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Comment by Digory | Hacker News Reader

>ghost towns

...if rents don't fall. And maybe they should.

I think I've seen it stated that property developers and property-management companies are often heavily leveraged, such that they can't lower rents; in about the same way that a VC firm with a ten-year investment time horizon on their fund can't invest in your startup if all your valuation-growth will come only after 11 years.

In both cases, the lenders and shareholders of the firm, have contractually obligated the firm to have specific returns (and often have built financial instruments on top of those predictable returns, which is why they bothered to invest in the first place!) So the firm itself is destined to either return the predicted profit, or die, with no middle road.

Then they are doomed. Their current tenants can’t afford the current rent, and no new tenants are going to come along at that rent level while this crisis is still ongoing, so what are they going to do?

If the current tenants can be viable if rents are reduced, along with other cost saving measures, then maybe that’s a least worst outcome for society and the landlords.

Ultimately though, to me, the actual business leasing the property, employing people and providing service to customers is doing more for society and the real economy than a heavily leveraged management company. Those retail businesses don’t deserve to exist on any terms, but if they do have value, then I think they’re worth giving a second chance.

The property management company isn't really a company per se; it's more like a conduit for money, an instrument.

If that instrument defaults, it's not of so much concern that a property management company will die; but rather, that the companies who were on either side of it, relying on it as a conduit for money to flow through, will end up illiquid, unable to exchange through that instrument.

On one side, that's large investors, e.g. mutual funds. So the markets will go down.

On the other side, that's the businesses themselves. Having no access to financially-healthy property management companies to rent from, is a lot like having no access to loans: it limits your choices as a business.

Maybe the valuations of these properties will crash without property-management companies around to compete over them, and businesses will be able to afford to buy them directly. But more likely, as we saw in 2007, the commercial real-estate market will just become illiquid, with everyone who is currently holding empty commercial property (i.e. mostly banks, after a presumed default or bailout of PMCs) refusing to sell it "until things recover", so that they don't have to write down a loss. And that means there won't necessarily be any commercial properties on the market for these businesses to buy into in place of their previous rentals.

And yet again the cleanest method would be to not bail out the banks and let the assets be actioned to the highest bidder. Everything else is trading off long term efficient ressource allocation in favor of short term stability.

Funny how it's a moral hazard to bail out individuals weighed down by debt, but an economic necessity to bail out millionaires and billionaires who didn't do their risk analysis.

Or maybe they did do their risk analysis, and incorporated the likelihood of getting bailed out into that?

At this point they'd be fiscally irresponsible if they didn't assume a certain level of bailing out - and they're likely "investing" in relations with various senators and representatives to make sure their name is on the list of those eligible for the bailouts.

I agree bailouts should not benefit shareholders, but it can be pragmatic to rescue businesses, including banks, that are systemically important. That may mean the government temporarily assuming equity in, or ownership of the enterprise. The important thing is that it's the interests of the economy that are being safeguarded, not those of investors.

That would cause a massive economic disruption that could potentially lead to actually bad economic effects. Right now things aren't all sunny and happy for everyone but they can get a lot worse if infrastructural components of the economy start getting eroded - either by being chopped up for vulture capitalists or by having their lending chain & backers divided up similarly.

If Fedex & UPS were to be forced to sell off package delivery in NYC to cover losses while USPS continues to be hamstrung by the administration then things will get bad - and there are a lot of other operators that are a lot less visible but just as essential. Let slip retailers and banks are less stable - let slip banks and companies that are operating through the pandemic on shoe-strings and a whole bunch of backed credits lose the ability to keep the lights on.

> If Fedex & UPS were to be forced to sell off package delivery in NYC

Then the market will adjust. If you can't get packages delivered in NYC, you will have to get your goods through some other means. Maybe all of NYC is a bubble. Maybe that many people shouldn't live on a handful of tiny islands, importing their food from the mid west and their goods from China. Maybe everyone's in the wrong place.

Maybe.

But if that's true, is the correct solution to crash-and-burn from the current scenario to some version of a "better" one?

Creative destruction is how capitalism is supposed to work. Bankruptcy is a vital part of the system - and far from "crash-and-burn" it's a well-regulated process with a lot of safeguards in place. If you stop allowing companies to go bankrupt then you end up with a crony capitalism that's not much different from oligarchy.

The correct thing to do is let the market decide. If it's profitable to do something, people will do it.

