purchases therefore tend to support lifestyle experiences and have clear delineations of what brings value to their lives.

The choice isn’t just about lifestyle, it is about far lower median wages than prior generations were paid at that age, despite higher educational attainment and labor force participation.

Like millennials, boomers are doing more with less. According to an Insured Retirement Institute (IRI) survey approximately 35 million boomers lack any retirement savings today and cannot afford to retire. A quarter don’t plan to retire until age 70 or later and almost two-thirds are dissatisfied with their economic outlook. Lack of confidence about living comfortably throughout retirement has forced boomers to change their behaviors. Many recognize their lack of financial and retirement planning so they are limiting their current expenses. The youngest boomers know they need to tighten budgets and save now for their future; the same behavior as millennials, creating equally monumental impacts on retail expenditure.

Combined, millennials and baby boomers represent more than half of the U.S. population. Both groups have chosen, or been forced, to spend less and save more.

For decades shopping centers were built for a single purpose – having people move from store to store and buy things – and purposely excluded other types of businesses, where people engaged in other types of activities. In fact many national retailers insisted on leases that limited the occupancy of those centers to other retail tenants, to increase their mutual shopping drawing power.  The single-use separated-use preference of national retailers was reinforced by the simple, single-use preference of lenders and investors, who wanted their investments to follow a particular model that had worked in the past, and eventually by land use regulations.

The result had been the creation of places where every thing a person might want to do required a trip in a motor vehicle.  Even taking a walk. Much to the disappointment of the inventor of the shopping center.

His first mall, built in 1954 in suburban Detroit, was seen as the future of American shopping. Unlike so many of the fully enclosed malls that came after, the two-million square foot center included outdoor space (eventually removed), auditoriums, a bank, a post office, local retailers and a supermarket.  It was an early stab at new urbanism — a chance to shop and run errands without the drawbacks of driving downtown.

But what the typical American mall did become, instead, was a formulaic collection of fully enclosed space occupied mostly by national retailers and surrounded by seas of surface parking. That upset Gruen who said in a 1978 speech, “I refuse to pay alimony for those bastard developments.”

And yet the vacancy rate for retail shopping centers has remained lower than the rate for suburban office buildings.  The reason is many of those shopping centers and big boxes are going through bankruptcy, foreclosure, workout and value added reinvention. Former retail spaces have been converted to offices, medical use, educational uses, and warehouses.  Including self-storage warehouses for things that people couldn’t afford to begin with, and don’t actually need, but do not wish to throw away.

Entertainment is a growing activity.  Suddenly, axe-throwing establishments are popping up everywhere, as if there was a latent American desire to throw an axe after drinking beer.   Elsewhere, one can drink wine and paint pictures. Housing, parks and plazas have been built on what had been parking lots, providing a population that doesn’t have to drive to shop or purchase services.

I can’t help but impressed with how fast the commercial real estate industry has adapted to changing economic and demographic circumstances, and changing consumer preferences.  Cap rates being as low as they are, the assumed property sales price at the end of a holding period is having a far greater impact on IRR and NPV than it once did.  That price has become highly speculative, and based on the potential for the adaptive re-use of the property.

While the commercial real estate industry has adapted quickly, however, most local governments have not adapted at all.  They have maintained commercial use, parking and other code requirements that presume a 1960 to 1990 suburban development and occupancy pattern.  Even in pre-automobile cities, in fact, parking and use regulations enacted during the suburbanization era (in New York City in 1961) would make it impossible to build most of what already exists, let alone what could be.

In post-WWII suburbs, where aging suburbanites resist change, regulations and discretionary approvals impose costs and delays that often exceed the value of the property.

Mind the Gap

Sometimes the rules are enforced, or require expensive, time consuming and politically difficult discretionary approvals to get around. Sometimes they are not, or at least not against everyone.   Knowing what those rules are is essential to understanding the value of a property beyond the end of current leases.



Large-scale economic and demographic changes have worked to the disadvantage of brick and mortar retail, but they have worked to the advantage of apartments – by working to the disadvantage of their tenants.

