What I don't get is there are a lot of empty storefronts and places moving that I see... and retailers say the rents are still sky high for those storefronts.
Is it really worth the property owners keeping them empty?
Is it really worth the property owners keeping them empty?
Housing demand in cities is much higher than the normal available space on the boundaries. Carving a big box into 300 apartments more than justifies a couple of years of doing nothing with the place.
It'd also ideally need a ton of parking though which brings a hard compromise between making a nice walkable pleasant park area and having enough parking that your reinvigorated area doesn't become too congested. On top of that most malls are way too large even for that, it'd be hard to build out enough shops to make the mall not feel super empty.
The developers tore down the existing structures and built from scratch. They didn't build around an existing mall (although there is an another mall across the street).
Yes. It's a tax dodge. [1] [2]
The owners "...hold out for higher rents to increase the worth of their properties because value is based on future income stream...They can afford to forego current rental income, waiting for higher-paying tenants because they claim big business losses. Landlords get a tax loss from negative rental income when no rent comes in, which cushions their lack of cash flow."
There are also perverse incentives structured by the debt instruments securing these properties. [3]
There's some more miscellaneous reasons, like not wanting to hassle with renegotiations from existing tenants who hear about a lower psf/psm rent of a new tenant, not wanting to attract the "wrong" class of tenant, etc., but by and large, the money reasons talk loudest.
High real estate costs preventing affordable, energy-dense and hyper-efficient living and working for most of the world's population are imposing quite significant externalities around the world. Not really discussed much though, as it gores too many oxen. Saliently changing this status quo would require fundamental changes in how real estate and credit interact, and that's not going to happen without some real not metaphorical blood spilling.
[1] http://www.nydailynews.com/opinion/change-math-keeping-nyc-s...
[2] https://gizmodo.com/full-bank-accounts-empty-storefronts-the...
[3] https://commercialobserver.com/2016/09/soaring-retail-rents-...
Nothing guarantees the higher rent will come eventually
Also
"According to Plasky, landlords who wait for their ideal tenant are generally approached by small businesses but reject them because they want a national chain—like TD Bank, CVS or Starbucks—and a corporate guarantor... But this leads to a vicious cycle, into which the entire retail corridor is sucked.
When a retail corridor deteriorates because of its empty spaces, the first tenants to leave because of low foot traffic (and consequently fewer customers) are the mom-and-pop businesses. "
It seems this is another bubble that will burst.
People in real estate are pretty satisfied with the current global monetary configuration that guarantees asset appreciation of most real estate over long enough (decades) time spans, over positions spread geographically wide enough (tens of millions of square feet/meters). At large enough capitalization scales, real estate starts to behave like passive indexing when set within our current monetary and legislative backdrop.
The way credit and tax are structured around real estate is deeply entwined with how our civilization generally conceptualizes money and the act of exchanging. And the big realty interests (trusts, big brokers, etc.) are using the small players as human shields, what I call the "Grandma Shield" political strategy. Any move to configure the gears of globalization to also crush real estate pricing with competition like it has with supply chains puts up a storm of "think of G'ma's rental income receipts!!!111!!!". This gives them the emotional charge to gin up a lot of political support, and structure "way of life being threatened" political battles.
Globalization has shed blood. The grand hope of globalization was deeply intertwined national economies propel with enmeshed economic pressures an evolution to Western liberal progressive postures and increased global harmony. There are today gaps in that narrative; it remains to be seen if they are patchable or structural. Globalization is the overarching thematic fundament that lends legitimacy to sovereign interference in Syria, Iraq, Afghanistan, South China Sea, Crimea, Falkland Islands, etc., predicated on the current mainstream foreign policy conjecture that turned into the modern globalization effort starting around the WW1 era that non-interference and neutrality leads to even worse outcomes.
Deep structural changes in real estate (and finance more generally) would have to take place in some similar context as globalization, and historically conflict arising to the level of blood shed accompanies changes on such scales because the architects of such changes do not model conflicts into their projections. Like programmers that don't model debugging time into their project plans.
