Axios Markets

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September 28, 2022

G'mornin' markets folks. Today's newsletter is 1,111 words, 4.5 minutes. Let's do this.

🚨 Situational awareness: The Bank of England this morning announced a plan to try to calm its bond market: It will delay the start of gilt sales and buy long-term bonds. (CNBC)

🗓 Join our Axios colleagues Dan Primack and Kia Kokalitcheva today at 12:30pm ET for a virtual event looking at what’s in the pipeline for the M&A market heading into next year. Register.

1 big thing: Post-pandemic cities

Data: Cushman & Wakefield; Chart: Axios Visuals
Data: Cushman & Wakefield; Chart: Axios Visuals

Cities and states across the country are looking to transform vacant office buildings into housing — a solution for both empty downtowns and housing shortages, Axios' Kate Marino writes.

Why it matters: Commercial districts with little to no residential presence turned into near ghost towns during the pandemic, becoming a blight on the cityscape and a detriment to local businesses like shops and restaurants.

  • Live-work neighborhoods, however, fared better.
  • And much of the U.S. still faces a persistent housing shortage.

What they're saying: “We need to recognize how we’ve evolved during the pandemic,” says Dan Garodnick, New York City's director of city planning.

  • Garodnick is the chair of a new Adaptive Reuse Task Force that's expected to recommend regulatory changes by the end of the year that would spur conversions of obsolete office buildings.
  • Adaptive reuse of old office buildings has happened on the margins for decades, but the pandemic has accelerated interest in it, says Wendi Shafran, a principal at FXCollaborative Architects, and also a member of the task force (views her own, not the task force's).
  • Conversions are also gaining popularity for their environmental benefits, adds Roberto Vazquez, project director at Omgivning, a Los Angeles-based architecture firm.

What we're watching: Office leases are often anywhere from 10 to 20 years long, so the full extent of the office-building exodus isn't even clear yet.

  • But a lot of leased office space now has less than half the daily occupancy that it did before the pandemic, swipe-in data from Kastle covering 10 metro areas shows.
  • If vacancy rates grow further, the most likely candidates for conversion will be older, smaller buildings in need of upgrades — those that are now out of favor with companies that want newer environs with the latest amenities to lure employees.

Zoom out: Conversions have yet to really pick up steam because they’re expensive, and loads of red tape and zoning laws usually get in the way — that's why government officials are exploring incentives.

  • And while converting office buildings won’t alone solve the housing shortage, it’s one of many avenues that government officials want to tap to make a dent in the problem.

The bottom line: Saying goodbye to concentrated office districts and 9-to-5 downtowns is probably a process that will play out for decades — part of the pandemic’s lasting impact on our lifestyles and communities.

2. Who's doing it

Illustration of a high-rise office building with an oversized "Home sweet home" embroidery piece framed and hanging from the roof

Illustration: Annelise Capossela/Axios

Along with New York, a few other big cities are exploring new incentives they hope will unleash a wave of housing conversions in the decade ahead, Kate writes.

State of play: Chicago just this week proposed an initiative to repurpose high-vacancy office buildings in its downtown financial district into homes.

  • The Los Angeles City Council is expected this fall to consider an updated ordinance that would make it easier to convert downtown office buildings.
  • California's 2023 budget allocates $400 million in incentive grants for office-to-residential conversions; Denver's provides funds to study the matter. D.C. Mayor Muriel Bowser pitched a 20-year tax abatement tied to these kinds of conversions.

By the numbers: Real estate trade association REBNY estimates that a "conservative" conversion rate of 10% of New York's lower-tier office buildings could generate approximately 14,000 new residential units.

  • And an L.A. study by Rand Corp identified underutilized commercial properties that could collectively produce about 92,000 housing units.

The playbooks: Lower Man­­hattan and downtown L.A. undertook similar efforts in the early 2000s.

  • In New York, city and state coordination on financial incentives — plus regulatory and zoning changes targeting the depressed post-9/11 financial district led directly to around 25,000 housing units created from office buildings over the past few decades.
  • “It changed the character of the community … it really did revitalize the neighborhood,” says Shafran, of FXCollaborative, who previously worked in lower Manhattan.
  • And L.A.’s original 1999 Adaptive Reuse Ordinance (which the city's current proposal would expand) made it easier for developers to undertake conversions downtown. It was groundbreaking at the time — and was hugely successful, says Omgivning's Vazquez.

3. Catch up quick

💰 White House mulling departure of Treasury Secretary Janet Yellen after midterms. (Axios)

📱 Regulators fine 16 Wall Street firms $1.8 billion for talking deals on personal apps. (Reuters)

📝 House Democrats unveil bill to restrict trading by lawmakers, presidents, Supreme Court Justices and other high-ranking government officials. (Bloomberg)

4. U.K. mortgage shock

Illustration of a percent sign shooting upwards like a rocket.

Illustration: Gabriella Turrisi/Axios

Millions of homeowners in the U.K. could see their mortgage rates skyrocket to 6% over the next year or so — from as low as 2% — a massive hit to monthly budgets at a time of soaring inflation, Emily writes.

Why it matters: The coming "rate shock" is a prime example of how homeowners in the U.K. feel the pain of central bank rate hikes faster than in the U.S., where the Federal Reserve's similarly steep increases generally only impact those making a new purchase.

  • Mortgages in the U.K. typically have fixed terms of only two or five years. After the fixed rate expires, mortgage holders pay either the "standard variable rate," or they can refinance into a new fixed rate loan.
  • The set-up was a boon for a long time when rates were falling. Now they're rising fast.

On the flip side: Most American homeowners have 30-year mortgages with very low rates secured during the past two years. They don't need to deal with the pain of higher rates (now topping 7% per Mortgage News Daily) unless they need to move.

Worth noting: Rates are moving up so fast, that some U.K. banks have temporarily stopped offering mortgages over all the uncertainty.

By the numbers: About 600,000 fixed-rate mortgages are scheduled for refinancing by the end of 2022, followed by 1.8 million in 2023, UK Finance, an industry trade association, tells Axios.

  • And there are around 1.7 million mortgage holders with floating rate loans who are already feeling the pain of rising rates, according to an estimate in the FT.
  • Someone currently paying £863 a month could wind up paying £1,490, according to a note from Pantheon Macroeconomics.

What's next: Pantheon predicts a sharp rise in mortgage defaults in the U.K. — and that home prices will plummet.

5. Money's running out

Data: Morning Consult/Axios Inequality Index; Chart: Axios Visuals
Data: Morning Consult/Axios Inequality Index; Chart: Axios Visuals

Savings have dwindled over the past few months for middle- and lower-income Americans, Kate writes.

Why it matters: Inflation is enlarging household budgets. Dismal market performance is eating away at asset values.

  • It adds up to this: The share of adults in those income categories who say they can't pay one month of household expenses with their savings is near its highest point (second only to January) since Morning Consult began polling on the question in May 2020.

What we're watching: Whether these numbers hit new highs in the coming months.

Today's newsletter was edited by Kate Marino and copy edited by Mickey Meece.