Why do commercial spaces sit vacant? (2025)
freerange.city
freerange.city
The other side of this is that landlords hate to reduce rent to rent vacant spaces because their paying tenants will demand rent reductions or move. That can crash the rental market. A building half rented at rent X is more profitable than a building fully rented at rent 0.5 X.
[1] https://propmodo.com/the-end-of-extend-and-pretend/
[2] https://www.newyorkfed.org/research/staff_reports/sr1130
There are buildings that seem to purposefully keep commercial space vacant to devalue the building:
https://therealdeal.com/chicago/2021/09/10/trump-gets-anothe...
The article writes a bit about property value being based on rents.
So a completely rented building pays the same property tax as an empty building with no renters.
Where I live (NC, USA) there was a big issue where commercial property owners have been able to reduce their property tax assessments, not on the basis of 'comparable sales' (like everyone else), but on the basis of the income derived from the property.
I can't say how widespread this practice actually is, but it's not unheard of. Apparently property tax rules are going to vary widely by jurisdiction, which country / which state or province / etc.
Switching to Georgism overnight seems way too hard to execute.
That too is a "it depends". For a failing mall, getting anyone into the empty spaces starts to become important to the other tenants because anything that draws people into the mall is a potential customer. Customers will even no shop you just because they know there is nothing else in the mall. Thus some malls near me have museums and the like inside - anything to get traffic.
That's assuming rents would decrease by half, and also that it's still half occupied. A building half rented at X isn't more profitable than a building fully rented at 0.7 X. A building 25% rented at X isn't more profitable than a building fully rented at 0.5 X.
Since when have tenants known each other's rents?
At this point I think that's exactly what we need in a lot of places.
If the land isnt being used efficiently the owning entity should fail and a new productive use made.
Whether thats tearing it down for the public to get better use of the land; rerouting roads, community swimming pool, park etc. Replacing with a more economic building; factory, stadium, appartments (zoning not withstanding). Or a more productive entity getting use of it.
Bagholders being entrenched and protected are becoming a weight around the neck
...as if it was a bad thing.
There is no escaping the powers of supply and demand.
Suppose there is a building that was built in 1970, last rented out in 1975 and then bought by a company that has used it as their own offices until now. The last transaction was in 1975, what's the value if they apply for a mortgage today? Surely they have some formula to use for this based on e.g. other buildings in the area.
Moreover, "failure to find a tenant" is also a type of transaction. It's the landlord acting as the high bidder for the space, essentially the involuntary edition of imputed rent, and implies something negative about the financial prospects of the building when it continues for a significant period of time or large percentage of units. Ignoring that it is either incompetence or some kind of perverse incentive.
For who and in what way though? Every entity involved wants to keep the price high, except the renter/new buyer, so with that in mind, "Last Value" seems optimal for achieving that.
Maybe it's different in the US, but in Spain there is a ton of properties that sit completely empty and unused, even since earlier than 2008, just because the owners don't think the value is enough to sell yet, and they wouldn't earn enough renting it out, so everyone (except renters/new buyers) seems to prefer it just sits empty for decades.
For anyone who wants an accurate accounting.
Suppose the building is supposed to be worth $20M, has an existing $10M mortgage and is actually only worth $10M. The landlord comes to you and wants to borrow another $5M against the building. Pretty important to the lender at this point that they're not overvaluing it, right? Or the same if they go to a different bank trying to refinance an existing mortgage they're already underwater on when using an accurate accounting.
You don’t like it. We get it.
No one is doing anything illegal. If the bank thought a customer couldn’t pay, they’d get foreclosed, end of story.
You’re also assuming every vacancy has this pigeon holed financial setup. A LOT of commercial property is freehold.
I’m honestly at a bit of a loss that people feel they can tell others what to do with their property because it’s vacant. That’s not how society works, and it won’t change to that either.
No one was really discussing in a EU context though.
This is not Bluesky leftist "let's take Jeff Bezos' yacht so we can all have 15 minutes of health insurance" but rather "let's have more businesses in this town that can put capital to work, create jobs, create wealth and the kind of consumer choice that Ralph Nader and Ludwig von Mises both agreed on."
One day a crew turns up and starts jack hammering away a gangway. Its technically now two buildings; one of them is still unfinished and empty, the other has now been finished and is up for rent.
In terms of my utility I would prefer things renovated, changed, or rented out to funky things than have ghastly empty buildings
https://www.investopedia.com/terms/d/dscr.asp
Lower income for the building means lower numerator, which means being unable to meet the agreed upon DSCR, which means default. Whether or not the lender acts on this default is a separate matter, as they are usually loathe to get into the property management business, but renegotiation of terms and eventually foreclosure does happen.
