This question comes from Tom Seymour. He says, “The first sentence of a recent Financial Times article read, ‘Charlie Munger has warned of a brewing storm in the U.S. commercial property market with American banks full of what he said were bad loans as property prices fall.’
“Please elaborate on what’s going on in commercial real estate. How bad will the losses be, and what sectors or geographies look particularly bad?”
I’ll just add an addendum from another viewer who wrote in and wanted to know if Berkshire would be more active in commercial real estate as a result.
Well, Berkshire’s never been very active in commercial real estate.
It works better for taxable investors than it does for corporations to act the way that Berkshire is. So, I don’t anticipate huge effects on Berkshire. But I do think that the hollowing out of the downtowns in the United States and elsewhere in the world is going to be quite significant and quite unpleasant.
I think the country will get through it all right, but as they say, it will often involve a different set of owners.
Yeah, and the buildings don’t go away, but —
The owners do.
Well, (Laughter) but most people like to buy with non-recourse in real estate. And one time I asked Charlie, there was some real estate guy, we were talking to him, you know, “How do they decide how much a building like this is worth?” And the answer is, “It’s whatever they can borrow without signing their name.”
And if you look at real estate generally, you’ll understand the phenomenon that’s happening if you remind yourself that that’s the attitude of most people that have become big in the real estate business. And it does mean that the lenders are the ones that get the property.
And of course, they don’t want the property usually, so the real estate operator counts on negotiating with them, and the banks tend to, you know, extend and pretend. And there’s all kinds of activities that arrive out of commercial real estate development, which occurs on a big scale.
But it all has consequences, and I think we’re starting to see the consequences of people who could borrow at 2.5%, and find out it doesn’t work at current rates, and they hand it back to somebody that gave them all the money they needed to build it. Charlie’s had more experience. Charlie got his start in real estate, though. Right? Charlie?
Yes, it’s difficult. I like what we do better.
Well, as Charlie once said to me when I was leaving his house a few months ago — I was visiting him, we talked for a couple of hours. And I said to Charlie as I left, there wasn’t anybody else in the house except one daughter. I said, “Charlie, I’ll just keep doing what we’ve been doing.” And Charlie said — without looking up or pausing a second — he said, “That’s all you know how to do, Warren.” (Laughter) He was right too.
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A non-recourse loan is one in which the lender cannot go after more than the collateral offered for the loan. This type of loan is beneficial for the borrower because the lender cannot seize other assets to recoup their losses.