Recommended by Ricochet Members Created with Sketch. Liquidating the ‘Hood

 

Stranded assets are the beached whales of capitalism. Capital invested in what looked like a good long term bet, that has now turned into an illiquid headache due to a change of circumstances. This term is often used in the context of regulation and environmentalism, but assets can become stranded in other ways:

If you keep even half an eye on the investing scene, you know that commercial real estate in general, and retail in particular, has been in trouble for some time. The advance of online shopping and networked business in general has been relentless and deadly. ‘Category killer’ store fronts and department stores alike have fallen to bankruptcy and reorganization, shopping malls have lost their anchor tenants, gone under and been rebuilt into everything from housing to entertainment centers. And that was before COVID, and before looters and arsonists showed up at the door.

Few retail establishments own their premises. The small operation or franchise might have a mortgage held by a local bank. Storefronts in a strip mall are likely leased from a development company, which in turn owes that mortgage. Large scale malls or a chain of branded stores are likely to have been ‘securitized’, with the loans that funded them packaged with others in one of the famous derivatives that caused so much trouble back in 2008.

Suppose you are the holder of some of those retail mortgages, or packages of them in the form of REITs or CMBS. Things have been looking bad, with high tenant turnover and markdowns of credit quality tracking the advance of online selling. Then along came COVID and shut down your tenants for weeks, putting some out of business, and others are withholding rent. That whale is looking pretty stuck at this point, and you own it.

Now some of your properties in sketchier neighborhoods are visited by local homies or Antifa, doesn’t matter which, who clean out your tenants and finish by torching the place. Horrible, right? Wrong! This is awesome, you just got liquid!

The business that just got trashed may or may not have insurance, good luck to them. But since the property was securing a loan, it almost certainly did have insurance. And unless the managers were idiots, it covers little things like arson. You may have lost any upside on that property (like there was any left) but at least the replacement value is going to be coming back in good old fashioned cash!

Yes, the investor walks away a survivor, if not a winner. Who loses? Well the insurance companies for sure, but they’ll put up the rates on similarly situated properties and make it back in the future. Who’s stuck are those who depended on the tenant businesses, for employment or local shopping. Because who’s going to be fool enough to put fresh capital into the situation that resulted in a stranded asset? If they’re lucky, the ‘hood might get a dollar store to replace the Target, grocery store, or strip mall. More likely, it’ll be a vacant eyesore until the city grabs it for back taxes and hands it over to some race-hustling crony.

It’s been noted that neighborhoods that were torched in the riots of the late ‘60s and early ‘70s took decades to recover, if ever. Expect it to be worse this time, the real estate markets have become much more efficient in the intervening time.

Published in Economics
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  1. PHCheese Member

    Many commercial buildings insurance policies require that you must rebuild to collect on the policy therefore your whale is still beached. Those insurance guys didn’t fall off the turnip truck.

    • #1
    • June 5, 2020, at 4:59 PM PDT
    • 9 likes
  2. philo Member

    Locke On: Because who’s going to be fool enough to put fresh capital into the situation that resulted in a stranded asset? …it’ll be a vacant eyesore until the city grabs it for back taxes and hands it over to some race-hustling crony.

    It’s been noted that neighborhood[s] that were torched in the riots of the late ‘60s and early ‘70s took decades to recover, if ever. Expect it to be worse this time, the real estate markets have become much more efficient in the intervening time.

    As I referenced earlier with respect to Minneapolis, it will be like an economic Chernobyl.

    See Destruction and Desolation:

    • #2
    • June 5, 2020, at 4:59 PM PDT
    • 2 likes
  3. philo Member

    PHCheese (View Comment): Many commercial buildings insurance policies require that you must rebuild to collect on the policy therefore your whale is still beached. Those insurance guys didn’t fall off the turnip truck.

    I would bet that certain deals could be made to make both sides happy enough to just move on. It is business afterall.

    Otherwise, I would be very suspect (or probably disappointed, at the least) with a whole neighborhood of buildings erected to the minimum requirements to collect on the insurance policy.

    • #3
    • June 5, 2020, at 5:04 PM PDT
    • 6 likes
  4. Bruce Caward Thatcher
    Bruce Caward Joined in the first year of Ricochet Ricochet Charter Member

    philo (View Comment):

    PHCheese (View Comment): Many commercial buildings insurance policies require that you must rebuild to collect on the policy therefore your whale is still beached. Those insurance guys didn’t fall off the turnip truck.

    I would bet that certain deals could be made to make both sides happy enough to just move on. It is business afterall.

    Otherwise, I would be very suspect (or probably disappointed, at the least) with a whole neighborhood of buildings erected to the minimum requirements to collect on the insurance policy.

    Yes, they may “have” to rebuild, but it will be the minimum, and zero joy or relish at getting going here. Like a movie star having to make three more movies to finish off a contract – the movies are rarely good, the dude just wants out.

    And even in the best case scenario, you get a reasonably good tenant. He’s operating with a sword of Damocles hanging over his shop, just waiting for the next race temper tantrum.