Starting with the back end of the Baby Boom, each generation has been paid less than the one before, with the Millennials paid 25 percent less on average than Baby Boomers had been, despite higher average educational attainment. Later born generations also have less accumulated wealth than prior generations had at the same age, in part due to higher debts.  They lack the ability to buy owner-occupied houses at current prices.

Late Boomers and those in Generation X also had lower average incomes than those born between 1930 and 1957, but they didn’t live that way for most of their lives.  Instead, they added workers per family, failed to save for retirement, and took on more credit card and cash-out refinancing mortgage debt.  Many ended up in foreclosure after 2008, and in the rental market.

All this should have pushed the price of for-sale housing down. But federal policy has desperately sought to keep the price of for-sale housing high, to preserve the net worth of aging Baby Boomers, the value of their mortgages, and the solvency of financial institutions.  In the aftermath of the financial crisis, financial institutions were allowed – encouraged – to keep foreclosed and delinquent houses off the market, rather than see prices fall to a level that would allow poorer later-born generations to buy without becoming house-poor.

Fannie Mae and Freddie Mac increased the permitted debt to income ratio for a conforming mortgage to 50 percent.  That’s 50 percent of homebuyer income going to debt. Taxes and savings for retirement would come out of the other 50 percent.  All to allow higher prices to be paid to existing homeowners, out of the smaller incomes of later-born buyers.

Wisely, many young households who might have done so in the past have been unwilling (or at least unable) to buy houses, and have stayed in rental housing.  The increase in demand has led to rising rents despite extensive development, and to a squeeze on tenants that has become a major political issue nationwide.  In part because much of that development has targeted a narrow slice of the renting population, the most affluent tenants, leading to both high-end gluts and affordable housing shortages at the same time in the same markets.

That apartment shortage, however, doesn’t have to be resolved by either even higher rents or by more development of more such complexes. Because in reality there is plenty of housing in this country, but much of it is kept empty by local zoning regulations based on the suburban paradigm.

From the 1970s through the 2000s the average size of a new home soared, even as average household size fell.  Government subsidizes – through the tax deduction for mortgage interest – were part of the reason.  In 2005 one author found…

We Americans seem to be in the process of becoming wildly overhoused. Since 1970 the size of the average home has increased 55 percent (to 2,330 square feet), while the size of the average family has decreased 13 percent. Especially among the upper crust, homes have more space and fewer people. We now have rooms specialized by appliances (home computers, entertainment systems and exercise equipment) and — who knows? — may soon reserve them for pets. The long-term consequences of this housing extravaganza are unclear, but they may include the overuse of energy and, ironically, a drain on homeowners’ wealth…

Unless some of that extra space could generate some income.

By the late 2010s there were nearly 240 million bedrooms in owner-occupied housing units, even assuming those in the “five or more bedroom” category had just five.  There were just 211 million people living in those housing units, and 46 million of them were married, meaning they were probably interested in sharing a bedroom.  That means there were 75 million extra bedrooms.  Most of those housing units also had extra bathrooms, often more than one.

It would not take much money, if combined with sweat equity, to add extra rental units to these oversized homes.  Neighboring Baby Boomer suburbanites might resist — unless they needed the income themselves, or their heirs were desperate to find someone willing to buy their parents’ houses.   Eventually, people might just decide that they have every right to use their property differently at different points in their lives, rather than move to a different property for each part of their lifecycle.  Occupying an entire house in middle age when there were children at home, but renting out part of it when they were younger, or older, and living in smaller households.

AirBNB has already demonstrated homeowner interest in using empty bedrooms as a source of income.  The fuzzy line between roomers and boarders, and separate units, provides a loophole through which subdivision into additional housing units could slide, at least in some jurisdictions.   As it did in New York City, where a review of the Census Bureau’s address list for the 2000 Census found an additional 300,000 housing units, many of which had been added to existing buildings without permits.  These sorts of informal arrangements are presumably spreading.