This seems profoundly naive to me. "If it's profitable do something" is beyond simplistic.

Profitable compared to what? Profitable for whom? Profitable based on what assumptions? Profitable by what metric? Dollars accrued to capital? Dollars accrued to GDP? Quality of life index? Happiness index? Life expectancy numbers? Infant mortality? Profitable with what externalities forced to be part of cost-factoring?

What is "the market"? What is a "decision" in this context? What is the cost benefit analysis of allowing "the market" to "decide" versus more policy-driven unfolding of the outcome?

... and so on and so on ....

i.e. the usual litany of problems with free-market boosterism

To refuse to decide is even more simplistic. The free market offers a clear way to decide where resources are invested. If you're going to override that and prop up failing companies, what grounds are you going to use to decide, and why do you believe your process will be better? Letting the market decide at least ensures that completely useless companies go to the wall, and companies that people are willing to spend a lot on get to continue (and, notably, it does this in a nondiscriminatory way - anyone's money is as good as anyone else's). Can your process - which is, what, Trump picks and chooses which companies don't go bankrupt? - guarantee that much?

I don't propose propping up failing companies. I agree with others who have suggested that ensuring that individuals (i.e. employees/workers) are adequately protected so that the immediate aftermath of corporate failure doesn't fall on them. Remember: the usual reason why employees are not entitled to the same share of profits as investors is that "employees are not taking a risk". If we're going to start arguing that deciding to take a job at a company is just as much of a risk as investing capital, then the relationship with profit will need to change too.

But the implications go beyond the people who work for corporations that fail, into communities (possibly far and wide). I don't think there are policies that can mitigage this without damaging the entrepeneurial climate, which I'd rather not do. At the same time, the incredible ease with which one can start new businesses in the US, and the trivial availability of credit, almost guarantees that we have huge numbers of businesses that play valuable roles in their communities but have absolutely no resilience to negative economic shifts. I don't know how we fix that.

Corporations are supposed to be easy-come, easy-go; the fact that it's easy to start new businesses should mean that if there's genuine need for a business then it's easy for a replacement to start. I wouldn't be surprised if e.g. a lot of bankrupt restaurants start operating again with the same kitchen and most of the same staff, because there's no reason for whoever ends up owning the place to do anything different (unless there's a long-term shift in people's behaviour - in which case we don't want the restaurants to re-open). So I think the main thing is to make sure it really is easy for replacement businesses to open (i.e. avoid situations like new businesses requiring a difficult license, or zoning that grandfathers in existing businesses but wouldn't allow similar new businesses), and to avoid having communities dominated by a small number of big companies (which mainly means not having the kind of tax loopholes that give big businesses advantages over small ones). Ultimately the losses have to be borne somewhere, and it's better that they fall on business owners and equity investors (who knew the risks they were taking) than anywhere else, even if spreading them out among taxpayers makes it looks like no-one would notice.

The instances where it's been profitable to maintain a standing army are quite few and far between - and allowing the market to control fire extinguishing has led to some really perverse incentives.

There are things that we benefit from as a society that aren't realistic to accurately price for ethical reasons so I think this is quite too simplistic a statement.

Inflation to the rescue? If rents decline in real dollars but go up in fiat dollars, does it resolve the situation where renters can't afford rent and property owners need a certain profit?

What happens is someone with money buys out the deal for pennies on the dollar or there is a successful renegotiation with lenders or there is a successful renegotiation with the limited partners (in the US most real-estate deals are structured as limited partnerships with the general partner as an LLC).

Basically, except in the first scenario everyone agrees to suffer together. In the first scenario, the initial investors suffer and the new investors think they got a good deal. It's worth noting that LP's are usually built from people who have worked together before or from people with track records of being good to work with.

What does the good deal look like here if there no new tenants ?

>So the firm itself is destined to either return the predicted profit, or die, with no middle road.

Nah, the third option is bailouts, and they are not wrong for having high confidence in getting bailouts.

It's interesting, where I live in Ontario, the mall pre-recession was doing extremely well. They changed focus primarily to services, clothing, and food. Massive food court, 80% of the mall are clothing/fashion, and then there are services, like dr's office, optometrist, gym etc. They were killing it.

No not all developers/commercial property owners are that leveraged or locked into those kind of cash distribution obligations. The smart ones will survive fine. The irresponsible will just file bankruptcy, and a more responsible owner gets to buy their properties and run them better.

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