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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)

#21

Post by AnthonyMouse »

postepowanieadm wrote: post #15
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?

How do you asses the value? You use the x last transactions. No transactions, no data, the last value remains.

"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 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.

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

#22

Post by Anon4Now »

bsder wrote: post #10

The "problem" is that we let people claim the "rent" is X for certain people and "Y" for other people--both at the same time. Just stop that. 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,…

If the property is devalued, the property taxes lower accordingly. Portland, Oregon has been facing this problem recently. The devaluations caused the tax revenues for the city to drop, which in turn has caused budget issues.

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.

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

#23

Post by senordevnyc »

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?

Agreed. From the article:

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.

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

#24

Post by lotsofpulp »

postepowanieadm wrote: post #15
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?

How do you asses the value? You use the x last transactions. No transactions, no data, the last value remains.

“You” require a continuous analysis of cash flow to continuously determine value, and proper management. A simple, and common, requirement in commercial lending called the debt service coverage ratio.

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.

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

#25

Post by yellow_lead »

Schiendelman wrote: post #2

I actually think there's a business to be had here. 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 manageme…

well, isn't the rent estimated as the daily rate * 30 then?

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

#26

Post by AnthonyMouse »

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.

> 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.

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

#27

Post by bandrami »

AnthonyMouse wrote: post #26
makeitdouble wrote: post #16

Earlier quoted context omitted.

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

> 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…

Humans are not Pareto efficient.

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.

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

#28

Post by nairboon »

Anon4Now wrote: post #22
bsder wrote: post #10

The "problem" is that we let people claim the "rent" is X for certain people and "Y" for other people--both at the same time. Just stop that. 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,…

If the property is devalued, the property taxes lower accordingly. Portland, Oregon has been facing this problem recently. The devaluations caused the tax revenues for the city to drop, which in turn has caused budget issues. 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 m…

Adding taxes in a downturn obviously adds additional friction. One might ask, what happened to the tax revenue of that $370M transaction, where is it now when the city needs it.

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

#29

Post by zipy124 »

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?

The policy is spelled out in the article? Banks have strict regulations that mean they have to have a certain amount of capital backing loans, and by revaluing a building you lower the capital that backs the loan, thus raising its risk, and thus leading you to break the regulation around capital requirements.

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

#30

Post by bandrami »

bsder wrote: post #10

The "problem" is that we let people claim the "rent" is X for certain people and "Y" for other people--both at the same time. Just stop that. 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,…

Georgism FTW
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