The next step is retroactive legalization, as in Soho in Manhattan where the occupancy of abandoned industrial buildings by artists’ “live-work” quarters in the 1960s was followed by legalization in 1973.  And in Minneapolis, where a coalition of Millennials and less well off people pushed through an end to single-family zoning in 2019, perhaps legalizing the original apartment in the 1970s Mary Tyler Moore Show in the process.

Bottom line:  in the long run apartment owners cannot count on government regulations to maintain a development pattern that Millennials do not want and cannot afford.   The result may be more small-scale competition for large, institutionally owned apartments.


Senior housing

The Baby Boomers, the large generation born between 1947 and 1964, are now between 56 and 73 years old.  The richest generations in U.S. history are now between 62 and 90 years old.  As a result, the market has assumed there will be an ever-growing demand for age-restricted senior housing.  And developers have built accordingly.

High demand for senior housing may be short-lived, however, for two reasons.   In a decade, when less wealthy generations of seniors start reaching old age, they may not be able to afford it, even if they need it.  And the generations now in old age placed a low priority on family ties, and chose to relocate to places where much of the nation’s senior housing is now located.  The generations to follow may have different priorities.

On the affordability front, many who entered the labor force prior to 1980 received defined benefit pensions. And those who purchased long-term care insurance in the 1990s were able to get a high level of benefits that turned out to cost far more than premiums paid.

Eventually all these lucky people will be dead and gone, leaving the future senior housing customer base without these funding sources available. Later-born generations are also likely to have less in home equity to tap.  In part because the average income of later-born generations is so much lower, leading to a need to sell for less, or an inability to sell at all.

The U.S. is at the beginning of a tidal wave of homes hitting the market on the scale of the housing bubble in the mid-2000s. This time it won’t be driven by overbuilding, easy credit or irrational exuberance, but by an inevitable fact of life: the passing of the baby boomer generation….

By 2037, one quarter of the U.S. for-sale housing stock, or roughly 21 million homes will be vacated by seniors. That is more than twice the number of new properties built during a 10-year period that spanned the last housing bubble.

Most of these homes will be concentrated in traditional retirement communities in Arizona and Florida, according to Zillow, or parts of the Rust Belt that have been losing population for decades. A more modest infusion of new housing is expected in pricey coastal neighborhoods of New York or San Francisco where younger Americans are still flocking in large numbers.

In part because home equity may have already been tapped, through cash out refinancings, home equity lines of credit, and/or reverse mortgages, to pay for retirement in the absence of savings.

Are Homeownership Patterns Stable Enough to Tap Home Equity?

A practice that was common during the 2000s housing bubble, and led to many foreclosures, but nonetheless returned once zero percent interest rates caused theoretical values to re-inflate, despite a decrease in sales.

That leaves the government, in reality already the source of most funding for long-term senior care.  But repeated rounds of tax cuts, to benefit the same generations that also benefitted from rich pensions and cheap long-term care insurance, have left the federal government facing a severe long term deficit.  And recently, state and local governments have faced fiscal pressure due to soaring Medicaid costs.  As I noted in this post…

The number of people employed in the Nursing and Residential Care, Home Health Care, and Services for the Elderly and Disabled industries has already started to fall, relative to the population ages 75 or more, in low-tax North Carolina and Florida.  An attempt to limit Medicaid eligibility, as the elderly population soars, may be the reason.  In New York State, where employment in these “senior-related” industries has soared even when measured 1,000 people ages 75-plus, there is now a $6 billion Medicaid-driven state budget deficit.

In the end, a large inventory of senior housing will end up competing for a narrow slice of the old-age population, the affluent people who actually saved rather than spent.  Reuse of that property for other types of housing will be constrained by prior local government approvals.  Suburban and Sunbelt governments often approved multifamily housing only because it was age restricted – and thus would not generate public school children that local taxpayers would need to pay to educate.


Student housing

The demographic trend is already working against private student housing, for which there has been a development boom even as the large Millennial generation was exiting higher education.  Most members of that generation, more likely to have divorced parents, less likely to obtain teenage jobs, and paid a relatively lower inflation-adjusted minimum wage when they did get them, would have been unable to attend school away from home in the absence of an explosion of student loans.  Now that it is clear that a large share of those loans will never be repaid, and higher education enrollment is falling, one wonders where the money will come from to pay for the new dorms.

