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Comment by the-dude | Hacker News Reader

I have somewhat inside info about a drop in rent for commercial real estate in a high end shopping street in NL ( The Netherlands ).

This is unheard of, real estate owners rather keep a shop vacant than drop the rent.

I think we have seen nothing yet in commercial real estate, obviously not limited to SF or NL.

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Commercial real estate rents work differently, at least in America, because of how they’re financed. Unlike residential housing, commercial buildings are continuously refinanced. When the owner of a commercial building gets a new mortgage on their building, the potential for rent is weighed more by the banks than the current rent. The way the math works out, it’s much better for a commercial land lord to leave a unit empty for a surprising amount of time rather than reduce rent, because the impact on financing costs is typically larger than lost rent.

Really interesting. There's an empty spot in my building that's a coffee shop storefront. When we moved in, I saw that it was vacant (beginning of 2020) and asked about rent. It was $9k/mo. I offered them $5k and they declined. Still vacant. That's a lot of lost income, but perhaps it makes sense in the sense of commercial real estate.

if they can offset the cost of the lost income from the (lack of) rent with some other source of gains, they pay less taxes!

Also, if they accept a rent of $5k/m, it sets a new (lower) price ceiling, where as a $9k/m original price was the original ceiling which supports the current valuation. Thus the commercial real estate would have a harder time to capitalize on the equity. S

Therefore, the losses are more than just the $4k/m difference - it's lost capitalization/equity to which one may leverage against, and lost tax offset potential as well.

Do you know of anywhere I can read more about this? I've been trying to understand this phenomenon in NYC for a while.

Here's a good comment covering it[0]. I got my summary slightly wrong; buildings aren't re-financed, but rather the owner has the ability to delay payment on any unleased units. Leasing a unit at a lower rate suddenly modifies the value of the building, which means signing a lower lease can put the loan underwater. The same basic motivation structure applies though, it is far better for the owner to leave a unit empty and pray that someone can rent it at market rates later than it is to lower rates and get a tenant now.

0 - https://old.reddit.com/r/nyc/comments/innhah/nearly_twothird...

Thanks!

There ar e plenty of commercial buildings in the USA that have been empty twenty years.

Really? Any in/near a major city?

It's not 20 years, but the old Circuit City building in Assembly Square (just outside of Boston) has been vacant for 11.

That does seem strange, it’s hard to imagine the financial and legal structure that would incentive the beneficial owners to let a desirable chunk of real estate sit idle for 11 years.

Because the Fed is continuously lowering interest rates and pushing up asset prices??

Commercial space in a city like Boston rarely rents for anything close to 1% per year. R/E has been appreciating at over 6% per year.

You're going to make almost 10x as much money doing nothing as you would renting the building - even if the rent was 100% profit (it's not). In this case, the landlord would need to do a ton of repairs and probably wouldn't even cash-flow for 2 years.

For 10% more profit? That sounds like unnecessary / excessive risk to me.

They will build a new one right next to an empty building.

There is overhead cost to having tenants as well that may not make the drop in rent worth it. As someone mentioned, if you drop rent by a significant amount, banks have to adjust you potential profitability, and that's a big downside. Its also harder to get rent prices back to where they were once you drop them.

NL as in the Netherlands?

Yes, comment updated.

No they're referring to one of the haute shopping districts in Newfoundland/Labrador.

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