Keeping it vacant only impact current income, lowering rent impacts future forecasts.
Does it though? Suppose you can't find a tenant right now because the market is soft but is predicted to improve in a few years. If you leave the unit vacant, you lose money right now. If you rent it out with e.g. a 3-year lease, you make more for the next 3 years than you would with a vacancy, and if the market price has increased by then you can increase the rent on the unit and either get it from the current occupant or the one you get to replace them in the high demand market when the higher rent causes the low-paying tenant to not renew the lease.
So taking a tenant now only improves prospects (you fill a current vacancy) with no negative impact on future returns. The only thing it does is imply that current rents are lower than before and future rents might be too, but a vacancy implies that even more strongly.
If my wife and I are at the airport, and the gate agent offers me (and only me) an upgrade on the flight, your logic says I should take it since that's strictly better than both of us flying economy.
Why wouldn't that happy cycle work with the husband ?
> Husbands, love your wives, just as Christ loved the church and gave himself up for her...In this same way, husbands ought to love their wives as their own bodies. He who loves his wife loves himself
Too many people ignore this part of that "submit yourselves to your husbands" quote.
For those of us who think of themselves as Christian, I think sitting in a less comfortable seat is probably small potatoes to what Christ did on the cross.
Just throwing out some biblical ideas here. I know there are a lot of other perspectives.
The landlord doesn't want you to to leave but only to the extent that finding a new tenant costs more than the discount against the current market price they'd have to give you to stay.
Jk of course
This has happened many times to me - the answer is to take it and give the upgrade to your traveling companion if you are the one who flies a lot.
You'd need perfect information to make a contractual decision on that, and it still has lasting effects.
For instance imagine renting your floors to Pornhub for these 3 years on the cheap because the market it low. Assuming you made the right calculation and demand recovers 3 years later, you'll have to first kick out the company (= months spent restoring it), then try to convince the insurance company that eyes at your building that they should pay a hiked price to move into Pornhub's previous floors.
And that's assuming you haven't completely blown it where the market actually recovers within 6 months for reasons nobody anticipated.
If you’re levered up to the eyeballs you don’t want your bank reviewing your file.
Simply stated, if you rent a new unit for 25% lower, then the value of the building just dropped 25%. If you don't rent to a new tenant, your value must be the same, that's what the existing tenants are paying (not that I agree with this, it's just how it works right now).
It's similar to how people holding low liquidity assets will claim they are "worth" whatever the last person who paid for this assert, even if the real value of it is dropped, the "book value" is still sky high.
And the result is dumb, which is the point. The bank should stop doing that if they don't want to cause problems for themselves.
Review again how this works. The landlord put in $4M and the bank $16M on what was supposed to be a $20M building. They can't find enough tenants, which means in real life it's only worth $14M and the incumbent system is for everybody to pretend that isn't the case when it really is.
As a result, the landlord is collecting $500k in net rent instead of the $700k they could get by lowering rents and getting more tenants, while paying the bank $640k/year in interest. The landlord does this because if the value of the building eventually recovers then they don't lose their initial $4M investment, whereas if they hand over the keys to the bank it's definitely gone. And even if that money was gone, they'd still want to keep operating the building if they were at least turning any annual profit instead of making continuous losses.
This is bad for the landlord (they lose $140k/year instead of making $60k/year) and it's even worse for the bank, because now if the landlord runs out of cash or concludes the value of the building isn't going to recover, the bank has to eat a $2M loss by foreclosing instead of continuing to collect $640k in interest every year, which they could have done indefinitely if the landlord was allowed to keep renewing the loan while making more money by lowering rents and increasing occupancy.
Worse, this is happening at scale. If landlords could lower rents without getting foreclosed on then banks would keep getting their interest payments until inflation catches up to the nominal amount of the mortgage. But if the landlords are required to keep taking a loss, they eventually start to give up -- the article implies that they don't want to give up until the annual loss eats the original $4M, but it really happens as soon as they think the value of the building isn't going to recover. But that's only a problem for the bank if they default on the mortgage, which they do if keeping it makes them lose $140k/year but not if it's still earning them $60k/year. And that's especially a problem for the banks if it happens not just at all but all at once.
But I'm not convinced the risk-reward calculation fully explains it. You can see plenty of places where they know full well it's not going to rent at the price they're asking. I think there are other factors, including not letting your other high-lease tenants think that they're now occupying a low-rent establishment.
Your jewelry store would rather not suddenly be next to a cheapo nail salon. And if you've got a third property to lease, the high-fashion brand looking at it will see the nail salon and move on.
I can build a building that charges a billion dollars a month rent, and sits completely empty. A forecast suggestion I'll be making hundreds of billions with no renters is clearly silly.