As I showed here, based on state and local government finances data collected over the decades by the U.S. Census Bureau:

On average charges for services covered 32.9% of the cost of actual education at state colleges and universities from 1988 to 2000, mostly pre-Millennial, and 37.4% from 2001 to 2016.  That’s an increase of 13.6%.  For auxiliary enterprises, on the other hand, charges covered 101.9% of the cost from 1988 to 2000, but just 91.7% 2001 to 2016 – and just 80.6% for 2016 alone.  It would seem that state colleges and universities were left with a lot of stranded costs as the Millennials aged out and enrollment fell.

According to Census Bureau definitions, higher education auxiliary expenditures include dormitories; cafeterias; bookstores; athletic facilities, contests, or events; student activities; lunch rooms; student health services; college unions; college stores, and the like.  After covering their costs for decades, going back to at least the 1970s, these facilities are now a drain on state universities as a whole.  And if there is a high level of vacancy in university-owned housing, those universities have the power to require their students (or some subset of them, such as freshmen and sophomores) to live on campus, to protect their own bottom lines.


The Coming State and Local Government Fiscal Crisis

The loss of patronage for private student housing, and public funding for senior housing, is far from the only way a growing fiscal crisis across state and local government will affect commercial real estate.  As I showed here, based on decades of data reported to the Governments Division of the U.S. Census Bureau, in 2016 the state and local government liabilities implied by public employee pension underfunding, state and local government debt, and inadequate past infrastructure reinvestment equaled 46.9% of the personal income of everyone in the United States.

With some states and areas worse off than others.

Over the past 25 years, I have been surprised to find, $trillions of dollars of commercial real estate investment has taken place without any apparent concern about the tax increases and public service cuts that might eventually result.  Including reductions in infrastructure quality and reliability, public safety, park and other public amenity maintenance, and other diminishment of shared community resources that directly impact the value of property.  And increases in property taxes that hit the commercial real estate bottom line directly.

The market, I am told, does not price in “tail risks” such as state and local government insolvency, or service insolvency.  Even if, in many places, this is not a risk but an inevitability, making the use of the language of probability inappropriate.  The only way out I could see is mass inflation that devalues existing pension promises and debts.  The high inflation of the 1970s, which effectively cut the cost (and value) of its existing debts and pensions in half over a decade is the only thing that allowed New York City to recover from its own fiscal crisis in the 1970s, after much of its housing stock passed 50 years of age and was passed down to the poor.  That is the point where many suburbs, and entire states, are right now.

Making a repeat of the 1970s urban crisis possible in many of them.

Beginnings, Middles, and Ends

And yet it is only in the past two years, and only in a limited number of places, that real estate investors have started to think about the possible impact of the growing state and local government fiscal crisis.  In Illinois, the Federal Reserve Bank of Chicago, examining all the unpalatable options for a state where taxes have already soared and services have already been cut, recommended an additional dedicated state property tax to pay for pension liabilities.

Standard economic theory predicts that home values go down in response to new property taxes (that is, they are “capitalized” into home values). Current homeowners would not be happy about this, but it would be a good result for the Illinois economy. That’s because the new taxes wouldn’t affect people thinking of moving to Illinois. While they would have to pay higher property taxes, that would be offset by not having to pay as much for their new homes. In addition, current homeowners would not be able to avoid the new tax by selling their homes and moving because home prices should reflect the new tax burden quickly.

Imagine paying off all these state and local government liabilities as a mortgage over 30 years.  Even at today’s low interest rates by my estimate this would require U.S. local government property tax revenues to nearly double during that period. The increase would have to be far more than that in some states.

On the infrastructure side, in 2007 property in the vicinity of rail transit stops was identified as the new beachfront property.

Even allowing for a modest increase in stations, only 300,000 of those two billion acres are within walking range of rail transportation. And with many of those acres already built-up, undevelopable, or devoted to untidy necessities like parking, development land in transit station zones has become highly desirable, very rare, and extremely expensive.

