Financial engineering/optimization. I'm not well versed in it myself, but from my understanding:
Commercial landlords can harvest a paper loss from a vacant unit. If you were renting a unit out at $100 per square foot per month, being able to take a $100 sq/ft/month write off from a vacancy may be more advantageous than dropping your rate to $50 sq/ft/month and getting it occupied. Particularly useful if you have a large enough portfolio to withstand the loss in cash flow.
Leasing a unit out at a lower rate can also have other implications on financing (and I believe valuations) for commercial real estate, by essentially re-establishing the cash flow potential of the unit less than what it was (and still is on paper, until you re-lease it at a lower rate).
You may have a valid point on financing.
Imagine a landlord with 10 properties that rent for $100 per month. That’s $1,000 per month rental income, or $12,000 per year. Assume 10% tax rate, the landlord clears $11,000 after tax.
Imagine now that half of them are vacant. The landlord is now bringing in $500 per month, or $6000 per year. Is it your expectation that the landlord can somehow deduct the other $6k in rent not paid and pay $0 per year in taxes??? No, the landlord would now pay $600 a year in taxes on that $6k in rental income. Naturally the landlord doesn’t pay taxes on money they didn’t receive, but it’s always better to have 90% of the rent after tax, than 0% of it. It is always always more profitable to receive rent than not.
Now, as others have mentioned, it may be worthwhile to lose a few months of rent in return for signing a higher-dollar lease over a 10 year term.
But if you leveraged to buy the property, then you deduct the interest payment from the rental income. In the case of a vacant property, the interest cost will get deducted from another source (other rental income perhaps).
Then, come tax time, you net out the rental income. If they do it exactly right, it could net out to zero. And so pay no taxes since they did not make any money.
On paper this sounds bad. But because the expectation that property grows in value, they gain capital growth. This isn't taxed until sale time, but capital gains tax is very favourably taxed in most juristictions. Not to mention depreciation over time (a paper loss tbh) can deduct taxation.
After a few more years, they sell the property, using the old (high) rental income value as the valuation figure, pocketing the capital growth while paying little in taxes from the rental (which goes into the cost of debt).
This is why rents would remain high - you need high rents to value the property as high value.
Then you mention capital appreciation. Same thing. If I sell a property at a profit, then I’m always better off having earned rent from it while I owned it than not. Additionally, you don’t “claim a value” on a property when you sell it, someone pays you for it based on fair market value. For commercial property, the key measure of value is the rental income - when you buy or sell it, you advertise the cap rate (annual percent of investment made back in profits after expenses) and also the vacancy rate. Buyers get a copy of your income statement for the property going back a few years. If the property has been sitting half-vacant, then it will almost always sell for less money, since it’s not earning.
Bottom line, taxes are calculated as a percentage of profits. Outside of some esoteric situations, the money you save on taxes is less than the money you lose in profit.
For a 30% increase, locked in for at least 10 years (assuming the restaurant survives), landlords are willing to let a property sit vacant for a while.
The thing that puzzles me is how willing landlords are to let properties stay vacant. I live in NYC and all of the newer high rise apartment buildings in my neighborhood have retail spaces at the ground floor and usually a few floors above the ground floor also for retail/commercial use. As far as I can tell, almost every building has utterly failed to get any tenants in the ~5 years since the buildings have been built.
If its anything like what I saw in Boulder, most are held by large companies (TEBO) who can write off the losses come tax year because they have other more profitable locations/sites.
The restaurant I came out of retirement on in 2018 has been vacant since Summer of 2018, just to give context that building was $13k/month before operational costs, which were immense due to it be an incredibly old building. I personally had to patch up the pipesdue to massive leaks as our dishwasher wasn't getting enough pressure and my station was getting all the run off I had run to FOH get some wine cork to plug the holes and used a bunch of duct tape until the plumber could get there for the next week of service.
I think I overheard the Sous and Execs saying where I last worked that rent was 20k/month for the flagship, which on a busy night we could clear in a single days (day/night) service.
The further this has gone on, Colorado only just lifted its stay at home order today, the more I think I've hung up my whites and knives professionally for good this time.
By contrast, this is what is happening in Hong Kong, as they have captured the loyalty of their patrons and are months ahead of most country in terms of Covid19 recovery [1]:
1: https://www.reuters.com/article/us-hongkong-protests-mayday/...