Actual commercial real estate professionals could give you many more reasons than I can
I am so tired of listening to people with little to no experience with commercial real estate try and explain the vacant storefront thing. Maybe this explanation in the article is correct, but it raises more questions than it answers, and it’s unclear why we should trust this person’s explanation.
I don't know much about microbiology, but that shouldn't stop me from asking someone who "did their own research" to shut up and let the experts talk.
at best you could say that you do not find the argument convincing, but even then you should explain why. you are not even claiming that the argument in question is wrong, you are only questioning the credentials of the author. that's appeal to authority, and therefore not a valid argument. https://youtu.be/N5k4yUSPHI8
I don't know much about microbiology, but that shouldn't stop me from asking someone who "did their own research" to shut up and let the experts talk.
yes it should, unless you can provide a convincing argument that the person is wrong, expert or not.
on the internet anyone can claim to be an expert and nobody can prove it.
AND I’m also saying I’m tired of non-experts giving their theories on this particular phenomenon, since they never make much sense.
Also foreclosure generally isn't the only option: the borrower could, for example, agree to repay part of the loan early, or give extra collateral, both of which would increase the LTV (and this would be better for the bank).
I'm not saying the explanation is wrong, but I don't blame people for finding it difficult to understand. Other factors contributing to this are probably borrower relationships/negotiating strength and the high costs associated with foreclosing.
They care about the regulatory requirements in so far as you either meet it, or you don’t at the time of writing a loan. And maybe you get a yearly review.
Also people are looking at this in a very isolated view. Just because a building is vacant doesn’t mean the owner has no other option than just lower the rent. Typically owners of commercial property own multiple properties and various other types of assets. Vacancy rates are also built into calculations.
They don't want to disrupt the flow or trigger contract clauses, so they cover the missing cashflow from elsewhere.
When everyone, the regulator, the operator, and the bank, are whistling a tune, when the whole sector is fucked, everyone has a big problem. How big? About as big as hundreds of buildings in the downtown of every major city sitting half-empty!
That's a pretty big problem. Maybe not as large as 08 but definitely structural. We're all paying indirectly for this office space to sit empty, instead of being able to use it.
We're talking about the whole sector here, not one borrower. Huge swathes of commercial real estate are sitting empty, that's a big ongoing problem for everyone whether the loans are being serviced or not.
The whole sector doesn't have a vacancy problem. And it's not a problem for the banks nor the owners if they're servicing their loans. Sure they're not making money but that's not your or anyone else's problem either.
Capital is weird.
Commercial leases are often for say 5+5 years, so once you lock it in, you know for sure what the property revenue is going to be for the next so many years. Your uncertainty equation has collapsed.
I think the main insight here is that commercial real estate is an entirely different animal than the residences that you may be used to.
You can apply this same reasoning to the "back to the office" pushes done on behalf of the institutional investors who have exposure to large commercial properties in inner cities. That too is a financial house of cards built on assumptions and vibes.
Well done. Way to encourage people to not do things.
I suggest that like the dotcom/2008/AI bubbles, people will just keep dancing and making money until reality catches up and the music stops.
The question is, why would they actually do that? The premise is that the landlord has to take out a new mortgage every few years and then the bank won't give them a new one if they're underwater. But that's only true if it's a different bank.
Let's take the same example. Building was expected to be worth $20M, landlord pays $4M down and takes a $16M interest-only mortgage. The only thing the bank ever expected from this was to collect interest on the $16M until it's paid back, which could be never and that's fine as long as they get to keep collecting interest.
Then we find out the building is maybe really only worth $14M. But the landlord is still making the interest payments on the $16M, and over time it will likely become worth more than $16M again due to inflation if nothing else, so why does the bank need to foreclose? The risk that they could "lose $2M" is by that point a sunk cost. It's the thing that happens if they do foreclose (or fail to renew the loan). They'd be calling in the note against an LLC that owns nothing but a building which is now estimated to be worth less than the loan principal. So the obvious thing would be to keep renewing it as long as the landlord continues to make the interest payments.
This feels like some kind of regulatory inefficiency or accounting scam where the bank is listing the mortgage lien as an asset and would have to take a write off if they valued it accurately and therefore transfer their perverse incentive to the landlord to prevent that from happening.
Notice however that doing that also hurts the bank. The landlord is collecting $500k/year at half occupancy, then paying the bank $640k and losing $140k/year to try to avoid the total loss of their $4M initial investment. Maybe they can do that for a year or three but the longer it continues the higher the probability that they run out of money. Whereas if they were collecting the $700k/year from renting out the entire building at lower rents then they could keep paying the bank its $640k/year forever, regardless of whether they're technically underwater. And if the landlord runs out of money then the bank has to take the $2M write off because they get a $14M building instead of collecting interest on a $16M loan. So the bank is really shooting itself in the foot.
