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TBL Thinks Real Estate Edition: Retail, ARMs, & China bailouts

TBL Thinks

May 30

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Dear Readers,

Welcome back to another week of TBL Thinks. This week we give you the breakdown on the US housing and commercial real estate markets. Then, we make our way to China for a brief peek into the country’s real estate woes.

TBL Thinks is our way to summarize the most important paywalled, longer reads relevant to global macroeconomics, helping you cut through the noise. With that in mind, please enjoy.

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What did we read this week?

Bankruptcies Have Left More Stores Vacant, but the Space Doesn’t Sit Empty for Long (WSJ)
- What does this mean? Major retail bankruptcies rose to 26 in 2023, the highest since 2020, yet landlords seem unfazed. As more companies succumb to the rising pressures of inflation and online competition and shut their doors, property owners seem to be welcoming broken leases as opportunities for renting to new retailers and increasing rents. “Years of little construction have helped push retail availability to near record lows, making it easier than ever to replace departing tenants—often with more successful ones who pay higher rent and draw more customers to the shopping center.”
- Why is this important? Even with the uptick in bankruptcies, US retailers are tracking towards opening more stores than they shut this year—demand for opening retail stores is outweighing the availability of retail space. No new supply. “Retail construction fell sharply between 2008 and 2010 because of the financial crisis and has been at record-low levels since the onset of the pandemic”.
- Why are we watching this? TBL is closely watching the revival of retail real estate post-pandemic. As the US shifted to a work-from-home culture, which continues to prevail even now, more brands are making their way into the suburbs, away from the bustling office hubs and downtowns of the cities they once inhabited. Shopping center owners, particularly in the suburbs, have benefited from the rise of remote work since 2020, as consumers visit local grocery stores and other shops more often during the workweek. As retail vacancy falls to record lows, untenanted stores won’t remain so for long, as new retailers make a beeline for the vacated spaces. Retail’s strong rally post-pandemic is in sharp contrast to the aftermath of the 2008-09 financial crisis when vacancies skyrocketed and hundreds of retailers closed shop as consumers slowed spending.

‘Not Gonna be Pretty:’ Covid-Era Homebuyers Face Huge Rate Jump (BBG)
- What does this mean? A small group of American homebuyers is bracing itself for a readjustment to mortgage rates. Hundreds of thousands of homeowners who bought their homes since 2019 with an adjustable-rate mortgage, and loans averaging $1 million, are set to see their payments go up as their loans come out of the fixed period. Adjustable-rate mortgage loans are set at a rate lower than the prevailing 30-year for the first few years and then adjusted once or twice a year based on current borrowing costs. As interest rates soar to a two-decade high, the timing couldn’t be worse for an estimated 330,000 home borrowers to come out of their fixed period, with another 100,000 anticipating their first adjustment in the next 12 months.
- Why is this important? Even though a vast majority of mortgages in the US have long-term fixed rates, this will impact some wealthier homeowners materially—the average loan size of an ARM is hovering near $1 million, roughly triple that of a fixed-rate mortgage, according to Mortgage Bankers Association.
- Why are we watching this? TBL is closely watching this because readjustment could lead to a potential delay or default in payments by these borrowers. The best hope for these borrowers is that interest rates come down, but that does not seem to be happening anytime soon, as the Fed as yet to show confidence that inflation is on a sustainable downward trend. Lagged effects of monetary policy are present here.

China’s Biggest Cities Continue to Ease Home-Buying Policies (WSJ)
- What does this mean? There’s no respite for China’s real estate troubles. Housing prices and sales are falling, and with them the investments of the Chinese, who are notorious savers putting most of their excess cash into property. As developers default on loans, and customers who have paid full price for units that won’t be completed realize losses, there are too many units and too few prospective buyers. China’s property boom of the early and mid-2000s turned into a bubble, leaving the country reeling with the repercussions of operating on the assumption that the government would never allow the market to crash.
- Why is this important? According to this WSJ article, more than 50 Chinese developers have defaulted on international debt, approximately 50,000 people have lost their jobs, and around 20 million housing units across China have been left unfinished with an estimated $440 billion required to complete them. In the face of this reality, more of China’s biggest cities are easing home-buying policies as the country’s leaders signal a shift to aggressive measures to tackle the country’s property crisis. Two of China’s four Tier-1 cities (typically the largest and wealthiest of the tiers), Guangzhou and Shenzhen, introduced measures, such as reducing down payments required for first-time home buyers, lowering mortgage rates for second homes, and trimming bank prime rates. Beijing remains the only Tier-1 city that has yet to take any action, but that is expected to change soon.
- Why are we watching this? TBL is looking for the bailout impulse from China but certainly in a more measured manner than what we saw a decade ago. Our analysis on China revolves around whether the country will be forced into a currency adjustment, and also whether Chinese citizens will use gold and bitcoin as a wealth storage mechanism as opposed to property going forward. We understand Tether usage via Hong Kong to be evidence of this.