I think the reason they preferred the vacancies is that the value of the property is related to the rent price, so if they lowered the rent they’d have to lower the book value of the asset as well.
Investors know that book values are usually stale. They're rarely used as a primary justification for valuation except in industries where mark-to-market is common like financial institutions.
Real estate investors tend to focus on Net Operating Income, which a vacant property won't generate, and Net Asset Values, which are based on market values. Sophisticated investors and lenders aren't going to be fooled into investing in it based on some historical or hypothetical value. Cash flow is important.
If rental properties really were sitting vacant because managers were hoping to preserve book value through an accounting gimmick, I would think property manager that focused on actual cash generation yield would drive them out of business.
So long as the payment can be made at all, it doesn’t seem like people look that hard if the space is vacant or not. Usually only the ground floor is retail.
* Posted rents are sticky, in that they are the basis of the negotiation for the next round of rents, and especially so for commercial real estate where leases are multiple years long and landlords often throw in renovation for leasees. Banks would prefer a space be empty rather than lower rent and then you have to negotiate from a lower base, and getting another tenant would mean having to rip out everything you put in for the current tenant at your own cost.
You see similar issues in multifamily where landlords would rather offer you "X free weeks" instead of lowering the actual rent by an equivalent amount.
If your property value dropped (with last paid rent being the proxy for this), you'd be liable to be margin called. If you're fully vested on margin in something illiquid like real estate, then it very well might be better to have a few vacant properties than be forced to liquidate to cover your margin balance.
Obviously though this has the makings of a real estate bomb, as a few forced liquidations could set off a cascade of value collapses.
At a high level commercial real estate valuation cares about the cash flows for the entire building (usually over 10 years) and a discount rate to get to a number on what the building is worth. When we see empty space, we think it's not making money, but all landlords assume that a space will be empty at some point and for some amount of time, so that's already baked into those cashflows.
Without getting into the specifics, you'll generally push out your assumptions on leasing that empty space rather than drop your price on cost of the space. Pushing out assumptions typically means taking a slight hit because the cashflows you were already expecting are just hitting the books a little later. Dropping the cost of the space generally decreases market value, so that makes all of the space in your building cheaper which has a much more significant impact on the cash flow for the entire building, rather than just one space.
The other significant factor is that landlords typically have significant upfront costs in base building improvements and free rent credits that they give to tenants. This means that there's a certain amount of time, generally a few years, where the landlord has paid out more money to the tenant than they've received. Landlords need to be confident that the tenant is going to be paying rent beyond that break even point, or else they've lost money in addition to losing out the ability to rent it to another tenant and any legal fees associated with evicting a tenant.
Between how valuations are structured and needing to hit that breakeven point with a new tenant, there are relatively few incentives for landlords to just "lease the space".
If you lose $100, and you get to deduct that $100 loss, then that saves you the taxes on $100, but unless the marginal tax rate is somehow greater than 100% then you have still lost money.
Where I live this has also shown up in the retail/office split: some of the loudest voices calling for the end of telework are the same real estate moguls who jacked the ground level retail rents up and are now surprised that most of the good restaurants out, and most people don’t go across town for chains. They could afford that when all of the offices were booked but now most office workers are asking why they should be taking time away from work to buy mediocre $16 salads.
As usual with financial instruments, it's probably the result of a model being applied and the limits of the model institute some perverse incentive that is not rational.
In this case seems that the convoluted way of tying up property value to last rental price, and using that proxy to extend margin for loans is where this model breaks down.
There were subway ads touting how convenient Chase was with 3k locations in Manhattan alone.
But cities that want to retain vibrant downtowns should consider imposing some sort of vacancy tax on commercial real estate. That would give landlords an incentive to lease their space out at a lower rate rather than waiting for a more lucrative tenant to come along.