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Why do commercial spaces sit vacant? (2025)

freerange.city

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Re: Why do commercial spaces sit vacant? (2025)

#101

Post by em-bee »

nemomarx wrote: post #92
em-bee wrote: post #78

Earlier quoted context omitted.

another possible remedy would be to find ways to change the conditions of the loan so that building owners can continue to pay off their loan at better rates that match the income they can make from rent.

If the banks would prefer to adjust their loans instead of defaulting on them I think they would just naturally do that? They may not want to take a longer loan though.

the question is, why don't they prefer that? what is influencing that decision. for the building owners, if they don't want a longer loan then that's their choice. but we want the building filled, so if forcing them to lower the rents will cause them to go bankrupt because they refuse to accept a longer loan with lower monthly payments, then that's also their choice. and if the banks don't want to offer such a loan, the question is also "why?". if there are legitimate reasons then we need to fix those. if there aren't then it's probably just greed.

Re: Why do commercial spaces sit vacant? (2025)

#102

Post by charcircuit »

fl4regun wrote: post #89
AnthonyMouse wrote: post #26

Earlier quoted context omitted.

> 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 increase…

it's because the expected future income is based on what current tenants are paying, extrapolated to the number of units in the building, ignoring vacancies. I get what you are saying, it should be based on total rental income from the building - full stop - but that isn't how it is done, and this is the result. Simply stated, if you rent a new unit for 25% lower, then the value of the building just dropped 25%. If y…

If you let a family member move in for free that doesn't make the value of the building go to $0. That valuation strategy is too simplistic.

Re: Why do commercial spaces sit vacant? (2025)

#103

Post by advisedwang »

The key analysis is how does the system manage the risk that a building's equilibrium rent goes down or turns out to be lower than assumed when writing the loan.

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.

Re: Why do commercial spaces sit vacant? (2025)

#104

Post by nitwit005 »

makeitdouble wrote: post #16
jwarden wrote: post #12

This explanation seems very implausible to me. By lowering the rent by X%, and therefore reducing annual revenue by X%, you admit the building is worth X% less. But by leaving the building X% vacant, also reducing the annual income stream by X%, you and the bank can somehow pretend the building is worth what it would be if full? I doubt owners and banks actually believe this. Is there some policy that forces this?

Here the bank cares less about annual income than future income. Keeping it vacant only impact current income, lowering rent impacts future forecasts.

But that just means the bank is creating deliberately delusional forecasts.

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.

Re: Why do commercial spaces sit vacant? (2025)

#105

Post by [deleted] »

em-bee wrote: post #86
grebc wrote: post #83

Earlier quoted context omitted.

If you think there’s a better use it’s a free market. It’s even up for lease, you don’t even need to buy it ;)

no, i can't. the rent is to high. which means the rent is not market-rate. the free market was supposed to correct that, but it doesn't, so maybe this is not a free market after all.

[deleted]

Re: Why do commercial spaces sit vacant? (2025)

#106

Post by joshuahaglund »

pif wrote: post #45

Say what you want, but a law that lets you pretend that the value of a building is based on what you ask, rather than what you can actually obtain, is a stupid law.

It's not a law, it's a financial contract between a borrower and a lender.

I agree it's stupid, but that's what you get when you let the invisible hand bind human hands

Re: Why do commercial spaces sit vacant? (2025)

#107

Post by bluedino »

embedding-shape wrote: post #32
AnthonyMouse wrote: post #21

Earlier quoted context omitted.

"Last value" is pretty meaningless when it's stale though. 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 te…

> "Last value" is pretty meaningless when it's stale though. 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…

There are buildings in my town that haven't been used in 20-30 years. And that's in the 'modern' shopping area. In the old 'downtown' area there are some that have been empty for 40+ years.

Re: Why do commercial spaces sit vacant? (2025)

#108

Post by quickthrowman »

The value of a commercial building is based on the potential rent, not how much space is leased.

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.

Re: Why do commercial spaces sit vacant? (2025)

#109

Post by dietr1ch »

Animats wrote: post #100

Article is from 2025, and "extend and pretend" is coming unglued.[1] Extend and pretend was big around 2024.[2] 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-…

This just says that they have too much power and society would be better off having a vacancy tax that aimed to reduce abuse by landlords while at the same time ensuring the city doesn't look like post crisis Detroit, which makes it worse for everyone.

Re: Why do commercial spaces sit vacant? (2025)

#110

Post by AnthonyMouse »

grebc wrote: post #69
AnthonyMouse wrote: post #48

Earlier quoted context omitted.

> For who and in what way though? 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…

Commercial borrowers have to pay for a valuation report by a bank approved valuer.

Then why does anybody care if they rent out some of the units for a lower rent?
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