I personally think globalization is patchable, but only starts to make real progress again (we've done a lot so far, possibly stretching beyond our reach by now) by the time we start getting much better modeling of societies that makes today's Summit-based modeling look like a Tinker Toy. There's also the problem that we simply don't know how to model societies at a fine enough granularity to tell with a high degree of confidence (>99%) and consistency (>99%) how broad swathes of people will vote. Lenin thought central planning projection was possible, but it took until today's computer-driven supply chain management to even begin to realistically approach just a pale shade of semblance of his vision of how to perform economic projection, and only at the short-term, reactive micro-economic level at that.
[1] http://fortune.com/2016/01/26/rea-estate-global-economy/
That's just the apparently-not-so-well-known First Law of Tax: It is always better to have more money than less money.
For little people like you and me, taking rent is a simple income and forgoing it would be a simple loss. As you say, it wouldn't make any difference for our net taxes.
When you own thousands of square meters of [what will be] prime brownfield development space, leaving it unoccupied just hastens the local government to offer incentives for redevelopment. Tax, rates, planning, VAT. Even if they don't subscribe to broken window theory, an unoccupied building pays them no business rates or council tax (UK) so doing anything else is preferable to doing nothing. They'll bend over backwards to make that happen.
A job-seeker may pass on an offer that he considers too low (because he's confident he will find something better later), no one would say he's doing so to avoid paying income taxes.
The overall portfolio cash flows profit, and capitalization is sufficient to ride out 10-20 year cycle minima on the minority of the portfolio sitting vacant until asset appreciation works in their favor again. These holdings are so large they overwhelm lay people's sense of what is feasible. This model only breaks down in "perfect storm" secular changes set within a dysfunctional government context like Detroit, and only then do you see true abandonment and not just vacancy.
To these holders, how these vacancies work is a feature, not a bug.
https://thetyee.ca/Solutions/2018/06/04/Tax-To-Solve-Housing...
This doesn't mean I want to toss out all economics, but some discerning skepticism about the descriptive (not to speak of predictive or prescriptive) modeling power of economics is in order, certainly at macro scales.
What to do about all this? I think a start was expressed by Iain A Banks in his The Culture storytelling universe, where he said "Money is a sign of poverty." My take on that is all capitalists should be striving to achieve a world where money is a historical artifact, because money is only used as a tool to advance science sufficiently to unlock post-scarcity material and cognitive abundance. In other words, capitalists should be working to progressively put themselves out of a job as capitalists, driving down the cost of every material good to the point it is cheaper to subsume it as a general utility everyone pays for than to leave it outside the Cosean boundary.
In practical, actionable terms today, I suspect this means forming inter-generational and intra-generational cooperatives as a defensive measure by the under-capitalized against predations (sometimes not even conscious or intentional) by the well-capitalized. That's a tough problem to solve.
I can definitely see a situation where the owner prefers to have some storefronts vacant rather than lowering the rents because they aren't sure lowering the rents would actually fill the storefronts and it might cause the other tenants to demand lower rents. Plus it might attract the wrong sort of business.
I've met people who sincerely believed making enough to enter another tax bracket would mean all their income would be taxed at that rate, not just income inside the range.
If you have 100 shops, and rent 11 at $10k a month, and the rest are empty, you get $110k a month
If you have 100 shops, and rent 60 at $2k a month, and 40 are empty, you get $120k a month
Now lets assume a 50% tax
In the first example you keep $55k In the second example you keep $60k
Great, go for the second.
But now if you make the empty shops a tax writeoff, you instead
first example, $110k income, $850k loss. No tax to pay, total income $110k with no tax (and a £750k loss to offset other income) second example, $120k income, $80k loss. Tax to pay on $40k which is $20k, so total net income $100k
This is assume that you can claim that unrealised rent as a loss. I believe there are ways of doing that (charity shops for example)
Do you have any examples please?
If they earn an extra £1, the marriage allowance vanishes, and they pay £11,449.54 in income tax and national insurance
That's a 23,822% tax rate on that pound.
You've also got the state where you have 7 kids (say you had 4 from a previous marriage and your partner had 3), and earn in the £50k-£60k range, where you attract a "High Income Child Benefit Tax Charge" which, combined with income and NI, works out to be 102% marginal rate, over a range of £10k.
