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Comment by Digory | Hacker News Reader

And yet I'm not sure it's a smart deal to be a commercial landlord. These "Retail space per capita" graphs have been eye-popping for awhile.[0]

The landlords that win seem to be the landlords who play the political subsidy and tax games, not just good developers.

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My favorite is the landlords that refuse to lower their rents to attract tenants. They got a loan to buy the property, and the loan is backed by the revenue potential of the property. If rents decrease, the revenue potential also decreases and the lenders require the property owners to make up the difference. It produces a huge incentive for a property to go unrented at a high price rather than rented at a low price.

I’m familiar with the argument but I think people overstate the importance of unrented high price to refinancing. Banks (and CMBS investors) don’t simply look at market rent levels in isolation. They also look at percent vacant and length of tenancy. Except over the very short term, no one is being deceived.

I can't say that it's specifically the case, but in Montreal, there's been an ever increasing number of vacant commercial spaces - seemingly because they know that "eventually" some BigCo will come along and be willing to pay the extremely high rent. As anecdata, there's a corner space on the ground floor of Duluth and St. Laurent that's been vacant for well over a year - maybe even two. It's pricing out smaller businesses, and even though the space is available and empty, it's just unaffordable and priced far above the true market value.

We don't want more A&W's and Starbucks, but that's what eventually happens here. The only places that survive are bars.

Refinancing isn't the answer, because the borrowers will need to make up the difference between the old value and new value in cash. That's what makes this such a strong incentive, where it's worth it to leave a property unrented for a long time. If there's no refinancing, there's no reevaluation and no big lump of cash to be produced - everything just continues on as it did before.

Large landlords who own an entire street/area in upmarket or aspiring parts of a city also worry about low end tenants dragging the rest down. Completely rationally they'd rather have 60% occupancy at 2x the average rent than 95% at 1x and they know that high end retailers will pay a lot less (if anything) for a site next to a McDonald's (for example) than for a site next to another high end retailer.

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