Moneywise

‘The buildings don’t go away … but the owners do’: Warren Buffett and Charlie Munger warn that a storm is brewing in the US real estate market — here’s where they'll seek refuge

Vishesh Raisinghani
Sat, October 21, 2023, 7:00 AM EDT· 3 min read

Charlie Munger, Warren Buffett’s business partner, has been growing increasingly worried about commercial real estate. He believes a storm is brewing in the sector that could engulf the banks and impact the broader market. … “The buildings don’t go away,” Buffett said at the May 2023 Berkshire Hathaway (NYSE:BRK.A) shareholders meeting. “But the owners do,” Munger chimed in.

“I think that the hollowing out of the downtowns, in the United States and elsewhere in the world, is going to be significant and quite unpleasant,” Munger said, adding he believes that the U.S. economy will weather the storm eventually but that commercial real estate will eventually “involve a different set of owners.”

Munger’s bear case

Munger and Buffett’s concerns could be based on the fact that foot traffic near stores in metropolitan areas is 10% to 20% below pre-pandemic levels while office attendance is 30% lower than before COVID, according to a recent report by the consulting firm McKinsey. The report predicts that, because of these trends and other factors, demand for office space could still be almost 20% lower in 2030 than it was in 2019.

That’s bad news for commercial landlords. It’s worse news for their lenders. Munger said in an April interview with the Financial Times that the U.S. banking sector was “full of … bad loans” in the commercial real estate sector. Eventually, higher interest rates, lower rental income and resulting lower property values could send some of these loans underwater — meaning that the outstanding balance will be greater than the value of the underlying properties.

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