Commercial Real Estate’s Teardown

Plus: By getting boring, tech stocks got cool again ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

April 10, 2023

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TOGETHER WITH

Good morning and happy Monday.

You know what they say, fake it till you make it… or until you commit securities fraud. New details have emerged revealing just how, exactly, entrepreneur/future Hulu miniseries subject Charlie Javice allegedly conned the nation’s biggest bank into wildly overpaying for her student financial aid assistance startup, Frank.

Her secret? Acting like any other startup founder, according to a report from the Financial Times this weekend chronicling how Javice parlayed early backing from Apollo Global Management CEO Marc Rowan into further high-profile support until selling to Chase for $175 million.

Morning Brief

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Could commercial real estate be the next shoe to drop?

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Finally, a cheap place to ski.

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Tech is back, baby.

Real Estate

Rent is Coming Due for the Commercial Real Estate Industry

Has the commercial real estate industry been sacrificed at the altar of home-brewed coffee and lunchtime walks with the family dog?

With a $1.5 trillion wall of debt coming due before the end of 2025 and a litany of external challenges facing property owners, some analysts are sounding the alarm that instability in commercial real estate could deliver the next shock to the economic system.

A Vacant Stare

If some sectors have faced death by a thousand cuts, the commercial real estate story has looked more like a scene from Kill Bill. Couple work-from-home and “quiet quitting” on the demand side with a deep pool of vacancies on the supply side, and it’s easy to see why people are breaking out the worry beads.

It gets worse. More than half of the $5.6 trillion of all outstanding commercial loans sit on the books of American banks, according to a Goldman Sachs note published last month. And not just any banks. Small and regional lenders, the same banks that you might remember made a few headlines in recent months, are holding the majority of this paper. That leaves property owners with few willing lenders ahead of debt repayments just as building valuations crash amid all-time high vacancy rates (some 18% of office space sat empty by late 2022, according to brokerage giant Cushman & Wakefield).

Frantic analysts, unsurprisingly, are screaming and pointing at what they see as a bubble bursting… or an asteroid striking… or whatever other economic-disaster imagery you may prefer:

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Overall, the valuations of office and retail properties could plummet by as much as 40%, Morgan Stanley analysts wrote in a note last week, flagging the risk of defaults.

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“Refinancing risks are front and center,” the analysts wrote. “The maturity wall here is front-loaded. So are the associated risks.” Making everything worse, the analysts say, is the banks’ dual role as lenders and buyers.

B for Busted: Most analysts say the pain will not be felt equally. Employers, still desperate for the imagined inspiration spurred by water-cooler chit-chat, have focused on finding and upgrading office space to rival the comfort of the couch. That leaves Class B space to absorb the brunt of the downslide, while the industry’s reliance on regional banks may offer natural roadblocks to contagion (the tax base of municipalities — where Class B space will continue to sit empty — may have reason to be concerned, on the other hand). Other spaces, like warehouses and rentals, remain strong. The S&P United State REIT Index, which fell precipitously in the weeks post-SVB collapse, has recovered most of its losses and is now up on the year. That leaves some hope for a crisis being averted. Then again, 2023 has been all about Murphy’s Law.

– Brian Boyle and Pat Trousdale

Leisure

Nonprofit Ski Mountains Offer Alternative to Major Resorts

(Photo Credit: Stanley Cheung/Unsplash)

Are non-profit resorts the answer to Big Bad Vail and the rest of Big Ski? Who knows, but at least they’re free.

While mega ski resort brand Vail has been gobbling up ski slopes all across the country, a few small communities have managed to turn their local, sometimes abandoned lifts and trails into cheap and accessible non-profits, the Associated Press reported.

Small Mountain, Big Heart

It’s not out of the lift line to call Vail a monopoly at this point. In fact, Hasbro even released a Vail-themed version of their classic real estate board game a few years back. The $9.5 billion Colorado-based consortium owns and operates 37 resorts in 15 states and three countries. Though Vail has the funds to revamp trails, build gondolas, and invest in premier snow-making infrastructure, it often comes at the cost of an enjoyable customer experience. There’s a whole website dedicated to it.