The average inflation over the last 10 years has been just north of 3%. If you have tenants today that are paying $500k/year, in 10 years they should be paying almost $700k/year with 50% occupancy. If you can string the bank along for another loan then your valuation is $28M instead of $20M. As the owner you can effectively take money out in this scenario.
If the bank won't refinance at that rate, then you could lower your rents by a bit in the last year. If you lowered your rates back down to $500k/year then you invite a bunch of new tenants, and now you can show high occupancy again.
But if the value doesn't recover then the landlord is still only getting $500k while paying $640k at the point when they run out of money to pay their $140k annual loss, and then they default. Which they wouldn't do, even if the value never recovers, if they were allowed to make $700k by lowering rents.
If a bank only loaned 60% of a buildings value, it could be devalued, the operator would eat the shortfall, but the bank could reappraise, with the loan continuing as before.
[So a regulation setting a banks maximum loan percentage, at a percentage less than they are required to maintain, is an obvious regulatory fix.]
However, another way to look at this from a banks point of view is while they may loan 80%, they might have been happy to loan 100% but for regulations. So perversely, they may not be as concerned about this happening as it appears.
For them, the 80% max loan is already providing a buffer, in terms of the risk they would be happy to take. So if they can avoid acknowledging they have loans that have risen in percentage terms, it is in their business interest to encourage, facilitate, giving operators breathing room.
And in the meantime, inflation, property value growth, and future demand increases provide three statistically “expected” ways for the situation to self-correct over time.
For financial investment products, all value is “expected” value.
And the operator may not be losing money, so much as paying for the buildings accrued value growth. Which would be a wash, but avoids the practical problems of defaults. Not the best, but not losing (as much) money as it appears.
And for the bank, if the loan payments are made there is no problem.
So there are two hidden buffers: banks willingness to loan more than regulators want them to, and natural property value increases, lowering rent prices (i.e. inflation) over time.
They did though. It was a $20M building and they only loaned out $16M, providing a $4M buffer. It isn't possible to require an amount that the value of the building could never fall below under any circumstances because that would require the loan amount to be zero. It's always possible for the value of the property to crash, e.g. it becomes contaminated with toxic waste and the remediation costs more than the property value, or the area's major employer shuts down and the area becomes a ghost town.
Meanwhile increasing the size of the buffer has costs that can exceed the value of a larger buffer, i.e. fewer people can afford a mortgage, which is both economically bad and not in the interests of the bank who wants to make more loans rather than fewer.
> However, another way to look at this from a banks point of view is while they may loan 80%, they might have been happy to loan 100% but for regulations.
The reason banks require a down payment instead of loaning out 100% of the value of the property is definitely because the banks want the buffer to not be zero.
> And for the bank, if the loan payments are made there is no problem.
But that's the issue. If they prevent the landlord from lowering rents to increase occupancy then they may not be able to make the payments anymore, and then the bank is screwed.
The problem is the bank is regulated to only maintain loans at 80% of property value or lower.
If they give a loan at the maximum allowable level, they don't have a (legal) buffer.
Thus the strong incentive to perform creative bookkeeping, to avoid having to repossess property they don't want. Instead of simply recognizing the falling property value in their accounting, which without a forced call, is the property owners loss, not theirs.
and Spirit Halloween.
I worked for a commercial property company before, and yes this is exactly how it works, and yes it's just as stupid as it sounds.
Margin Call nailed it perfectly:
"It's just money. It's made up. Pieces of papers with pictures on it so we don't have to kill each other just to get something to eat".
Weirder still, many of them were on the market, theoretically for rent, but if you called them up it turned out they weren't actually available, and the landlord wasn't interested in renting them. I couldn't figure out why you would pretend something was for rent at $X, and let it sit empty for years, rather than actually rent it at something <$X. Now it makes sense.
Might not be available unless your name ends in 'tarbucks'.
In others they would just have too high a price, and it is still empty six years later so they are clearly not unaware that they have it priced too high. Simple math showed they would be better off renting at a lower price than going years without anything, but it was quite common so it didn't seem like it could be simple stupidity.
The test, I guess, of this explanation is whether or not the flow of money out of private credit causes the end of "extend and pretend", and the market finally clears.
The system described in the article is basically that the risk is not explicitly planned for, and just washes out that it is managed by a vacancy and building owners eating the cost of the vacancy.
Any solution needs to provide a new answer for how that risk is managed, preferably one that doesn't result in foreclosures. Some possibility:
* The bank takes on the risk, by loans having a provision for writing down value if rents have to drop. This is tricky, because if the operator decides when rents need to be revised down, they have no incentive to protect the bank's position. If the bank decides, then they have no incentive to ever accept a rent drop, they'd rather force the operator to eat the vacancy. You'd need some trigger like duration of vacancies.