    This is no way to build a functioning community. So many innocent people – of all races, just typical hard-working people – are toast, for nothing.

    Any people out there celebrating these protests for any reason make me sick.

    • #4
    • June 5, 2020, at 5:32 PM PDT
    • 7 likes
  5. DonG (skeptic) Coolidge

    All those people that complained about red-lining and food deserts better be condemn the looting. 

    • #5
    • June 5, 2020, at 5:37 PM PDT
    • 7 likes
  6. Stad Thatcher

    Locke On: Who loses? Well the insurance companies for sure, but they’ll put up the rates on similarly situated properties and make it back in the future. Who’s stuck are those who depended on the tenant businesses, for employment or local shopping. Because who’s going to be fool enough to put fresh capital into the situation that resulted in a stranded asset? If they’re lucky, the ‘hood might get a dollar store to replace the Target, grocery store or strip mall. More likely, it’ll be a vacant eyesore until the city grabs it for back taxes and hands it over to some race-hustling crony.

    Riot Economics 101 in one paragraph . . .

    • #6
    • June 6, 2020, at 6:15 AM PDT
    • 1 like
  7. Jules PA Member

    I’m a novice on this topic, but didn’t the looters just attempt to red line all the places they just looted. 

    And, it has struck me as odd that looters actually refer to insurance, on camera no less.

    Does that suggest that looters have received some level of training in their task, from someone with a higher purpose?

    I mean, the actual looters aren’t informed savvy business owners are they?

    In all of this, my heart breaks for those industrious people who are wrecked and destroyed by looters. Looters seem like toddlers mad they can’t have all the toys, and knock everything over in a tantrum. 

    • #7
    • June 6, 2020, at 6:44 AM PDT
    • 1 like
  8. Instugator Thatcher
    Instugator Joined in the first year of Ricochet Ricochet Charter Member

    DonG (skeptic) (View Comment):
    All those people that complained about red-lining and food deserts better be condemn the looting. 

    Like THAT will happen.

    • #8
    • June 6, 2020, at 3:59 PM PDT
    • 2 likes
  9. James Lileks Contributor

    Jules PA (View Comment):

    And, it has struck me as odd that looters actually refer to insurance, on camera no less.

    Does that suggest that looters have received some level of training in their task, from someone with a higher purpose?

    I don’t know. But on one livestream of last week’s riots, the narrator said “iPads! Insurance! Insurance! IPads!” as the mob broke into a cell phone store. The owner was on site – he lived there – and turned to the cameraman with bitter anger to inform him that he didn’t have insurance for this. The crowd took the alteration to their moral calculus in stride, it seems. They may have contented themselves with the believe that this wasn’t really wrong, because Insurance would pay for it. What is Insurance? Part of the vague distant entity that makes Things Happen, the inscrutable entity in the sky that somehow makes Target stores appear and grocery stores abound with produce, and channels money to rich people and denies it to them. It’s like believing in God, except he’s Mr. Potter.

    When they realized he didn’t have insurance, and thus by their own moral calculation this might be wrong, they managed to turn in a trice to doing what they wanted to do anyway. 

    • #9
    • June 6, 2020, at 10:46 PM PDT
    • 6 likes
  10. Bryan G. Stephens Thatcher
    Bryan G. Stephens Joined in the first year of Ricochet Ricochet Charter Member

    Barbarians don’t care about then rights of others. They don’t care where the gold comes from, just that it is there. 

    They always seem surprised that after a while, there is no more gold. 

    • #10
    • June 7, 2020, at 2:45 AM PDT
    • 2 likes
  11. Randy Webster Member

    Bryan G. Stephens (View Comment):

    Barbarians don’t care about then rights of others. They don’t care where the gold comes from, just that it is there.

    They always seem surprised that after a while, there is no more gold.

    That’s just another version of Thatcher’s “After a while, you run out of other people’s money.”

    • #11
    • June 7, 2020, at 3:12 AM PDT
    • 1 like
  12. Unsk Member

    Nice paintings Philo.

    Happily our wondrous California State Senate has a solution for this problem of stranded capital and the general dire conditions of commercial real estate; pass a law that lets renters walk away from their commercial leases with no consequences. Now that’s the ticket! Another brilliant solution cooked up by our oh! so compassionate Marxist Progressives! We are saved!

    • #12
    • June 7, 2020, at 6:52 AM PDT
    • 2 likes
  13. Bryan G. Stephens Thatcher
    Bryan G. Stephens Joined in the first year of Ricochet Ricochet Charter Member

    Randy Webster (View Comment):

    Bryan G. Stephens (View Comment):

    Barbarians don’t care about then rights of others. They don’t care where the gold comes from, just that it is there.

    They always seem surprised that after a while, there is no more gold.

    That’s just another version of Thatcher’s “After a while, you run out of other people’s money.”

    Barbarians sacking cities is the old version of socialism. More civilized because it was at least not your fellow citizens doing it to you

    • #13
    • June 8, 2020, at 5:22 AM PDT
    • 1 like