It's pretty much the exact same situation in Toronto.
Trying $40k/mo in Midtown in rent alone. It's stupid.
That’s not how taxes and “write-offs” work. You deduct your expenses from your income, and pay tax on a percentage of what’s left. Having more income is always better than having more expenses.
Does that apply to all properties, including commercial buildings? I only said that because a close friend of Tebo's wife (that's his actual name, and he named his business after himself from striking it big in collectors Coins) was a trainer at the gym I went to and we'd often talk about how all the property surrounding the area was owned by him and a lot are vacant, he said that was her rationale. He could be wrong or made it up, I suppose.
He literately is a Feudal Lord in Boulder and has obscene amounts of holdings, its actually alarming how much clout the guy has a result of it and the effect it has on the local population.
I learnt about two ways, but I am sure there are many more. First you can manage the losses of selected businesses of yours such that you break the tax progression and second if you own the property you rent to yourself (this means to your company) such that the deduction of rent leads to a higher reduction of taxes than the increase by the rent income.
I don't know how often this bet comes true - it is truly remarkable to see retail properties empty for so long sometimes. But it's just a bet, not a tax strategy.
The value of a commercial property is (generally, if it has development potential that may be the main factor in valuation) usually multiple of the rental income that it can generate. If landlords accept lower rents then that lowers the value of their property.
There is a retail development near me that sat largely empty for years. They kept it up and clean, but word was the prices were sky high. It still has a huge number of vacancies ... we're talking 5+ years after it was built.
Meanwhile other retail places had shops closing, word was the rent kept climbing.
I almost want to suggest that the local city come up with a concept that somehow would encourage actual occupancy. Granted that could be complex but it seems a real waste to have these spaces empty / taking up space with high rents where maybe some business could try to run if rents were lower...
It is a weird dynamic. It's like every spot is just waiting for a Chipotle or Noodles & Company or some small fitness fad / chain and if not that ... nothing.
In summary, lowering rents to market price lowers the value of the building and makes the project insolvent.
If a project isn't objectively solvent and banks are still lending on it, then the problem is higher up the food chain - a lending "market" based on moral hazard which encourages poor decisions that blow up later.
This is one of those situations where the people on the ground - shopkeepers, small restaurant entrepreneurs, and their customers - are being punished for policy errors in the financial and real estate industries.
If you read the link, the point is the project is able to pretend it is still solvent when it isn't anymore.
From what I understand, the owners of the buildings are holding out for the high cost renters... like a bank.
A city government could provide incentives to ensure these places don’t sit vacant, and that formerly thriving areas stay interesting and have shopping for most people, not just those with massive wallets or looking for a bank.
Land value tax. Shift away from taxing the value of buildings and towards taxing the value of the land they're built on; that way you encourage appropriate and efficient development / land use.
How? Is rent lower for chain restaurants? Do they charge more than non-chain for the same food? And they still have the franchise fees on top of the same costs as the non-chain restaurants. How are chain restaurants surviving and others not?
I'd expect what nradov describes: That the space stays empty.
The only reason fast-food franchises are better commercial tenants is because they're usually better capitalized than bespoke restaurants. (McDonalds franchises also don't worry about rent since the parent corporation owns all the land).
I don't have any specific insight into the EU, but in the other global markets I'm familiar with (mostly China, Hong Kong, Singapore, and Japan) locations are either owned by McDonald's directly or franchised by large corporations that have significant bargaining power with (and sometimes are) landlords.
The China/HK franchise, for example, is operated by CITIC (a Chinese SOE) and Carlyle.
"The company owns about 45% of the land and 70% of the buildings at their 36,000+ locations (the rest is leased)."[1]
This article is from 2015, but I don't have any info that disputes it.
[1]https://blog.wallstreetsurvivor.com/2015/10/08/mcdonalds-bey...
Sometimes they increase margin on price. But more often, they do it on labor and cost of goods. McDonalds takes no-skill workers, applies its systems, and spits out 5 billion cheeseburgers at five nines consistency. And then it buys in quantities that move world markets, unlike your locavore restaurant.
Five Guys will have lower margins, but still be 4-10x the margin of a one-off restaurant. Same for Cheesecake Factories, and all the Darden-owned restaurants.
Good thing central banks around the world have been cutting rates. /s