* The operator takes on the risk but with a mechanism for lowering the rent. I can't really figure out a way this would work without requiring the operator to have capital on hand though.
* The risk is insured. If rents need to drop then insurance pays the write-down in property value. I'm not sure any insurance company would be able to take this business though, as it is highly correlated between customers. A downturn would just wipe-out the insurer.
>> If the system allows you to pretend that the vacancy is temporary, why doesn’t it allow you to lower rents on the pretense that lower rents are also temporary?
> This does happen sometimes: it’s packaged as “incentive offers,” like 50% off the first 12 or 24 months rent, or 6 months without rent, etc, that lower the average rent over the life of the lease without lowering the “list price.” That’s common in residential leases, and I know it happens sometimes in commercial leases, but I don’t know how prevalent it is.
So as a blind guess, it probably depends on how legal incentive offers are. The axis being optimised here will be what the regulatory bodies can tolerate before they start handing out fines and punishments.
Could the situation be improved then if financial regulators started treating both versions ("temporary" vacancy / "temporarily" lowered rent) equally? Tolerate both or crack down on both.
People are actually advocating for looser lending requirements, which I’m perfectly fine with but the result might not be what they expect either.
People have to realize that banking as a business is inherently broken. It is about lending long and borrowing short, which is very risky. Deposits are used to provide funds to lend long, but deposits can be 'called' at any time. The loans cannot.
But banking is also critical for a properly functioning society. It is in the government's (the people's) best interest to have a robust banking system in place. How to reconcile the risk with the benefit? By heavily regulating it.
I agree it's stupid, but that's what you get when you let the invisible hand bind human hands
Where do we draw the line between reality and fantasy then? If the terms of a deal are not reflecting the reality of the moment (i.e. the office rent market demand quotes) but some figure people come up with on their own, then let's call it what it is -- gambling (in which case it should be treated as such).
Not sure what you mean. What I mean is that I am fine with policies that effectively force the building owner to lower the rent (if their net worth is high enough) even if it means they take a loss, because I am fine with forcing people with lots of money to take losses. So the rent will go down.
As described, the landlord can't offer a traditional lease for the actual value of the space.
However, the landlord could offer essentially day rentals without creating a lease. There are systems for this already, such as Peerspace and their ilk, which I've used for small events. I believe these don't trigger the foreclosure clauses.
I think that a property management company managing deeply underwater buildings could play in this, reducing their cost structure by offering day rates. They've often already got a solid NFC entry system. Most of what you need is automated pricing, onboarding and offboarding, and figuring out how you avoid needing physical cleaning/setup/teardown overhead.
I don’t enjoy dealing with property management or the fees they charge.
I know regardless of the vacancy I would not consider day rates, I’d eat the loss and deal with the cashflow via other means. Consider what sort of fit out would be necessary for what’s lets be honest is being suggested - hot desking - compared to a standard office: lots of IT systems necessary, lots of additional security, lots more cleaning, and likely lots more repairs for wear & tear which probably isn’t recoverable easily.
I can’t fathom just putting some dinky reader on the front door and letting absolutely anyone in.
The current tenants of mine started a lithium battery fire, almost burnt my property down.
I didn't install a reader, I provided a physical key copy. Readers make it slicker.
I haven't had any problems, most of my rentals have been for small events. They brought their own supplies, minus a few tables I provided.
Generally people renting space have no incentive to create a problem. They pay, I get paid, they want to take some pictures or get some people together.
I've seen companies provide some moveable furniture in a space like this - some desks, some extension cords - but it has to be up to the temporary user to configure and put things away when they're done.
viz. wework could apply the "single-use low-priced shampoo sachet" model [0] to SaaS-style rent-seeking of long-lived infrastructure. Infra. that is guaranteed to be always under-utilised... even in boom markets, because nothing functions at 100% capacity.
Adobe, as another example of (software) infrastructure --- i.e. traditionally, lifetime licence and ownership desktop software --- figured out their own "shampoo sachet" pricing. viz. how to make and ship desktop software product but kill-switch them with metered SaaS subscriptions.
The monthly price is just high enough to make gobs of cash for Adobe, while causing the typically-feast-and-famine freelancer to take the capitalist shellacking because it's just convenient enough. They can align software spends with active projects, and avoid the anxiety of cracked software doing nefarious things to their computers and data.
But over a long enough time, they pay Adobe a (presumably) huge premium over up-front priced software. And they stay locked into a planned obsolescence cycle controlled by Adobe... "The new version of your beloved editing software will only work with the latest Windoze which means hardware upgrade and oh, you have to do it because well we are soon kill-switching the current version you are dependent on."
