Carnage in commercial real estate; Buffett trims Berkshire's Apple stake; Automakers changing their EV plans; China's baby bust
1) A recent Bloomberg article caught my eye – it underscores the bloodbath in commercial real estate: The Brutal Reality of Plunging Office Values Is Here. Excerpt:
Since the COVID-19 pandemic upended the use of real estate around the world, lenders have had little incentive to get tough on borrowers squeezed by soaring interest rates and take on loans that had lost value. Transactions ground to a halt as potential sellers were unwilling to unload buildings at distressed prices – an outcome that allowed them to pretend that nothing had fundamentally changed...
Across the country, deals are starting to pick up, revealing just how far real estate prices have fallen. That's spurring widespread concern about losses that can ripple across the global financial system – as underscored by the recent turmoil unleashed by New York Community Bancorp, Japan's Aozora Bank Ltd. and Germany's Deutsche Pfandbriefbank AG as they took steps to brace for bad loans.
In Manhattan, brokers have started to market debt backed by a Blackstone Inc.-owned office building at a roughly 50% discount. A prime office tower in Los Angeles sold in December for about 45% less than its purchase price a decade ago. Around the same time, the Federal Deposit Insurance Corp. took a 40% discount on about $15 billion in loans it sold backed by New York City apartment buildings.
Charlie Bilello, in his latest Week in Charts, also shared data on what's causing this.
As he shows in this chart, the office vacancy rate in the U.S. is up to 19.6% – the highest level in history:
And as he says with his next chart:
The main reason: workers are not going back to the pre-COVID model of five days per week in the office, with most major cities hovering around 50%. As long commercial leases continue to roll off, that means less space is needed going forward, with increasing vacancies over time.
2) In the fourth quarter, Warren Buffett trimmed Berkshire Hathaway's (BRK-B) huge position in Apple (AAPL)...
But the only thing surprising here is that Buffett didn't trim more, given that Apple currently accounts for about 45% of Berkshire' $367 billion stock portfolio (according to CNBC's real-time tracker).
Here's the Wall Street Journal with the story: Warren Buffett's Berkshire Hathaway Trims Its Massive Stake in Apple. Excerpt:
Berkshire sold about 1% of its Apple shares in the final three months of 2023, leaving it with a 5.9% stake in the iPhone maker worth about $167 billion on Wednesday, according to Dow Jones Market Data.
The Apple position held by the famed investor's Omaha, Neb., company has grown to an outsize share of its more than $300 billion stock portfolio. As the tailwinds of the tech trade pushed Apple shares higher, investors who follow the company have wondered how much bigger Buffett and his deputies would allow the position to grow.
Apple shares have soared 367% since the end of 2018, while the S&P 500 has about doubled. Buffett praised Apple at Berkshire's annual meeting last year, saying "it just happens to be a better business than any we own."
3) I just sent this front-page story in today's WSJ to my personal e-mail list in which I follow Tesla (TSLA) and its CEO, Elon Musk (to subscribe to it, simply send a blank e-mail to: tsla-subscribe@mailer.kasecapital.com): The Six Months That Short-Circuited the Electric-Vehicle Revolution. Excerpt:
A confluence of factors had led many auto executives to see the potential for a dramatic societal shift to electric cars: government regulations, corporate climate goals, the rise of Chinese [electric-vehicle ("EV")] makers, and Tesla's stock valuation, which, at roughly $600 billion, still towers over the legacy car companies.
But the push overlooked an important constituency: the consumer.
Last summer, dealers began warning of unsold electric vehicles clogging their lots. Ford, General Motors, Volkswagen, and others shifted from frenetic spending on EVs to delaying or downsizing some projects. Dealers who had been begging automakers to ship more EVs faster are now turning them down.
Even Tesla Chief Executive Elon Musk warned of "notably lower" growth in vehicle deliveries for the company in 2024...
EV sales continue to grow, and auto executives say they remain committed to the technology. But many are recalibrating their plans.
I remain bullish on EVs, but the competition has become so ferocious that each player in the market will likely struggle – as consumers benefit.
Related to Tesla, here's another chart from Bilello's latest Week in Charts:
This in part likely reflects Tesla's newly redesigned flagship Model 3, which is getting rave reviews.
4) I also sent this WSJ article to my personal China e-mail list yesterday (to subscribe to it, you can send a blank e-mail to: china-subscribe@mailer.kasecapital.com): How China Miscalculated Its Way to a Baby Bust . Excerpt:
The rapid shift under way today wasn't projected by the architects of China's one-child policy – one of the biggest social experiments in history, instituted in 1980. At the time, governments around the world feared overpopulation would hold back economic growth...
Four decades later, China is aging much earlier in its development than other major economies did. The shift to fewer births and more elderly citizens threatens to hold back economic growth. In a generation that grew up without siblings, young women are increasingly reluctant to have children – and there are fewer of them every year. Beijing is at a loss to change the mindset brought about by the policy.
Births in China fell by more than 500,000 last year, according to recent government data, accelerating a population drop that started in 2022. Officials cited a quickly shrinking number of women of childbearing age – more than three million fewer than a year earlier – and acknowledged "changes in people's thinking about births, postponement of marriage and childbirth."
This is a staggering chart from the article:
My guess is that the authoritarian leaders of China will take whatever steps are necessary to arrest this demographic disaster, such as big financial subsidies for having children – but it will be costly...
Best regards,
Whitney
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