Hacker News Reader

Comment by wwweston | Hacker News Reader

> My hope is that this will bring down commercial real estate prices down significantly

I'm going to predict that this will not happen. More specifically, that it will be unusual in general for rents or prices anywhere to drop any more than 10%.

There's something odd going on and my best guess is that there are (a) accounting/tax practices that provide incentives for vacancy with certain nominal values and (b) real estate markets are now driven more by massive pools of capital trying to soak up opportunities than they are by demand on short-to-mid-term horizons.

But I don't know enough to say for certain and explain how, and I'm hoping that someone can tell me why/how I'm stupid.

View on HN

The value of land rented is mostly based on the rent that can be charged. Loans which use the land as collateral need the value to stay high in order to roll over (refinance) the loan.

It's conceivably better for major real-estate holders to rent the land out at their preferred rate one or two months in a year, and leave it unoccupied otherwise, than accept reduced rates. The former gives a fig leaf for rental value, which props up the land value, which enables refinance. The latter admits that rental value has dropped, which would lower the land value, which would cause refinancing to fail.

That makes sense, but I'm confused how you make loan payments without tenants paying rent. Not to mention property taxes, maintenance, utilities and other overhead.

Kind of feels like the cliché "make it up in volume" when you're losing money on each transaction.

It's not sustainable indefinitely but most large landlords have significant capital reserves as well as revenue from a diverse portfolio of other properties. So they can afford to take losses on vacant properties for a few years while waiting for the market to recover.

This is to the detriment of reality, to the actual structure of the city, therefore it must be curtailed.

Vacancy taxes?

You don't make loan payments; you make interest-only payments and are speculating on future appreciation on the value of the land, a proxy for the local economy.

It's not sustainable indefinitely, but it can go on for some time. And if the economy picks up, then all is right again.

You are speculating with other people’s money and at very high leverage. If the market keeps going up the amount of profit can be spectacular and the losses while also potentially spectacular may not be so bad if you don’t have any collateral in the first place.

Rents in SF are already down 20%: https://socketsite.com/archives/2020/08/asking-rents-in-san-...

Rent in SJC is down by at least 10% if not much more. I am in an apartment now that used to cost $3500/mo for only $2600/mo now. A month or so ago, I moved out of my dilapidated, old roach infested apartment I was paying $2750 for elsewhere in San Jose. Yeah lots of businesses have closed and people moved out, but the discount units are filling up and businesses are reopening.

That does sound like a remarkable change in price. Thanks for the counterexample data point.

Money printer goes brrrr. To save your money, land and houses are your best bet. (even in or after a civil war)

I don’t think that this is always true. Land reform happens consistently in history when ownership gets out of wack. Also the value you assign to the land is going to change when the use changes, for example houses in currently popular tech hubs aren’t as important when people can work remotely. And the improvements to land like houses aren’t always going to necessarily hold their value. Labor is a huge influence on price, what happens when machines start building houses? Not saying you shouldn’t buy land or houses, I consider them part of my strategy but consider the downsides too.

Oh yeah, take a look at the Georgists and The One Tax where land is the only thing taxed since it’s the only finite resource. It’s not impossible that we end up in a situation where holding land just to hold your wealth isn’t going to exist anymore.

This has historically been true, but one major variable has changed: executives have been forced to see what their companies look like with remote workers. The land and housing markets look very different when a significant percentage of people aren’t paying for a shorter commute.

I think the massive pools of capital thing is somewhat true, but this investment strategy works because ultimately there's so much demand for property, which is what's driving the real estate prices.

A permanent drop in demand because more people are working from home could crash the market.

If everybody has access to the pool of fake money: you get inflation.

If only a handful of fools do, you will get economic devastation sooner or later, because you remove the feedbacks of capitalism and hand the reins to monkeys that just happen to have access to the money printer.

Commercial real estate prices are coming down.

Reply on news.ycombinator.com