Wework like operators can do exactly similar shenanigans with access to commercial infrastructure. Crowd out competition by aggressive long-term leasing on their buy-side, and on their sell-side build daily-subscription-dependency (buying ease, google-ish facilities which feeds into cult-and-status-signalling games), and convert a percentage of that into routine-subscription-dependency. Meanwhile also run rent-seeking games inside the main rent-seeking game... now you have a captive wallets who will buy the add-ons and extras because it's easier than walking two blocks for some cheaper and better alternative (e.g. food, coffee, lovely meeting space etc.).
edit: add reference for "daily sachet pricing".
[0] Buying less, more often: An evaluation of sachet marketing strategy in an emerging market
https://www.researchgate.net/publication/233676293_Buying_le...
And the downside is loads of reasonably successful decent small shops in the UK now have to close after 12-24 months when the rents get jacked-up from sensible to astronomical levels. None of them become permeant tenants unless they are a front for money laundering (hence the explosion of nail bars and barbers on the UK high street) or illegal goods (dodgy vape shops).
https://www.bbc.co.uk/news/articles/cqj1rkqqrgro
Your local press (if yours still exists) will also be full of such stories.
> Half empty, the building is only generating $500k per year in net income instead of $1M.
> Let’s imagine the owner lowers the rent by 30% to fill the building.
> Now, reality has proven the operator can only make $700k per year.
No. When the building sat half empty, reality had already proven that it could not generate what they thought it could.
This is the insane fallacy driving this whole thing, and no amount of explanations about commercial mortgages will prove anything other than that a larger number of people than we thought are participating in the same delusion. If you cannot rent the space for what you thought it could rent for, your building is already worth less than you thought, and it is sheer folly to think that you can alter that fact by pretending you are waiting for higher rent later.
> So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts.
There is another problem. What we need is to dig deeper into that theory and push harder and harder for solutions where all the financial loss gets pushed onto the people at the top who have a lot of money. If the banks are making money off this kind of nonsense then they should fail.
> I’ll give this some more thought, but if any actual commercial real estate professionals have ideas I’d love to hear from you in the comments!
No! Commercial real estate professionals are mostly just more people buying into these same fallacies! What we need is more people outside that self-deluding system saying "this is nuts, I'm taking $100 million from you" and resetting the entire system.
Congratulations, you have just described high finance.
Thought I'd comment with some concrete numbers. New buildings near me (West LA) are at $4100/month for a studio, where average rent in the area is $2300 for a studio, $2650 for a 1-bedroom. To fit in with "average" rent they'd need to lower 44% however 30% might be about right. Otherwise at 4% inflation wait 9 years? 1.04^9 = 1.42 ~ 100/(100 - 30).
The "solution" is that you should have to pay tax on what you claim the rent is after a small grace period (Less than 24 months certainly. Probably less than 12 or at least prorated starting before that.).
If your financial agreement requires and claims that the rent is $5000, no problem! Then the tax authority should expect to receive the tax revenue they would expect if someone was actually paying $5,000 in rent to you. If you want to leave the space vacant even after paying the tax on the revenue--have a blast.
That would short circuit all the financialization shenanigans.
For example, "Big Pink" is an office tower in downtown Portland. It's last sale was for about $370 million. Out of desperation in a saturated market, the owners sold it last year for about $45 million. No one - the owners, the city, or the citizens - wants to have the vicious downturn of values, and there is no easy solution. Adding a vacancy tax just exacerbates the problem.
The point of the vacancy tax is also to prevent the over speculation before it happens. If the operators know that they are looking at having to cough up more cash than they expect in the future, they might reign in the rampant real estate speculation. If the bank knows that they might have to start coughing up cash, they'll be more inclined to actually just drop the property into bankruptcy.
* maybe if the operator goes bust, the rents on the building can be lowered with a new property value for future loans. Then perhaps it can be occupied. But that's very uncertain, especially if this happens to a whole city at once.
Who even is the fraudster? The operator of the building is losing money, so clearly they're not making a gain from anyone
The thing that feels fraud-ish to me is that the loss doesn’t just disappear because nobody books it. A huge amount of capital and useful urban land is tied up preserving a fictional valuation and someone is paying for that somewhere.
Maybe it’s not a clean “X stole from Y” thing here, but it still means real businesses are displaced, worse downtowns, and less of the city that could have existed otherwise. I haven't seen this sort of thing as much in Australian cities where I'm from, but have a lot in the US where I live.
So maybe a better way phrasing "fraud on the public commons" is closer to what I mean. Everyone involved is probably acting rationally inside the system. The public still gets stuck living inside the dead space created by the fiction created by it and ends up eating that cost.