One small Colorado community is presenting an alternative to the rise of Big Ski. Cuchara Mountain Park in La Veta closed in 2000 because of poor weather and even poorer management. It sat deserted for the next 16 years until the Cuchara Foundation, a community development nonprofit, put a downpayment on the mountain and then raised funds via local events and fundraising jars:

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Chucara is not trying to be Vail. Instead of a lift, Chucara staff welded school bus seats to a trailer and dragged skiers up the mountain using a snowcat. The foundation is still working on gaining lift certification, but the mountain is open and free to the public for ski season.

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Similarly, the nonprofit Antelope Butte Mountain in Wyoming opened in 2018 with a mostly volunteer staff and the goal of providing an affordable experience with lift tickets that are only $20. By comparison, a lift ticket at a Vail resort could set you back $200.

“It’s not necessarily about drawing overnight or out-of-town guests, but about bringing positive economic impact and a source of physical and mental wellness for the community,” Adrienne Isaac, marketing director for the National Ski Areas Association, told the AP.

Not enough snow: Regardless of their size or funding, all ski resorts are wrestling with the effects of climate change. As ski seasons get shorter, resorts are eschewing further investment in snowmaking equipment and trying to build up their year-round offerings with concerts, weddings, archery, and mountain biking.

–Griffin Kelly

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Blendid 3x’d the total number of kiosk locations in 2022, and now it’s cooking up a nationwide expansion to address even more cuisine needs.

The clock is ticking 一 there’s less than 10 days left to invest in the future of food.

Markets

After a Dismal 2022, Tech is Having a Major Moment

By embracing cost-cutting, efficiency, and a lot of other stuff Silicon Valley tended not to care about, the tech industry may have regained its first-mover advantage.

Believe it or not, the S&P 500 has seen a $2.4 trillion gain this year, and 90% of that growth is concentrated in the trading of just 20 stocks, according to the Financial Times. With persistent inflation dampening the retail sector, a lack of dealmaking subduing financial names, and banks being… well, banks, the S&P concentration shows investors have come back to Big Tech, which is suddenly behaving like the adult in the room.

Everyone Loves a Comeback Story

Silicon Valley’s decade-plus mantra of “Grow! Grow! Grow! Spend! Spend! Spend!” was catnip for traders who liked using cheap money to get in early on mind-boggling valuations. Facing the end of the FAANG era as tech stocks plunged, tech executives had something of an epiphany and decided it was time to “Shrink! Shrink! Shrink! Efficiency! Efficiency! Efficiency!”

Now, with the banking industry floundering and the macroeconomic climate uncertain, tech is seeing a healthy resurgence thanks to being the first sector to find a new religion in corporate penury. Among some of the top-earning stocks on the S&P this year are Nvidia, Meta, and Salesforce, all of whom got religion in recent months:

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Meta CEO Mark Zuckerberg is still insistent on virtual reality research and development, but the company as a whole – Facebook, Instagram, and WhatsApp – has cut costs and jettisoned more than 20,000 employees. As a result, its stock has shot up 74% this year. Salesforce’s Marc Benioff was able to quell activist investors recently by similarly cutting 10% of staff and delivering an 18% increase in revenue year-over-year.

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Nvidia stock has jumped roughly 90% this year despite not announcing any major layoffs. The company did freeze hiring last summer, though, and it has leaned on its dominance in the gaming card market to drive revenue. A Bank of America analyst found that of the 25 million active users on Steam – an online game distribution service – more than 80% ran their computer on an Nvidia card.

Can it last? “People are looking for safety and comfort given the cross-currents in the market, and tech gives them plenty of ease,” JP Morgan trader Jack Atherton told the FT. “Whenever the Fed hits the brakes, someone goes through the windshield. (Tech is) wearing an eight-point harness.”

– Griffin Kelly

Extra Upside

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Idaho here we come – see the fastest-growing (and fastest-shrinking) states.

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Life imitates art: SF lunch spot that inspired “Bob’s Burgers” permanently closed its doors.

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