Meanwhile, ridership is growing and land planners are working overtime. A Web search for “transit oriented development” yields 592,000 hits, or about 200 for every actual rail station. Every urban and suburban jurisdiction within eyesight of rail transit is looking for mixed-use transit-oriented opportunities.

In the years since $billions, perhaps $trillions, of dollars has been invested in new mixed-use transit-oriented developments in the vicinity of rail transit stops.  Tyson’s Corner, hailed as the auto-oriented exemplar of the inevitable auto-oriented future in Joel Garreau’s Edge Cities, published in 1992, is now staking its future on the extension of the Washington DC metro system, with extensive mixed-use development in proximity to the new stations.  One sees the same pattern in King of Prussia, PA, where an extension of the SEPTA commuter rail system is planned.

What many in the real industry failed to notice, however, is that at the same time that it was investing in development near transit, the public sector was disinvesting in the very transit systems that had attracted that development.  In Washington, the core of the Metro system faced an emergency shutdown on safety grounds, after a series of crashes.  The entire Baltimore metro shut down for months after deterioration made it unsafe.  In Boston, antiquated equipment, long passed its useful life, failed en mass during a snowy winter, leading to shutdowns that lasted weeks.  In New York, a halt on ongoing signal system replacement and an under-the-table return to deferred maintenance led to such a disastrous decline in subway service that a “state of emergency” was declared.

While there has been some investment in new light rail lines and systems over the past two decades, ridership has not increased as fast as vehicle miles traveled.  Meanwhile, motor bus service, and ridership, are plunging.

One also finds deterioration, and the potential for shutdowns, for public water, sewer and bridges across the country.

And in private communities, where an estimated 20 percent of the population now lives, in many cases precisely because they are people who don’t like sharing, the situation may become even more dire when major infrastructure systems installed by the developer come due for major rehabilitation and replacement.

Today buying a piece of property means buying into a collective liability, one that may be hidden, with eventual costs deferred.  Buying property without inspecting that liability is as risky as buying without inspecting the building and its title.  Those existing liabilities should the responsibility of the sellers, not the buyers, and the price should be adjusted to account for them.


A Surplus of Real Estate, A Shortage of Good Places

Everywhere one looks, other than the few booming “superstar” cities and metros that have been attracting the large, oligopolistic companies in the few expanding industries, one finds a surplus of real estate.  Too much aging suburban office space.  Too many suburban shopping centers. Too many empty bedrooms. Too much senior housing. Too much student housing.

And not enough money to pay for it at current prices.

In the 1970s, a similar oversupply of walkable, transit-served urban neighborhoods led to the “urban crisis,” from which most parts of most pre-automobile cities have never recovered.  The result has been a shortage of such places, now that a larger share of those in later-born generations have decided they want to live that way.  As I explained in this post from 2014.

The idea was expanded on by a book by Richard Florida, of the same name, in 2017.

I have lived in and around cities and observed them closely my entire life, and I have been an academic urbanist for more than three decades. I have seen cities decline and die, and I have seen them come back to life. But none of that prepared me for what we face today. Just when it seemed that our cities were really turning a corner, when people and jobs were moving back to them, a host of new urban challenges—from rising inequality to increasingly unaffordable housing and more—started to come to the fore. Seemingly overnight, the much-hoped-for urban revival has turned into a new kind of urban crisis.

Current solutions to this problem involve ever-more concentration into the limited number of major cities that survived the 1970s.   Additional growth is possible in these areas, but only on the margins, and it will be expensive and thus limited only to the best off people and largest firms.  The shortage of development sites, their high costs, and the need to build expensive high-rise buildings, means any new real estate will cost more than virtually anyone and anything can afford.  There is no way to accommodate national, even global demand affordability on a tiny sliver of America’s land.

It was only a couple of decade ago that some believed the internet would herald the end of space and place.  By opening up a global market to local firms located virtually anywhere, and a national or even global job market to workers in low-cost locations.  In the years since it has become easier and easier to work at home, to shop at home, to view entertainment in the home.  And yet the impact of the internet has been the opposite of what had been expected.  Most of the gains, at least thus far, have been captured by the small number of firms that operate it, firms that are concentrated in space, rather than widely dispersed people and firms that use it.