The defrauded parties might include secondary lenders (to the property mortgage holders), regulators to whom financial instruments and solvency are being misrepresented, tenants who are paying higher-than-market rents, potential tenants who are denied market-rate rents on existing space, and arguably communities in which business and commercial opportunities are depressed due to the denial of access to real estate at market terms.
The operator of the building isn't the key point to fraud, as their interest (reducing rent to attract tenants) is actively thwarted by their creditors. The element of fraud is misrepresentation of true market value / income potential by projecting partial tenancy at elevated rates as if it were full tenancy, rather than the actual income stream at full occupancy (allowing for a nominal vacancy rate) at actually-supportable lease rates.
Loans can be called by the lender if the value of the collateral (building) falls too low.
Lowering rents lowers the building value. Not lowering rents and leaving spaces vacant ‘maintains’ the value of the building, as long as you can keeep making the loan payments everyone pretends the building is worth more money than it probably actually is. As long as the borrower keeps making payments to the lender, nobody really cares.
Store-fronts were already in decline due to 'internet shopping', but Covid probably brought a lot of physical close-down plans forward, such that any likelihood of recovery should be measured in decades or, more realistically, start being written off progressively to minimise a big hit down the track.
The longer extend and pretend lasts, the bigger the hit will be when it that strategy breaks.
There is a lot of talk that "there are excessive vacancies on the Ithaca Commons" but doesn't seem that bad except for the bottom of the first floor of Harold's Square, a market rate apartment development that was recently developed.
It also does look like San Francisco has a vacant storefront tax although the penalties are fairly light.
https://abc7news.com/post/remember-vacant-storefront-tax-san...
> The obvious thing cities could try is to put more pressure on building operators to fill their spaces, but the building operators are already under a ton of pressure — they’re losing a bunch of money! So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts.
I agree that this is the obvious remedy. I don't know if it's exactly the right answer, but it's the natural place to start the conversation, and I think it's at least in the ballpark of the right solution. It's the city (and bigger) government's job to create policies that incentivize the right behaviors for the benefit of the community. There clearly has been an oversight here, if extremely valuable commercial properties are literally just sitting unused for no good reason. In my opinion we'd all be better off if the market did correct itself, at least getting us all on the same page about what these properties are actually worth, rather than the current situation.
The city stepping in also helps put the fuckup back in the right place, in the hands of the property owners and lenders who seem to have made these bad bets, rather than externalized to the residents and business owners of the city, who haven't done anything wrong. The article suggests that this leads to "bad consequences" and even bank bailouts, but I'm pretty unconvinced that the problem is widespread enough that the federal government would literally need to start bailing out banks. From what I've seen, it's really bad in a few specific metro areas and not so much in others.
and isn't investing into a property that they then fail to rent out in a profitable manner also already a failure to act within their own limits?
The shops staying empty is one problem. The call for bailing out or helping in any way the creditors that took loans in bad faith by relying on that kind of help (to prop them up along the way) is another problem. I very much want to address the first problem, but not by enacting perverse incentive inducing rules. A better solution (in my view), which I think was mentioned in other comments, was to disallow tax reductions for unused spaces, and maybe even rise them above the tax level for what that space is when rented. In this case the landlord may be incentivized to find ways to make their spaces (at least) look busy (if not be busy with something of real value), which may be what the cities and community think of as an improvement.
"and isn't investing into a property that they then fail to rent out in a profitable manner also already a failure to act within their own limits?"
Yes, it is "already a failure", and it was the reason behind my initial objection. The bad decisions should meet their bad consequences. A "remedy" "to find ways to change the conditions of the loan so that building owners can continue to pay off their loan" sounds to me like a measure to shield decision makers from facing their failures. It is also, in the context of imminent failure, a call for someone else to hold the bag, which is in itself unfair.
(The taxing authority might hold the property itself, or turn around and sell it to a third party, at market rates.)
For what it's worth, one of the specialised use-cases probably more likely to be encountered is large-volume food retail, a/k/a supermarkets or grocers. These have distinctive footprints, refrigeration, stocking capabilities, and the like. A few years ago the failure of a large regional grocery brand in the US resulted in numerous commercial vacancies of precisely this nature. There was some controversy when the successor to the chain held on to many of those parcels for years. There were still numerous vacancies at three years after final closing, several locations were demolished entirely, and the last property wasn't repurposed until six years after the original chain had failed. This despite pressure and desire to provide grocery services in the area. As the successor company was also a grocery chain (with operations in the area), stalling transfer of the properties was effectively a way of hamstringing their competition. The space wasn't easily converted to other uses (this happens, Sports Basement at the former Presidio PX in San Francisco is an example, a former A&P supermarket in NYC converted to a community center another), and food retailers hoping to expand had few other options. Notably, despite exploding vacancies in non-food retail, former strip-malls and shopping centres can't easily convert other retail space to groceries.
