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Why do commercial spaces sit vacant?

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Re: Why do commercial spaces sit vacant?

#101

Post by yesfitz »

Something that's not addressed is how this situation plays out for 5-over-1 development[1] that's becoming the norm (or other mixed-use buildings).

Basically, the buildings cashflow solely on the residential, but the commercial space is/was valued optimistically (especially leading up to the 2020 pandemic). So a building's owner isn't in a financial bind, and if they were to lower rent on the commercial space, even if they didn't lose the building, it would be much harder to refinance the next time their loan matured. (Commercial loans are frequently "balloon" loans that have payments like they're amortizing over 30 years, but they mature before then, meaning the borrower either has to pay the remaining amount of the loan, or refinance.)

Possible Solution:

I've been thinking about a cumulative vacancy tax that increases every year a space is vacant (and decreases for every year it's occupied). So a building owner or loan underwriter could project when a vacancy would become more costly than lowering rent.

You could charge the tax on the assessed value of the vacant space. Increase it by 100 basis points for every year that a space is vacant. Decrease it by 200 basis points for every year that it's rented.

1: https://en.wikipedia.org/wiki/5-over-1

Re: Why do commercial spaces sit vacant?

#102

Post by milkytron »

tigranbs wrote: post #42

Living in SoCal, I almost always prefer to order online. Most local businesses are losing to their e-commerce competitors; no wonder commercial spaces are empty. I have a side business of a small e-commerce shop. I would consider having physical space just for the sake of luxury, but now I would rather spend that monthly rent on marketing online rather than paying for physical space. IMHO, that's what is happening. B…

The article applies to all kinds of loans for property though.

Apartment complexes could also be 50% vacant and still "worth" their original value if the asking rents remain high.

Office buildings that got cleared out after covid, same thing.

Brick and mortar retail are the same.

The article is more of a criticism of how asset values are calculated and loans are managed to avoid foreclosure. Which results in financially valid buildings/loans that are underutilized because the other option is creating economic equilibrium at the cost of lenders and debt holders.

Re: Why do commercial spaces sit vacant?

#103

Post by milkytron »

toast0 wrote: post #57
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?

It's all about contract/loan assumptions. If the space is vacant, and the last known rent was $X, the assumption is that borrower is bad at advertising space, but a successor would be able to get it rented again at that rate. OTOH, if the space is rented at 0.7 times $X, the tenants may have a long term lease that fixes that price for a significant time and even a savvy successor would have a hard time raising rents,…

This seems like an assumption that over time would come to bite the banks that overexpose themselves to lending in this manner.

Wouldn't banks want to accurately assess these valuations so these types of "bad loans in actuality, good loans on paper" don't become a large portion of their balance sheet?

Maybe not all at once, but over time it seems like banks would want more accuracy on this.

Re: Why do commercial spaces sit vacant?

#104

Post by stared »

> Intuition fails because normal people think of a building as a building, when in the majority of cases, a building is not a building but a financial product. Behavior that makes no sense for a building can make perfect sense for a financial product.

And it is precisely why a lot of people hate capitalism.

Adam Smith himself would would disapprove: "As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce."

Re: Why do commercial spaces sit vacant?

#105

Post by thaumasiotes »

soared wrote: post #9

In the current world isn’t the “downtown parking lot” situation more common? Where the value of the asset is increasing so quickly year over year, that locking in a contract right now for x years mean forfeiting the increases of future years - meaning the value of your asset is more when vacant than when rented/built on? IE why sell my parking lot this year for $5M when I’m 2 years it will be worth $7M, so I’m better…

All you need is 20% annual returns and you're better off with the investment. ;D

Re: Why do commercial spaces sit vacant?

#106

Post by yesfitz »

HeyLaughingBoy wrote: post #50
immibis wrote: post #22

Earlier quoted context omitted.

By "devalue" you mean "lower the price of" which... seems fine? Useful assets being cheaper is a good thing.

As long as you're not the owner of said asset.

Does your house stop being a house if the price goes down?

Does your car drive worse if no one will buy it?

I'm not saying it doesn't suck to overpay for something, but you can't expect too much pity when you lose money speculating.

Re: Why do commercial spaces sit vacant?

#107

Post by thaumasiotes »

antognini wrote: post #95
lordnacho wrote: post #72

It always bothered me that certain things are not marked to market. It's pretty much the point of financializing the economy, that you can then get a current value for things, instead of being able to pretend everything is fine. The problem is that if you don't update values continuously, you are surprised when you finally are forced to. Some stock on the public market that isn't doing well goes from 100 to 90, 80, 7…

Mark-to-market can create liquidity crises when coupled with capitalization requirements, though. This can happen in, e.g., bond markets. Say a bank is sitting on a pile of very safe bonds. If the interest rate suddenly increases, the mark-to-market value of the bonds goes way down. The bank would still expect to get the full value of all the bonds at maturity. But if the bank has to mark-to-market, the current value…

I think that's almost what happened to Silicon Valley Bank, except that they weren't required to recapitalize, but all of their customers read their financial disclosures, assumed a mark-to-market loss was an actual loss, and withdrew their money, running the bank.

Re: Why do commercial spaces sit vacant?

#108

Post by ImPostingOnHN »

HeyLaughingBoy wrote: post #50
immibis wrote: post #22

Earlier quoted context omitted.

By "devalue" you mean "lower the price of" which... seems fine? Useful assets being cheaper is a good thing.

As long as you're not the owner of said asset.

yes, this entire discussion is about a policy which might be good for communities but not necessarily for real estate speculators who keep storefronts in those communities empty

Re: Why do commercial spaces sit vacant?

#109

Post by wiml »

jayd16 wrote: post #83

Why can you bullshit about an empty building but not a temporarily low rent building? Why doesn't this just lead to "Month-to-month and Pretend"?

The article touches on this briefly: they do do this, in the form of "five year lease, first year free as an incentive!". This lowers the actual rent by 20%, but they can still use the (pretend) full rent when calculating asset value.

Re: Why do commercial spaces sit vacant?

#110

Post by xboxnolifes »

roenxi wrote: post #24
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.

> Anything that makes owning an empty building a bad investment in all circumstances But empty buildings aren't a bad idea under all circumstances. Eg, It might be prudent to have empty living space in a tourist or student area to deal with annual surges in demand. Or maybe someone has a warehouse full of facemasks because they think the price will 10x in the next pandemic. We'd have the same crowd complaining about…

A warehouse full of things is not an empty buulding.
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