One of the last market warnings Charlie Munger, Warren Buffett’s late business partner, issued revolved around commercial real estate. Munger said he saw a storm 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 (BRK.A) shareholders meeting. “But the owners do,” Munger chimed in at what was to be his last annual meeting.
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“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 at that time that he predicted the U.S. economy will weather the storm 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 report from 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…
