Commercial real estate crisis may hit demand for Tesla EVs

The significant rise in interest rates has somewhat weakened commercial real estate, which was already suffering from remote work.

One of the consequences of the Fed monetary policy is that it has increased the debt payments of property owners who are very leveraged. Commercial real estate actors currently owe USD1.5 trillion to banks, pension funds, and insurers, according to industry data.

This enormous debt, which must be paid before the end of 2025, was secured by a national portfolio of office, retail, industrial, and multifamily properties that may not be valued at where they were 5 or 10 years ago when those loans were issued.

This reality is aggravated by the office spaces that are increasingly empty in the big cities. Large companies, i.e. those employing more than 50,000 employees, plan to reduce between 10% and 20% of their office space by 2026, according to a survey by real estate agent Knight Frank. The survey is based on a sample of around 350 businesses around the world, employing a total of 10 million people.

"Firms are looking to work their offices harder, but still offer some flexibility to staff," Dr Lee Elliott, global head of occupier research at Knight Frank, said in a statement accompanying the report.

This survey confirms the narrative that workers have abandoned office buildings, preferring to work from home. The consequence is that demand in the commercial real estate market has plummeted, bringing with it a decline in property values.

Elon Musk indicates that the situation will continue to deteriorate because, he says, the phenomenon of empty offices is becoming widespread, where investors have been waiting for an increase in delinquencies for months, because of higher rates and lagging office demand.

Delinquency rates on commercial office property have more than doubled in the past six months to 4%, real estate analytics firm Trepp said in the report. It's the first time office delinquencies reached 4% or more in five years.

Demand from big tech firms has eroded sharply. In addition, many companies are letting leases expire or are renewing with smaller footprints.
At the end of May 2023, Google, for instance, announced it was offering up 1.4 million square feet in Northern California for sublease.

With the expected commercial real estate crisis, the economy will slowdown and Tesla may experience overcapacity. Hence Musk may not build a new Gigafactory in the next 1-2 years. This may result in Tesla not meeting its goals of increasing production at 50% per year till 2030 and producing 20 million EVs in 2030.

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