Commercial real estate has to be re-priced for rents to come down, and rents have to come down to attracct tenants, now that it’s apparent that office space is less valuable.
What I suspect will happen is an extended period of pain as foreclosures happen, banks fail, etc. Then the buildings will get re-sold at a newer, much lower valuation, and it’s only at that point that rents are going to come down. It will take a while, and there will be much pain in the meantime.
This reminds me of the restaurant business. A friend who was a loan manager told me that the average restaurant succeeds - after three bankruptcies or so. What happens is that all that new, expensive kitchen hardware and furnishings makes the business too expensive, and it eventually goes under. Someone buys it at a discunt, but it’s still too expensive. Repeat. Eventually, the business winds up in someone else’s hands with the initial capital investment reduced to almost nothing, and finally they make a viable business out of it.
This isn’t remotely the case for restaurant operators that I know of.
One family has opened 20 locations, of which 11 are operating today (some of them for more than 20 years now). None of them were predicated financially on getting used equipment at a throwaway price.
Another acquaintance (former coworker) has opened four restaurants of which three are operating. Again, they were all “boxes” when he got them or even vacant lots.
Concept, location and execution make or break you in the restaurant business, not the cost of fridges, flat tops and fryers.
It also helps to not have a rapacious landlord who ensures the rent on your new store or restaurant leaves you just barely enough profit to bother to keep operating. If not the first year, then certainly at renewal time.
Obviously some restaurants are successful out of the gate. But many are not. We have a pizza place down the street that started out as a pizza shop, went under, re-opened as a donair / pizza place. Went under. Reopened as a ‘Busters’ pizza. Went out of business again. Now it’s another pizza/donair place.
This type of serial failure until the capital costs make a small restaurant pr pub viable is common.
We wonder about the type of restaurant operators you know.
There are a massive number of people who start a small business because “they want to be their own boss”. And naturally some start a restaurant because “everyone agrees they cook great meals”. So a combination of not knowing the large number of other skills you need to run restaurant and being massively under-capitalized means that the many thousands you spend on fridges, etc wipe out most of your capital so you can’t afford the losses from your first few months in business.
The two people (or rather one family and one partnership) have been in the restaurant business for 50+ years, now handing off to the third generation. They have a “formula” that works most of the time. They haven’t bet the family fortune on a single location or concept since the 1960s.
I know several people who have gone into business for themselves and crashed and burned. A fancy sports barbershop, a juice place catering to health fanatics, a coffee shop in a location that has a 2.5 month high season. In two cases burning through their life savings and loans from their family or friends. In the third case starting with a big fortune and ending with a slightly smaller one.
If you want to be your own boss and pay yourself a salary of $150k as the owner/manager of your coffee shop because that’s what you were making as an actuary, even though your coffee shop has negative cash flow, you’re destined to join the multitude of failures.
You’re also doomed if you think the formula for success is to find a cheap lease on a pizza place that has house two failed pizzerias in the past decade. Unless you’ve got some serious differentiator in the pizza business. What tanks a business is the lack of top line as much as the expenses.
Yeah, a small business can feel awfully ball-and-chainy once you have customers with demands, schedules to hit, bills to pay… I spent a fair bit of time at auctions buying stuff for cheap. PBX system, counters, chairs, etc.
What I wonder is how much fake money is out there built on the fake valuation? I can’t see a logical reason you wouldn’t use it as collateral. An extra $50 million in valuation could be supporting $500 million in other crap.
Yeah, if people have secured other financing by leveraging their building equity, then prepare for a lot of cascading failures. And bank failures/bailouts.
Yeah, I’m really tired of the idealization of small businesses and small business owners. A lot of small businesses fail because the owners bought into some fantasy that after a year or so they’d be passive investors in their own business, because they don’t want to work.
When an individual fails to be successful in their chosen line of work, it’s always framed as “they didn’t work hard enough or want it bad enough or somehow sabotaged themselves”, but when a small business fails, it always seems to be the fault of the government and “taxes and regulations” or some other external factors.
Small business owners as a class can be horrible in taking responsibility for their own actions and shortcomings, and society, especially the conservatives, buy into that bullshit hook line and sinker.
I had a friend that owned a small business that was highly successful for over 5 years, a yoga studio. Part of the reason it was successful was that she was a really good teacher, her classes and workshops always sold out. The other teachers she hired were good, just not as good as she was, and the attendance at their classes was more variable.
Then she and her husband started traveling 6 months of the year or more and she announced she wanted to put more time into her music, so she took herself off the schedule completely and failed to manage the business, people would show up for class, the teacher would be a no-show and no one could contact her or her husband.
Attendance and receipts dropped and she decided to sell the business - she had to sell it and get the new owners to take on the liabilities, she had sold a bunch of pre-paid multi-year memberships to finance her travels so she would’ve been in huge legal and financial trouble if she had just closed up.
I had a candid conversation with her around this time and she told me they could’ve remained financially viable if she went back to teaching 30% of the classes, which would’ve been 6-7 classes a week, a time commitment of 12-14 hours per week -but she wasn’t willing to do that.
She talked someone into buying it, this was in January 2019. The new owners failed to turn it around and they announced that they were closing in February 2020.
The kicker was a whiny crying social media post she made blaming the pandemic lockdowns and medical tyranny for destroying the business she had put her heart and soul into creating.
Seriously, if you’re a small business owner that can’t cut it, fucking stop whining and figure it out or cut your losses and get a job. And stop thinking you’re some model of “self-reliance”, if you’ve got to recruit dozens of underpaid workers to survive you’re the opposite of self-reliant, especially when your supply dries up.