This financial model is also the main reason why it's so hard to convert these buildings to residential. Somebody has to eat the markdown.
Or could be a shareholder lawsuit for banks as they are putting out riskier loans than the rate reflects?
So it's a choice between honesty and profit towards investors ...
Oh and obviously the "solution" is waiting for inflation to change the price of the rent effectively. So the real fix is for government to take the initiative and start paying people (by now, a lot) more.
There’s no actual problem here to be solved. If people feel they have better uses for a property they should put their money where their mouth is.
i see this all the time in china and in developing countries in general. they build huge malls, and then they can't fill them because there are not enough businesses who can pay the rent being asked. at least there is growth and the place will fill up eventually. but until that happens the place is less attractive.
seeing the same in europe in malls or shopping streets is even worse because it feels like the economy is declining. you have to apply the broken window theory here. the more shops stay empty the less people will go there to visit the remaining shops. their revenue goes down, they can't afford the rent anymore and another shop is empty. if this becomes a trend then you risk that the shops will never come back.
it is therefore in the interest of landlords and the city to keep the streets alive and fill them with businesses that attract people.
ignoring this problem is just a sign of greed. instead of building a vibrant space they just want to extract as much money as possible.
instead of being forced to foreclose the banks should be forced to extend the loan and eat the loss. foreclosing will cause them a loss too. so the banks are not better off either way.
the article says the building is an income stream.
no, it isn't.
the building is part of a community. the needs of the community top your need to make a profit. yes, this means the community should probably contribute to make your work financially viable, and one way they can do that is by making policy that gives you more reasonable conditions to pay off your loan so that a foreclosure is not necessary.
Everything else is your own opinion, which of course is fine.
the problem is not that i can't afford it. the problem is that NOBODY can afford it. free market rules then suggest that the value of that thing goes down and thus the price should go down too if the building owner has any interest in selling that thing.
and here is where the free market idea causes a conflict, because if they don't have an interest to sell then their interest and the city's interests are misaligned and the city should force the building-owner out.
or, you could also argue that the city itself is a market participant, because the city owns the land the shops are built on, and it leases or sells that land with specific expectations, namely that shops are built and rented out. if the renting out does not happen then the city's contract with the builder is violated and the city should have a right to take action.
Now you're proposing a different ownership model completely or that a government/city should be able to force a legal owner out of their legally owned property?
Honestly I think you need to back up and really consider what you're proposing.
basically you act like the error in my idea should be obvious, and i should be able to figure that out by myself. well, no, because if i could, i already would have. i don't write stuff without thinking about it. it may look like that to you, but only because you seem to know something that i don't. please share.
and what do you mean by no actual interest? have i not explained my interest? do you think the interests of the people living in the city are irrelevant? only owners and tenants count? well, most certainly not. but if you do not accept that the city and its inhabitants should have an interest in this matter then our problem is that we have a fundamental disagreement in our worldview.
No one’s outlined a scenario where the bank or the owner are violating some law/regulation.
Can’t wait for people here to begin arguing Elon should just sell/give up his equity because Starship hasn’t launched successfully yet.
Not everything needs to make sense to a bunch of IT peeps so, politely, either genuinely learn about commercial property or take a hike.
this is not just about how commercial property works, but this is about how urban planning works.
you keep insisting that i am a non-interested party. i am speaking for the city and the community. please explain to me how they are non-interested parties.
the needs of the community outweigh the needs of land and building owners. as an owner you are to serve the community. if you don't want to do that then you have no business being part of that community. we'll try to work with you to find an amicable solution, but if you refuse and leave your building abandoned then we can force you to sell. laws to that end already exist. they are used sparingly, but they are there if we really need them.
Plenty of the same type of commercial properties exist right next to each other, happily too.
Location still matters, as it does for residential, proximity to employees, or customers is important.
Zoning restricts what land can do what.
There's many reasons why this isn't a "free market"
Someone bought an asset they could afford to hold in bad times. End of story.
The article outlines the methods used for the most part to the best of my knowledge, as someone who owns and deals in this space.
I think you need to lay out a better argument for why your thesis is the case when what happens in the real world mirrors what the article discusses. Not to mention people forget property can be owned without a bank/loan, nor that vacancies are expected/factored in.
Markets clear at a price, pay that price. It’s just not the one you want.
this is why those win - it's cheaper to build & maintain them & easier to turn a profit on them.
the fancy big glass downtown skyscrapers are mostly for ego.
usually the tallest one determines who has power in that economy/city.
way back then churches used to be the tallest.
now in most cities it's the banks.
in SF - it's SalesForce Tower i.e tech is dominant