Even with Netflix available on a home viewing screen or smartphone, moreover, young people still go to public parks to view movies projected onto screens – with other people.  The preference for limited in-person social interaction, other than interaction with people screened by a price of admission, turned out to be the preference of a single generation, and only appropriate for one phase of life.

The suburban generations placed low value on family ties and community connections compared with any other prior generation.  Perhaps in reaction to the crime wave and social conflicts of their times, they also placed little value on common space. The suburbs were built for the buyers, who were middle aged, already working, already married, already had friends, already had children, and had neither the time or inclination for interaction with anyone new.

Humans are social animals, and that environment, which in its sidewalk-free post-1980s incarnation even prevented children from playing together unless parents arranged play dates and provided transportation, turned out to be isolating for teens, young adults, and seniors.  So many young adults have packed into the limited number of cities with vibrant economies and shared spaces, but these have become unaffordable.   There is a need to expand the number places that provide a lower cost of living (no need for one car per adult), the availability of social interaction, and a variety of jobs.

As I noted here…

There are in effect three options: reboot more of the older cities that collapsed in the 1970s, create entirely new cities with the characteristics people want today, and/or restructure the suburbs into places that meet today’s preferences. The free market, through big organizations, new small businesses, and individual action, is trying to do all three. But the government, controlled by Generation Greed and special interests, is an obstacle at the federal, state and local level.

Places are created by the real estate industry, the occupants, and the locality, but in the near term future the locality cannot be counted on to hold up its end.  The real estate industry and its customers will have to find a way to create more good places in the absence of assistance, and even in the fact of opposition, by elected officials and their aging suburban constituents.  Low going-in real estate prices, low enough to offset the collective liabilities and obstacles, are part of the solution, not a problem.

Here are three examples of place making from the past 15 years.


Late 2000s:  Caruso Affiliated, Americana at Brand, Glendale CA

Rick Caruso was an early pioneer of the “lifestyle center,” a retail development that combines shopping with entertainment and leisure pursuits. After noting that young adults were moving to converted office buildings in Downtown Los Angeles, he also provided housing for a live-work-play environment in the suburbs.

My interest in this development, however, is based on the battle that was waged to stop it.  As someone with a Masters of Urban and Regional Planning, and as an environmentalist, I’ve been disappointed to see urban planning and environmental review bastardized into NIMBYism and extortion over the past four decades. Projects are routinely opposed, and stalled by lawsuits, for reasons that have nothing to do with either planning or the environment.

Americana at Brand went through a long review process, and was welcomed by the suburban City of Glendale, which had seen many office-based taxpayers depart for nearby cities and needed a boost, with open arms.

City officials hope that the Americana — with high-end shopping, dining and hundreds of new residential units, both condo and rental — can boost sales along the boulevard and bring a touch of urban elegance to a town long known as a little suburban and perhaps a little bland.  “I think it will change Glendale’s reputation from being a sleepy bedroom community to one of the premiere cities in Southern California,” Mayor Ara Najarian said.

In a sign of the embrace Glendale is now extending to Americana, the City Council last month offered to name a street into the complex for Caruso.

The mayor said he expects the $400-million Americana to become a regional draw for Glendale, luring people from all over Southern California. And along with the Glendale Galleria — already one of the region’s biggest shopping malls — Americana could give a significant boost to the city’s sales tax revenue.

Owners of older, nearby shopping centers, however, whipped up opposition, sponsored a referendum to overturn Americana’s approval, financed a lawsuit claiming the environmental review was inadequate, and threatened retailers with retaliation if they opened stores in the new center.

Caruso’s Americana at Brand project would replace 15.5 acres of buildings and parking lots in downtown Glendale with 475,000 square feet of new retail and entertainment uses, and up to 338 residential units. The project site is across the street from the Glendale Galleria, a 1.5-million-square-foot shopping mall owned by General Growth.

