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Comment by andrewlevine | Hacker News Reader

Can anyone explain the economics of being a NYC landlord and keeping a property vacant for months or years?

I've experienced this in several different neighborhoods I've lived in, but it's worst in my current neighborhood (Upper West Side).

This article gives some high-level reasons (institutional investors more willing to wait for higher rent, banks devaluing non-chain properties, real estate bubble). But it's hard for me to imagine the math works out for leaving a space vacant in NYC for years.

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This is a classic example of real option valuation[1]. As others have pointed out, holding out could mean that the owner could charge more later on. The right, but not the obligation, to lease or sell the property has an intrinsic value which can be modeled using different option pricing methods. So long as the value of the option is greater than the current leasing options, then the owner should keep the property vacant.

[1] https://en.wikipedia.org/wiki/Real_options_valuation

It seems that landlords aren't paying enough in property tax if they'd prefer to keep the property vacant than rent it out. Sounds like we need to raise property taxes, implement some kind of vacant property tax, or introduce a land value tax.

I found another interesting article on this question: https://citylimits.org/2017/12/05/diagnosing-nycs-vacant-sto...

The additional reasons they give:

  * increasing prevalence of chain stores who move slower on real estate deals
  * willingness of national chains to pay high rents and lose money on a store 
    in a famous neighborhood to boost their brand reputation
  * landlords "warehousing" properties, waiting for rezoning or new development
  * rezoning causing an oversupply of commercial property in an area
  * unrealistic expectations of landlords who have not adjusted to lower
    rents caused by online competition
  * sunk-cost fallacy - for properties bought in 2014-2015, landlords could
    face "losing" money by renting for less than their mortgage
  * increased prevalence of "demolition clauses" in leases - that allow
    for eviction of tenants if the landlord wants to demolish the building -
    making it harder to find a tenant

Please don't use code blocks for bulleted lists, it makes you comment impossible to read on mobile.

I believe landlords try to get 10 year commercial leases which is the cause of holding out for the best price they can.

This article doesn't answer the question directly but it came to mind: https://www.nytimes.com/2017/05/31/fashion/bleecker-street-s...

10 year leases are mostly made by big companies with deep pockets, which puts the value of the property up.

A standard storefront lease is for 10 years. If you believe you can get 12% higher rent by waiting for a year, it's worthwhile to leave the space empty.

What I don't get is why there aren't more fun pop-up shops appearing in these spaces?

If you believe you can get 12% higher rent by waiting for a year, it's worthwhile to leave the space empty.

An interesting comment that dovetails nicely with this: https://news.ycombinator.com/item?id=16002397 :

Seems simple to fix. A building sitting vacant is depressing everything around it, pushing an external cost onto the city.

Leave it vacant and your property taxes triple to offset this cost.

Such a policy would probably need fine-tuning (e.g. what is the optimal number of months before taxes kick in, what is the optimal rate schedule, etc.), but it seems reasonable on its face.

I wish the popup shops were more frequent. 2 or 3 years ago there was a vacant store front on 39(?)th and Madison. Instead of just leaving it like that, the landlord turned it in to a private motorcycle museum. I got to walk by some very good looking classic bikes, he got to show off the shop.

I'm still skeptical (tell me what I'm missing) - are commercial real estate prices in NYC really going up 10% / year?

Certainly as a residential renter for ~12 years (in the same areas that have high vacancies) I haven't seen a rent increase like that.

It's not necessarily a market price increase that they're waiting for, but rather a higher bidder. Why rent now to a (price-sensitive) local pizza parlor if you have a chance to land a national bank that can afford double the rent without a second thought?

That makes sense to me if I saw properties lying fallow for a year or two... but there are tons of properties that just sit unused for many many years. I honestly don't remember the last time there was something in the amazingly-located spot next door to the Apple store in downtown Santa Barbara. I frankly bet it was longer than ten years ago! What are they waiting for? Bankruptcy?! I just don't get it :(. There are also lots of businesses that would be willing to sign on for just a year or two instead of for ten years. Hell: the average life expectancy of many businesses isn't even ten years, so you are essentially just refusing to sell your wasting good (minutes of building) to people who would love to pay you for it due to "I guess this is how people normally do it", which is insane.

> I honestly don't remember the last time there was something in the amazingly-located spot next door to the Apple store in downtown Santa Barbara. I frankly bet it was longer than ten years ago! What are they waiting for?

The answer is probably that Apple has a clause in the contract that says that if you give another client a better price than you gave Apple, Apple gets to renegotiate.

If you got a particularly good rent from Apple, it's probably better to leave the place beside completely empty.

You may be interested to know that spot next to the Apple Store was recently filled and is a furniture / interior decorating shop now.

I'd be curious too. Not NYC big there's was a medium sized retail space across from a Whole Foods in Noe Valley. It was vacant for 11 years. Maybe it's still vacant? The picture on Google Maps ©️ 2017 shows a still vacant space.

https://sf.curbed.com/2015/1/26/9999036/11-years-after-closi...

Still vacant!

I've heard rumbling that something will go in there, but nothing yet.

SF too. Our awesome neighborhood coffee shop closed after the landlord increased the rent from $3300 to $6k. It then sat vacant for 4 years, and finally got filled with a $10/entree vietnamese restaurant. I dunno what the idiot of a landlord thought they were going to get in rent, but a less than 10 table restaurant with cheap entrees does not pay much rent money. Certainly not enough to cover the foregone $120k...

In the meantime, I lost my coffee spot and my egg breakfast sandwiches.

>"Can anyone explain the economics of being a NYC landlord and keeping a property vacant for months or years?"

Vacant for years is a bit unusual. But being vacant for months seems to be the norm now. I think this is mostly because the type of tenants that can afford these rents or the ones the landlord wants are big corporate chains. These are entities that don't move very quickly or don't need to move quickly. It seems that vacant stores fronts are invariably replaced by the same 5 banks(Citi, Wells Fargo, B of A, Chase, TD) and the and two drug stores Duane Reade and Rite Aid.

These 7 companies have achieved absurd levels of density in Manhattan and it may even be that they are finally slowing these insane saturation campaigns they have undertaken.

Not sure about nyc but in other markets people claim that some are just speculating on the property value appreciating and it has been going up so much the extra money from renting isn't worth the hassle, especially for foreign investors. I don't know how true this is.

It was only touched on in this article, but I've read elsewhere that part of the problem is the structure of loans. If the landlord takes a lower rent, then the value of the property decreases in the lender's eyes. If the owner doesn't have enough equity then they might have to renegotiate at less favorable terms.

Do you have a source for that? I read the same thing a while ago but couldn't find a source more recently.

This happens in Australia all the time.

Real estate is a den of crookery. There are all sorts of tax schemes that make it desirable for some properties to lose money.

Isn't it the extremely low interest rate set by the Fed though? With the lack of good investment opportunities and the danger of inflation, everyone puts their money on real estate, so last decade's housing crisis is imported into the next decade.

We have this problem in Boston too. Let me know if you get a satisfactory answer. I’ve been wondering for years, and can’t understand it.

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