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Why do commercial spaces sit vacant?

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Re: Why do commercial spaces sit vacant?

#11

Post by strongpigeon »

A problem is that the externalities of leaving a space vacant are not priced in. Having a bunch of storefront vacant in an area makes it much less appealing and devalues all the other properties surrounding it. It does seem like a vacant storefront tax, which is briefly mentioned at the end of the article, could address this, if partially.

This whole extend and pretend deal seems like it's simply accumulating risk hoping this will pass, while risking an even bigger, potentially systemic crash. Though I honestly don't know that much about the commercial finance world.

Re: Why do commercial spaces sit vacant?

#13

Post by antognini »

LgWoodenBadger wrote: post #7

Pricing something based on what you project to make over 20 years seems like an insane way to go about it. Nobody can predict that far in the future. It's a no-lose scenario for banks though, which is why it's done that way I guess.

This article probably omitted it for simplicity, but you would discount the income stream over time. Projected income at the 20 year mark is valued much less than income next year. That helps to account for the uncertainty.

Re: Why do commercial spaces sit vacant?

#14

Post by coliveira »

dec0dedab0de wrote: post #5

Interesting, but It doesn't answer why a bank would hold a completely vacant building for 15 years. I think we need Vacancy taxes that go up based on the percentage of time vacant over different spans of time. Anything that makes owning an empty building a bad investment in all circumstances. This needs to apply to all units in a multitenant building.

This doesn't happen because the owners of commercial property are very rich people. Adding these rules would essentially devalue commercial property all over the US, and we know how congress would never allow this to happen.

Re: Why do commercial spaces sit vacant?

#15

Post by harmmonica »

polalavik wrote: post #2

We need land value tax bad [1] In Los Angeles I’ve watched business after business close because their rent was increased by their commercial landlord only for the property to sit vacant in some cases (no exaggeration) for over 5 years! Thats absurd. Also as a business owner who would like some space to work out of your only options are endless swaths of vacant industrial buildings that are tens of thousands in rent…

I’d support a land value tax myself so don’t take this following comment as criticism, but you don’t even need a land value tax in the case of LA. You do need to repeal Prop 13 for investment properties. I wager most of those years-vacant properties have a generous Prop 13 assessment and so the owner can just sit on it because their carrying cost is closer to zero than what it would be in any other tax regime. Then all of us folks around them continue to make the adjacent area nicer and they just ride off into the sunset while the absurd delta between their taxable value and market value increases.

Prop 13 is like the anti land value tax. Makes places like Texas look downright progressive.

Re: Why do commercial spaces sit vacant?

#16

Post by senordevnyc »

mistercheph wrote: post #12

This doesn't make sense to me, why is lowering rent by 30% any more "proof" that the building is not worth what's stated on the bill than having a 30% vacancy rate at the expected value? Aren't both subject to the same "market conditions" argument?

Agreed. I’ve always been skeptical of this argument, because it assumes the counterparty to these valuation models is consistently an idiot.

Re: Why do commercial spaces sit vacant?

#17

Post by coliveira »

polalavik wrote: post #2

We need land value tax bad [1] In Los Angeles I’ve watched business after business close because their rent was increased by their commercial landlord only for the property to sit vacant in some cases (no exaggeration) for over 5 years! Thats absurd. Also as a business owner who would like some space to work out of your only options are endless swaths of vacant industrial buildings that are tens of thousands in rent…

Some businesses survive because they already own the property or have long time leases.

Re: Why do commercial spaces sit vacant?

#18

Post by Ferret7446 »

strongpigeon wrote: post #11

A problem is that the externalities of leaving a space vacant are not priced in. Having a bunch of storefront vacant in an area makes it much less appealing and devalues all the other properties surrounding it. It does seem like a vacant storefront tax, which is briefly mentioned at the end of the article, could address this, if partially. This whole extend and pretend deal seems like it's simply accumulating risk ho…

That would just devalue the surrounding property even more. This is why "we should just do X" is almost always a bad idea.

Re: Why do commercial spaces sit vacant?

#20

Post by coliveira »

mistercheph wrote: post #12

This doesn't make sense to me, why is lowering rent by 30% any more "proof" that the building is not worth what's stated on the bill than having a 30% vacancy rate at the expected value? Aren't both subject to the same "market conditions" argument?

In a normal world yes. But banks are incentivized to mark up the value of these properties, so they continue to do that.
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