The Galleria owners fought the Caruso project during the administrative and environmental review processes, which concluded in 2004 with the city’s certification of an environmental impact report and approval of the project. Because Americana at Brand is a redevelopment project, the city also entered into a disposition and development agreement (DDA) with Caruso. General Growth forced a referendum onto the ballot, but voters in September 2004 narrowly upheld the project’s zoning change, specific plan and development agreement.

General Growth also sued, arguing the development agreement, DDA and EIR were flawed. A trial court judge and the Second District, in an unpublished opinion, rejected the arguments.

Caruso won in court at every turn, a nearly a decade before the YIMBY movement became widely known, and even winning an anti-trust judgment at a time of weak anti-trust enforcement.  Thereby striking a striking a blow for sensible land use planning and environmental regulation in a state where NIMBY activists use environmental litigation to stall bike lanes.

Cyclists Cheer as Judge Finally Frees San Francisco from Bike Injunction


Early 2010s:  Bedrock Detroit, Downtown Detroit

Dan Gilbert made his fortune as a non-bank residential mortgages lender, the same business that saw a large number of bankruptcies during the late 2000s financial crisis.  By that time Gilbert had sold his firm, Rock Capital, to software maker-Intuit, and Gilbert and Intuit turned the renamed Quicken Loans into an internet-based lender across the country.  Gilbert remained as CEO and later bought the company back.  His firm and fortune were large, but as ephemeral as cyberspace.

In his hometown of Detroit, Gilbert would be the first to turn a virtual fortune into a terrestrial empire.   In August 2010, Gilbert moved Quicken Loans and its 1,700 employees to Downtown Detroit.  After decades of urban decline, ending with the equivalent of a Great Depression statewide, not only was the City of Detroit bankrupt, but its downtown was largely abandoned.  In 1995, an urbanist proposed that Downtown be preserved as a ruin, like Acropolis in Athens, as a marker of a bygone age.

Downtown Detroit was worth so little that Gilbert’s new firm, Bedrock Detroit, was able to buy a huge share of it, including many of its most beautiful and once prominent buildings.  Low prices allowed existing office buildings to be redeveloped into new housing, and this attracted young adults (some working at Quicken Loans) who in turn attracted retail and entertainment activities.  Other companies owned by other wealthy Detroit natives and city boosters, notably Mike Illich of Little Caesars pizza, have followed Gilbert downtown, and Downtown Detroit is now the most vibrant community in the entire State of Michigan.   Revival is, in fact, spreading, with Ford Motor Company planning to move its headquarters from suburban Dearborn to a redevelopment of the former New York Central main train station nearby.

Bedrock Detroit has created $billions of dollars in value, and an entirely new place.  And it has spawned an imitator.   St. Louis natives Jack Dorsey, founder of Twitter, and Jim McKelvey, his co-founder of Square, have moved Square’s headquarters to Downtown St. Louis, hoping to contribute to its revival.


Late 2010s:  Somerset Development, the Bell Works, Monmouth County, NJ.

The former Bell Labs is located in an exurban county where much of the housing stock was built after 1980, to the suburban standards of that time. While AT&T had used the site for research since the 1930s, its greatest years followed a major development program from 1957 to 1962.  Thousands of engineers and researchers worked at in nearly 2 million square feet of space there, until it was phased out starting in 2006, and eventually closed and abandoned.

A series of redevelopment plans followed.  One would have torn the landmark building down and replaced it with housing and offices.

Some Holmdel residents opposed Preferred’s plan to build hundreds of homes. Others signed a petition hoping to preserve the historic Bell Labs building. Preferred and Alcatel-Lucent never closed on the sale.

“The public was just dead set against all of those (housing) units coming to Holmdel and knocking the building down,” Holmdel Deputy Mayor Patrick Imprevaduto said.

Finally Ralph Zucker’s firm, Somerset Development bought the building in 2009, pending the town’s approval of his zoning changes.  He promised to maintain the landmark main laboratory building, something the community and many who had worked there wanted, and turn it into a tech hub.  It took four years to get approval.  Somerset lost out on a proposal to create a walkable community and build high density housing, unfortunately, and had to agree that most of the housing would be age-restricted, and thus not create expensive public school children.

