The founder of Dallas-based Hayman Capital Management says office buildings in cities need to be demolished because demand isn’t returning and it’s impractical to turn most towers into apartments.

“It’s one asset class that just has to get redone, and redone meaning demolished,” said Bass.

The Dallas-based investor shot to fame more than a decade ago betting against subprime mortgages before the US housing collapse. He’s since pushed a series of contrarian investments that have occasionally burned investors such as predicting the collapse of Japanese government debt and Hong Kong’s dollar. 

His expectation of more pain in the office market reflects a more widespread view that the pandemic has driven a semi-permanent shift toward remote and hybrid work that imperils lower quality buildings that are older and lack amenities.

The office vacancy rate in the US climbed to 20.2% in the first quarter, up from 19.6% in the last three months of 2022, according to Jones Lang LaSalle Inc., and recent weakness in tech has forced companies including Meta Platforms Inc. and Amazon.com Inc., to scale back their footprint.

“We are now approaching the eye of the economic storm, and I expect it will get even worse,” Steven Roth, the chairman of Vornado Realty Trust, said in a recent shareholder letter.

Bass, who’s most recently been investing in Texas land, said there’s an imbalance in real estate with a severe lack of multifamily units, especially in fast-growing cities such as Dallas, but it’s impractical to convert the vast majority of offices into housing. 

“You have to jackhammer rebar and concrete. You have to re-plumb everything,” Bass, 53, said in an interview. “And when you finish it, it just doesn’t feel right. You wouldn’t want to live there,” he said, citing for instance the lack of light.

Despite high demand for housing, developers of multifamily properties simply can’t get the financing right now to proceed with projects, Bass said. Banks are constrained by the rise in borrowing costs brought on by the Federal Reserve’s rate hikes, and the rapid movement of money out of deposits amid turmoil in the sector.

He reiterated that the Fed will need to cut rates by the end of the first quarter next year and said the recent run on bank deposits and Silicon Valley Bank’s collapse has in effect tightened monetary policy by 150 basis points.

The lack of funding for new buildings means high apartment rental rates are likely here to stay with demand outpacing supply, he said. 

Bass isn’t shorting office markets, partly because publicly-traded real estate companies have already priced in significant pain. The Bloomberg REIT Office Property Index is down more than 50% since the end of 2021.

Bass is long a more traditional investment — buying Texas land. He’s spent about $100 million acquiring six properties since starting Conservation Equity Management. 

Bass said he can restore some of the properties into wetlands. In exchange, Conservation receives credits it can sell to companies needing to offset the environmental impact of their developments.

He’s also maintaining his short on the Hong Kong Dollar, which he established in late 2017. The investment is influenced by his critique over China’s banking system and escalating geopoliticial tensions between the US and China, especially over Taiwan. Bass said he has more confidence than ever the bet will play out, citing data showing the scale of deposits that recently left Hong Kong’s banking system. 

“We only have one position in Asia and it’s short the Hong Kong dollar,” Bass said. “As many as we can be short.”