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Why do commercial spaces sit vacant?

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Re: Why do commercial spaces sit vacant?

#51

Post by spankalee »

spwa4 wrote: post #32
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…

How does land value tax change the scenario in the article? It plays out exactly the same way with and without land value tax.

Land value tax mainly helps with severely under-utilized properties like parking lots. Right now a parking lot is taxed far, far lower than a lot with a building, so the owner can keep it for parking when it would be better utilized as residential, commercial, or office space.

If it didn't pencil out to just site on empty land, we'd get better development.

Re: Why do commercial spaces sit vacant?

#52

Post by roughly »

So the problem here is the banks wrote their loans stupidly and both the bank and the property owner's willing and able to burn money to keep those chickens from coming home to roost, which has an enormous social cost on small business owners, citizens, and other businesses in the area, but the article concludes we can't really do anything about it because it might make the banks sad and cause the renegotiation of a bunch of those shitty contracts.

Since when did "taking a loss" get written out of the definition of "investing"?

Re: Why do commercial spaces sit vacant?

#53

Post by Ekaros »

Analemma_ wrote: post #37
bix6 wrote: post #19

> a building is not a building but a financial product. Are we cooked chat?

Your house and the 30-year fixed-rate mortgage on it is a financial product too, and a fairly complex and risky one at that. This fact is just well-hidden from you by nested layers of government subsidies. There is basically no way for real estate to not be a complex financial product, because almost no one can pay cash-up-front for it. If it wasn't financialized, nobody could ever afford to own anything and we'd all…

Or we would live in unregulated slums...

Not that whole sector isn't over financialised.

Re: Why do commercial spaces sit vacant?

#54

Post by ryandrake »

toast0 wrote: post #30
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.

> Interesting, but It doesn't answer why a bank would hold a completely vacant building for 15 years. Lowering the rent to fill their building reduces the value of that building, which means when they sell it, they will recognize a loss that is likely larger than many years of operating loss from the empty building. Additionally, lowering the rent for that building will also reduces the value of other nearby building…

> Lowering the rent to fill their building reduces the value of that building

> Additionally, lowering the rent for that building will also reduces the value of other nearby buildings that have that building as a comparable property

> it's in the bank's interest to let things be vacant and keep the valuations based on the previous rent, rather than lowering the rent and facing the music.

This just seems like everyone involved is playing make-believe about the actual value of their property. A tax on vacant land that increases exponentially year after year might help to correct this behavior, because at some point, it costs less to realize the loss than it does to pay the ever-increasing vacant land tax.

Re: Why do commercial spaces sit vacant?

#55

Post by bobthepanda »

scifi wrote: post #39
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…

True. What I don’t get, is how is vacancy a good move for the landlord? Wouldn’t it make more sense to have a tenant during that time?

Commercial loans are not like residential mortgages and often the loan is based on a minimum rent. If you go below that then you are in default.

Re: Why do commercial spaces sit vacant?

#56

Post by jrjeksjd8d »

TFA seems to claim that the benefits of "nice buildings" outweigh the externalities of desolate, character-less street levels in cities. It doesn't seem very on brand for Strong Towns.

This phenomenon is going on in the downtown of my city - decreased foot traffic leads to tenants leaving, and the cycle continues. It's a miserable place to live or work that basically becomes a ghost town at 5pm. They're trying to do some office-to-residential conversions, but they're not very desirable because the entire neighborhood feels hollow and abandoned.

Instead of delaying these defaults and accumulating systemic risk until there's a massive correction, someone should be enforcing accounting that marks to market the actual rental value. That would force banks to be honest about the real level of risk on their balance sheets.

Re: Why do commercial spaces sit vacant?

#57

Post by toast0 »

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, so the valuation needs to be calculated based on current rent.

Re: Why do commercial spaces sit vacant?

#58

Post by chucksta »

ryandrake wrote: post #54
toast0 wrote: post #30

Earlier quoted context omitted.

> Interesting, but It doesn't answer why a bank would hold a completely vacant building for 15 years. Lowering the rent to fill their building reduces the value of that building, which means when they sell it, they will recognize a loss that is likely larger than many years of operating loss from the empty building. Additionally, lowering the rent for that building will also reduces the value of other nearby building…

> Lowering the rent to fill their building reduces the value of that building > Additionally, lowering the rent for that building will also reduces the value of other nearby buildings that have that building as a comparable property > it's in the bank's interest to let things be vacant and keep the valuations based on the previous rent, rather than lowering the rent and facing the music. This just seems like everyone…

They are, value is relative. If the local government did that, it would discourage investors and future growth. They would go somewhere with less risk

Re: Why do commercial spaces sit vacant?

#59

Post by ryandrake »

bflesch wrote: post #46
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…

A "vacant storefront tax" would easily be circumvented by a legal entity with a vending machine business or the "owner" themselves putting one of their "offices" there (a table).

Any realistic vacant land tax with teeth would obviously need to define vacancy such that silly tricks like this wouldn't work.

Re: Why do commercial spaces sit vacant?

#60

Post by bobthepanda »

ryandrake wrote: post #54
toast0 wrote: post #30

Earlier quoted context omitted.

> Interesting, but It doesn't answer why a bank would hold a completely vacant building for 15 years. Lowering the rent to fill their building reduces the value of that building, which means when they sell it, they will recognize a loss that is likely larger than many years of operating loss from the empty building. Additionally, lowering the rent for that building will also reduces the value of other nearby building…

> Lowering the rent to fill their building reduces the value of that building > Additionally, lowering the rent for that building will also reduces the value of other nearby buildings that have that building as a comparable property > it's in the bank's interest to let things be vacant and keep the valuations based on the previous rent, rather than lowering the rent and facing the music. This just seems like everyone…

The behavior with a lot of commercial real estate loans atm is literally called “extend and pretend”
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