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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)

#111

Post by dj_axl »

BrenBarn wrote: post #13

Here is the problem: > 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 th…

> Let’s imagine the owner lowers the rent by 30% to fill the building.

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).

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

#112

Post by bluGill »

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-…

> 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 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.

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

#113

Post by bluGill »

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.

What is a better option? Before your answer, remember it sometimes really is the case that the economy is down and in two years things will recover and everything will rent out again. Your answer needs to smooth that out.

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

#114

Post by ryanmcbride »

dietr1ch wrote: post #109
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.

Yup. Unfortunately landlords have plenty of time to lobby against things like this while the rest of us are busy contributing to society.

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

#115

Post by PaulHoule »

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.

... who therefore agree with the assumptions of this broken system.

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

#116

Post by AnthonyMouse »

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…

> but that isn't how it is done, and this is the result.

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.

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

#117

Post by wewtyflakes »

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…

This sounds like the worst case outcome for society; real estate permanently allotted to some entity that chooses not to use it. It is not an envious model; it is a model that should be eliminated.

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

#118

Post by AnthonyMouse »

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-…

> A building half rented at rent X is more profitable than a building fully rented at rent 0.5 X.

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.

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

#119

Post by jamilton »

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…

Why do banks calculate it that way? Do they all do it that way, is it legally compelled? It seems obviously incorrect.

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

#120

Post by PaulHoule »

I've seen a lot of this in Ithaca. They built a concrete parking garage with offices on the bottom level and for a long time it seemed like they'd only attract government offices. It took several years and they finally got a farm-to-table restaurant which is well regarded but possibly subsidized and in a category like government offices (e.g. no financial discipline about the rent)

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.

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