As the OP said: "A wise colleague told me that until effective income tax rates reach 100 percent, a dollar of income is worth more than a dollar of deduction"
There are cases in the UK where that's demonstratably false. A dollar of income is actually worse than nothing. At the marriage threshold a pound of income is worth £-230. A pound of deduction is worth 33p.
A similar loophole was being used in the UK a few years back: https://www.bbc.co.uk/news/business-16692556
Edit: reading your link it seems unrelated to deductions on taxable income. It's about council taxes on businesses, which are lower for charities than for regular businesses or unoccupied stores. So it makes sense for the owner to let a charity use the space rent-free and pay their 20% of the tax instead of paying 100% of the tax for the empty property.
[1] Actually I may end up paying less taxes if my costs raise, because I will be making a lower profit. But that would result in lower after-tax profits, which is probably not the objective of the scheme.
I sold my company (had a legal battle with my partners which destroyed me emotionally and now I find it hard to trust others, naturally i am risk reverse now), and deployed excess capital in these vacant kept properties. I simply have no desire to earn extra income on them. I hope I'll make some amount on appraisal.
Secondly, not everyone is in the market for maximizing their gains. It would cost more of my time if I ran into a bad tenant who sued me (if partners i known for years couldn't resist, what makes a random one any different? No amount of rational explanation is going to change my belief. Once you are burned, you even start hating candles). I optimize for less risk and if it comes at zero return or slight loss, all good.
It’s clearly not worth renovating, but maybe the seasonal business brings in enough that it doesn’t need a tenant the rest of the year. But also, the store is huge and its layout is unwieldy for most types of retail.
What I don’t understand as well is how many empty storefronts around here still have Radio Shack signs above the doors, even in what should be prime locations. I’ve started wondering if having been a Radio Shack is a curse of some sort.
I suspect it's a combination of factors that leads to this:
* Retail was heavily overbuilt leading up to the 2008 market crash, so even a decade later there's oversupply of retail real estate compared to demand for it
* The economics of brick-and-mortar retail haven't gotten much better, which further depresses demand
* There are probably uses for those properties as tools for tax arbitrage which are best served by keeping them empty (and in California, the fear of Proposition 13 reassessment being triggered by redeveloping the property)
So leaving it empty most of the year, with the seasonal rental, may be the best option for the owner of the property.
Dropping the rents would prompt their remaining tenants to renegotiate their contracts.
As a buyer you need to watch for new tenants at attractive rates as well. Sometimes the seller signs a 5 or 10 year lease with a connected company to drive up the cap rate, then a few months after selling the tenant defaults. As the landlord your recourse is limited, slow and expensive.
Or are the "lenders" in this case actually retail investors who are buying into dodgy REITs and suchlike?
There's dozens of buildings like these either recently built or under construction in or near RTP.
There are 2-3 abandoned moderate sized retail buildings in a suburb I pass on my way into work that have sat vacant for the better part of a decade with a big "for sale" sign out front.
On the odd times I look up the listing price, they want high hundred thousands to low million. Keep in mind this is for buildings and land that have not been maintained for years now.
Without a massive surge in pricing, they are already vacant maintained spaces that will capture most interest before that vacant tear-down gets bought.
Even when the value of something has fallen (as measured by market comparables, ability to generate incomes like rent, etc) people become anchored to a valuation and think they'll get the price they want if they just hold out a little longer. There's something psychologically difficult about accepting that you aren't going to get the price you want for something; it requires an act of "letting go" that can be hard.
You see this all over the subprime crisis, banks had tons of toxic debt but didn't want to "book" their losses by selling at whatever the fair-market price was that day.
I'm reminded of that old saying from finance, "The market can stay irrational longer than you can stay solvent."
I'm talking about rationally assessing that the value of an asset has fallen, vs. sunk cost's "we've come this far..." - even if you're rational, it can be hard to sell and psychologically tolerate taking such a huge loss.
was it built during the rush thereby incurring high land and building costs?
do they have good clients? good are grocery stores, popular chain restaurants, and such. bad are "I want to run my own coffee, cupcake, and such, stores.
So if they ended up with the less than favorable clients in order to get storefronts it does tend to lead to vacancies. that is always compounded by not having the big draw, I love grocery.