But he was able to add some retail, leisure and entertainment uses to the site.  In the end, the firm created what has been described as the first “Metroburb.”

The building is now mostly occupied by up and coming companies, an outstanding achievement in a county where the value of one-family housing has been falling, as aging Baby Boomers retire and move away and young adults who grew up there choose to live elsewhere.   A county where apartments for non-seniors are scarce.  As for those expensive public school children Holmdel was afraid of having to pay to educate, enrollment in Monmouth County fell from 94,782 in 2007 to 86,118 in 2017 according to Census Bureau data.   Holmdel school district enrollment fell from 3,484 to 3,016.

Somerset Capital, meanwhile, is bringing its suburban redevelopment expertise to another “Bell Works,” this time an abandoned former AT&T headquarters in the suburbs of Chicago.

Somerset wants to convert the AT&T property into 1.2 million square feet of offices, 60,000 square feet of shops and restaurants, and 60,000 square feet of conference space, storage and amenities.

The firm plans to sell some of the land adjacent to the main AT&T office building to another developer for the construction of up to 380 apartments and 170 townhouses.



For five decades, the real estate industry created places that were expensive and socially isolating to live in.  And then, with a new generation with less money and different preferences driving demand, it changed course.  In some of those now-obsolete places, political leaders will change with it, and in others it will not.  Either way, one cannot expect the late 20th century distribution of people and jobs on the ground, or the early 21st century pattern, to persist indefinitely.

4 thoughts on “The Commercial Real Estate Future: Bankruptcy, Foreclosure, Workout, Value Added Reinvention and Redevelopment


    Right. DC when trends didn’t favor urban living was great for buying a house. Lucky for us, existing conditions meant that price appreciation wasn’t out of the question. I argue that two different things happened, but will never know for sure. The big thing was the change in general attitudes towards urban living, sparked by Friends and similar. The second, but I can’t prove it, is that I believe the year by year moving into the city by the “pioneers” (really, people who liked cities regardless of the trends and what their parents thought) likely hit critical mass around the same time (1997-2000) and possibly, but will never know, that energy might have become self-replicating without the huge doses of new in-migration.

    DC isn’t the same either, but the riots destroyed a lot of the local character as it related to independent business. At least compared to NYC.

    1. larrylittlefield Post author

      DC happened to have a huge stock of abandoned industrial land that ended up in the city’s hands. That has allowed large scale redevelopment right up t the present day. And, thanks to Marion Barry, it was under a Financial Control Board during the decades when the worst of the future selling with regard to retroactive increases to public employee pensions, underfunding of the pensions employees had been promised to begin with, and debts took place. So DC has one of the least “sold out futures” in the country, NYC one of the most sold out futures.

      New York City had a lot of abandoned land and buildings after the 1970s. And after the high 1970s inflation wiped out half the consequences of the debts and retroactive pension increases it did the first time around, it had the money to build huge amounts of affordable housing. Now we don’t have the money or the land.

      It isn’t the lack of regulation, or an excess of regulation. You can’t meet global demand in a city that is already developed at a high density. The cost of tearing down and replacing what is already there, and valuable, is too high. Someone needs to build a few more Brooklyns somewhere, and about ten San Franciscos.


    Super disturbing. Thank you for taking the time to write this.

    one itty bitty point. Dan Gilbert is a second or third stage entrant for revitalization in Detroit preceded by people before Illitch IIllitch wrested big theater redevelopment projects from undercapitalized first moves), Illitch, and Peter Karmanos (Compuware) who moved his corporate headquarters to Detroit from Plymouth in 2003.

    1. larrylittlefield Post author

      Thanks for the point. I guess Gilbert is when I found about about it. But he also managed to time it for the bottom.

      Perhaps the less disturbing point is that for later-born generations seeking to create a good life on less, a big real estate bust is less a problem than a possible solution.

      Whereas soaring real estate prices add to the problem.

      Brooklyn, where I live, is a lot less interesting these days than even a decade ago.

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