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This reminds me of a similar land use issue I've seen a hundred times over. In major cities, in the middle of some of the densest, most trafficked, most transit-oriented neighborhoods, you'll find vacant lots and storefronts that sit there for years. Places that could, presumably, bring in many thousands of dollars every month in rent instead bring in $0 month after month. And the prime real estate sits unused, despite the thousands of residents and tourists that walk buy every single day. I've seen it in many different cities and towns.

Maybe there is some real-estate-specific knowledge I lack that can explain this phenomenon?

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I haven't seen this anywhere on the scale that I see it in California. It's largely due to tax reasons. Prop 13 allows property to not ever have the property tax exceed a certain percentage of the ORIGINAL purchase price. If you bought a half acre parking lot in Hollywood for $20k in 1960 -- even though it's worth $20M today -- your tax bill is likely less than $1k a year.

You might look at these places and see wasted capital. Why not cash out? Well, what would you do when cash out? Invest the money and try to make a better return than you're currently making.

Yes, these parking lots don't make much money WRT to their value. No body would buy a half acre land today and put a parking lot on it. So why do they exist?

The little money they make is usually more than they can get as a percentage of the value invested in any other safe asset. For example, a parking lot of that size might only make $2K profit per day, but because the taxes are essentially $0, you're generating a return of 4% per year. That might not sound impressive compared to equities, but you have to remember that the land is also increasing in value -- currently at about the same rate as equities.

Further, you have to consider that profits from land sales are taxed as capital gains. The return on equities includes dividends, which are taxed as income, which is taxed at a higher rate.

I'm not as familiar with New York tax code, but it might have similar laws to appease aristocrats. Other than these areas, it's really a pretty recent phenomenon for land to be as expensive as it is and increasing in value at the rate it is. I'm sure a lot of it is just owners unsure of what to do in this strange environment.

Take Texas for example -- until very recently, land was plentiful and very cheap. If you had a poorly utilized piece of land, there wasn't a lot of reason to try to figure out what to do with it.

Except for that property taxes in Texas are quite high for the US and there's no equivalent to prop 13. So, mostly you're right, there hasn't been as much pressure to use the land well, but as urban centers have appreciated there is more pressure than there would be in California.

Rapidly speeds up gentrification, to boot. The net results are all debatable, but no denying that it happens.

It often comes down to the laziness of the owners. Both offices I've rented in the Bay Area were owned by family trusts, where the children of the original owner were getting a check every month but nobody was interested in doing the work to fix the place up and find higher value tenants.

There's a huge amount of that real estate dark matter around here. It takes some legwork to find such buildings and rent them. And if you fix them up, the landlord might notice and raise the rent.

It's an inefficient market, waiting for disruption. Some startups are trying.

I live near a place with a similar story (not in California). The owner comes from a wealthy family and doesn’t care to rent it out at the moment. It has been empty for years.

"Thank You From a Land Speculator"

https://www.youtube.com/watch?v=xqQhoZgFZgk

The land value appreciates over time regardless of use. Why worry about setting up a business and trying to make money when you could do nothing and make a lot of money 10 years down the line when you sell?

The value of commercial real estate is also tied directly to what it can rent for so you’re encouraged to wait to maximize rent which may mean leaving it abandoned or vacant.

That's the ironic part. The more valuable the local market is, the more incentive there is for some people to sit on their asses.

That tells me that taxes are too low. Not necessarily taxes for used property, but vacant/unused property could be taxed more effectively to promote development.

Would love to see a gradually increasing tax on unused/underused property - so small time landlords who lose a lease aren't screwed over but no one should be leaving storefronts empty for years

It's terrible in Toronto, you'll see complete sections of the street literally empty since there's so many tax benefits for empty commercial-retail space

Where in Toronto? I don't really notice this phenomenon.

You could also rent it out and make money in the 10 years you're waiting for it to appreciate.

Yeah, but you can’t sell it at moments notice any more when the value crashes for some reason.

The property might be tied up in a court dispute, a bankruptcy, or inheritance. As an example, a building near where I work sat vacant for years; I did a web search for the building's address, and found an article mentioning that the company which owned the building had been bankrupt.

You can also get cash out of an asset like land by using it to back loans. So you get the advantage of land appreciation and borrowing money on a tax deductible basis at very low interest rates.

If the land is appreciating at 10%/year then it is a no brainer to borrow against it at 4% (pre tax)

In central areas of Hong Kong island locals who inherit stores at ground level sometimes never bother opening them at all, instead going to banks and using those properties as bargaining chips to get comfortable loans they’d basically live on and/or invest.

This was a point in a presentation about issues in local urban communities I attended a couple years ago. (The dynamic is not great for a community.)

There was some economist on the business TV channels blaming CCP for letting this happen by letting the businesspeople run Hong Kong untrammeled and how that was contributing to the protests

In theory this situation is avoidable under the letter of Chinese property law (the government could decide that your use of property harms public interests and take it from you, though that would be a very extreme interpretation). In practice I imagine banks are just as willing to issue property-backed loans under that system, while the associated corruption and lack of security in own future cause arguably bigger issues in city communities of communist China.

In general the non-use is not very widespread, and partly thanks to 唐樓 architecture there are plenty active small businesses in residential areas (I haven’t seen such abundance while staying in mainland cities). I believe the reason I saw it come up is the existence of active and conscious members of the community who are more invested in its future and sensitive to upcoming issues.

There was an article I probably saw here on HN a couple of years ago. The problem is that rents can't lower to what the market will bear, because that would lower the property value. The loan that was used to buy the property is based on that value, and if the value drops the owner may suddenly need to come up with a pile of cash to make up the difference. It makes more financial sense to leave it unrented at a high price than to rent it out lower.

At least in west la it seems there is like no commercial vacancy it They just cram little shops and groceries and restaurants and swap meets on top of little shops and groceries and dispensaries with even more people selling under canopies on the sidewalks. Fruit is sold everywhere. The place has a pulse, 4 million+ live in la after all.

You're about to "see the cat" dude.

https://henrygeorgedevon.wordpress.com/2013/02/01/do-you-see...

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