Here's a Bloomberg news segment from about a month ago (June 2023) talking about the crisis in commercial real estate happening now in the U.S..
Here's the basics of the commercial real estate crisis. Interest rates have risen dramatically over the last year and a half, as The Fed hiked their base rate higher to combat inflation. A lot of large commercial buildings, from smaller complexes to office skyscrapers, have loans that need to be rolled over (refianced) every few years. Some of those loans have variable interest rates. For those loans, when interest rates go up, and the loan gets refinanced, the landlord's payments go up, like an ARM loan for a home.
According to this clip above, about $1.4 trillion worth of commercial real estate loans in the U.S. need to be refinanced in the next couple of years. But the higher interest rates mean the payments on those loans will double or triple when they refinance. When you're talking buildings worth tens of millions, or hundreds of millions of dollars, that a HUGE rise in costs for the landlords.
This is coming at a time when a lot less people are working in many of those offices, due in large part to the work-at-home trend. So those same landlords are taking in much less rent than they were pre-pandemic. Several major commercial landlords, like Blackstone and Brookfield, are literally letting some of these buildings go into default. They're walking away and tossing the keys to the banks who hold the loans, much like homeowners with upside down mortgages did back in 2008-2009. Most of those huge buildings have non-recourse loans, so the landlords can walk away, and the banks can't go after the company's other assets to get their money back.
Now many of these huge properties are worth 30% to 80% less than they were a few years ago, because of the lower occupancy rates, and the much higher loan payments. This is a huge problem for the small and mid sized regional banks, because they hold most of these loans. In addition, city governments get a huge amount of their income from taxes on these large buildings. Another big issue is that the people who used to work in these buildings used to support many smaller businesses around those buildings. This means that there are several different major problems happening at once, that are all tied to these offices, and other commercial real estate buildings.
This brings us to the concept of a "spatial fix." A spatial fix is when there a change in business in a region, or a whole country, and one business, or one type of real estate, or one whole region, is no longer useful or viable. I first heard this term in a talk by economic development expert Richard Florida, in his book The Great Reset. I believe the general idea goes back to Joseph Schumpeter and his ideas about "Creative Destruction" in capitalism.
In any case, here's a very simple example. Shopping malls. I was born outside Akron, Ohio in 1966. In 1975, within a few miles of where I was born, a shopping mall was built. It was called Rolling Acres Mall. Although we moved away from the area when I was about three, my grandparents lived in the area, and as a kid we visited all the malls around there at one time or another. When I was a kid, in the 1970's malls were thriving, families bought clothes, appliances, tools, lawnmowers, shoes, and even furniture, in the major department stores in the malls of the area. Rolling Acres Mall was one of the malls my family visited, at least a few times, when I was a kid.
In the late 1970's, factories began to shut down, industrial jobs were outsourced or taken over by industrial robots, and well paid workers got laid off. As time went on, thousands of people moved away from industrial cities, like Akron, Ohio. Akron had over 290.000 people living there in 1960, a few years before I was born. In 2021, Akron had a population of just over 189,000 people. The big city closest to where I was born has lost 100,000 people in 61 years. This is a photo taken inside Rolling Acres Mall about 2014.
Rolling Acres Mall, abandoned, around 2014.
This photo, and a few others like it, made Rolling Acres Mall, the poster child mall for the Retail Apocalypse. We all know of malls that are struggling, and most of you reading this have probably heard about dead malls. There's even a dead mall website.
Back to where we started, a spatial fix is the geographical change that happens when major trends make some kind of building or infrastructure no longer viable. People move from where the jobs used to be, to where the jobs are. Then those new places need new houses, new types of infrastructure. Those changes across geography are the spatial fix caused by major changes in society.
Shopping malls made a lot of sense in thriving, post World War II, Industrial Age America. Malls thrived in a mass market, mass media world with lots of well paid, middle class factory workers. Rolling Acres Mall made sense when the big tire companies, Goodyear, Goodrich, Firestone, and other major manufacturing businesses, employed tens of thousands of people in Akron. Other malls across the U.S., particularly in mid-sized cities, had the same problems as factories moved overseas, and our Industrial Age society began to morph into an Information Age society. As the factories closed down, malls, and many other businesses in those towns, also began to die off.
Where did the people go? Did they move to smaller towns? No. Over half of all U.S. counties lost population between 2010 and 2020. Those people who moved out of the old, Industrial Age cities moved to bigger cities, by and large. Some of our biggest cities are now turning into Mega Regions.
I believe this is because of our shift from the old, Industrial Age business models, to the emerging Information Age business models. I think we're in a long transition period between these two types of society, a concept first explained in the 1980 book The Third Wave, by the late futurist Alvin Toffler. Whatever the reason, we now have thousands of empty factories, empty storefronts, vacant or much less busy shopping malls and shopping centers, and now we are beginning to see a huge decline in older office buildings, and even many huge skyscrapers in big cities. There are thousands of struggling or already abandoned buildings across this country.
The business and social changes that have happened over the last several decades have led to several types of business real estate, and also thousands of houses and apartments, in formerly booming cities (Detroit & Flint, Michigan, and Gary, Indiana, for example), that are no longer useful for their original purposes. We are in the middle of a HUGE, and decades long, spatial fix, away from the types of properties, and locations, that no longer make sense in today's world. We need, as a country and a society, to build the types of homes, apartments, business buildings, and infrastructure that make sense for the world we are moving into. In my understanding, the "spatial fix" is this transition from the types of buildings, and locations, that used to make sense, into the ones that make sense going forward.
This is also a part of the huge rise in homelessness, people living in vans and RV's, thousands living as wandering nomads, working odd jobs like for Amazon's Camperforce. This is why hundreds of small towns are dying on the vine and turning into ghost towns. There's an increased concentration of people in about a dozen huge metros, mostly tech hub regions, where the new technology work and businesses are clustered.
This short blog post is a very small look into a huge issue in today's world, but a very important subject that almost no one is talking about. As we mover deeper into the hyper-connected, digitally driven, Information Age world, we need to figure out how and where to build affordable housing, upscale housing, and what types of business, education, and public facilities and infrastructure we really need, and where those need to be.
So this was my quick look into the spatial fix idea, and why I believe it is critically important in the U.S., and other countries, going forward.
I'm doing a lot of my writing on Substack these days, check it out:
