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> Is it really worth the property owners keeping them empty? Yes. It's a tax dodge. [1] [2] The owners "...hold out for higher rents to increase the worth of

> Is it really worth the property owners keeping them empty? Yes. It's a tax dodge. [1] [2] The owners "...hold out for higher rents to increase the worth of their properties because value is based on future income stream...They can afford to forego current rental income, waiting for higher-paying tenants because they claim big business losses. Landlords get a tax loss from negative rental income when no rent comes in, which cushions their lack of cash flow." There are also perverse incentives structured by the debt instruments securing these properties. [3] There's some more miscellaneous reasons, like not wanting to hassle with renegotiations from existing tenants who hear about a lower psf/psm rent of a new tenant, not wanting to attract the "wrong" class of tenant, etc., but by and large, the money reasons talk loudest. High real estate costs preventing affordable, energy-dense and hyper-efficient living and working for most of the world's population are imposing quite significant externalities around the world. Not really discussed much though, as it gores too many oxen. Saliently changing this status quo would require fundamental changes in how real estate and credit interact, and that's not going to happen without some real not metaphorical blood spilling. [1] http://www.nydailynews.com/opinion/change-math-keeping-nyc-storefronts-vacant-article-1.3932715 http://www.nydailynews.com/opinion/change-math-keeping-nyc-s... [2] https://gizmodo.com/full-bank-accounts-empty-storefronts-the-economics-of-1706993230 https://gizmodo.com/full-bank-accounts-empty-storefronts-the... [3] https://commercialobserver.com/2016/09/soaring-retail-rents-keep-vacancies-high-so-prices-should-come-down-right-maybe-not/ https://commercialobserver.com/2016/09/soaring-retail-rents-...

raverbashing 8y ago
Sounds they're being 'penny-wise pound-foolish' Nothing guarantees the higher rent will come eventually Also "According to Plasky, landlords who wait for their ideal tenant are generally approached by small businesses but reject them because they want a national chain—like TD Bank, CVS or Starbucks—and a corporate guarantor... But this leads to a vicious cycle, into which the entire retail corridor is sucked. When a retail corridor deteriorates because of its empty spaces, the first tenants to leave because of low foot traffic (and consequently fewer customers) are the mom-and-pop businesses. " It seems this is another bubble that will burst.
- yourapostasy 8y ago
  > Nothing guarantees the higher rent will come eventually People in real estate are pretty satisfied with the current global monetary configuration that guarantees asset appreciation of most real estate over long enough (decades) time spans, over positions spread geographically wide enough (tens of millions of square feet/meters). At large enough capitalization scales, real estate starts to behave like passive indexing when set within our current monetary and legislative backdrop.
daodedickinson 8y ago
Why do you think riots or war are necessary to change this?
- yourapostasy 8y ago
  Capital wields asymmetrically greater negotiating leverage in legislative and judicial spheres, and is far more connected through revolving doors in executive arms of government. While tech is the darling of the business press today, a plurality of wealth around the world is represented in real estate. In other words, there are far more landlords than tech bros/<<insert female equivalent>> around the world. Worldwide real estate valuation is >$217 Trillion [1], working out to about $5896 USD/ac or 12340 EUD/ha. That kind of valuation isn't materially deflating absent a pretty foundational change. Considering how much other asset markets derive off of real estate, the valuation at stake is much higher, and the resistance to change correspondingly greater. The way credit and tax are structured around real estate is deeply entwined with how our civilization generally conceptualizes money and the act of exchanging. And the big realty interests (trusts, big brokers, etc.) are using the small players as human shields, what I call the "Grandma Shield" political strategy. Any move to configure the gears of globalization to also crush real estate pricing with competition like it has with supply chains puts up a storm of "think of G'ma's rental income receipts!!!111!!!". This gives them the emotional charge to gin up a lot of political support, and structure "way of life being threatened" political battles. Globalization has shed blood. The grand hope of globalization was deeply intertwined national economies propel with enmeshed economic pressures an evolution to Western liberal progressive postures and increased global harmony. There are today gaps in that narrative; it remains to be seen if they are patchable or structural. Globalization is the overarching thematic fundament that lends legitimacy to sovereign interference in Syria, Iraq, Afghanistan, South China Sea, Crimea, Falkland Islands, etc., predicated on the current mainstream foreign policy conjecture that turned into the modern globalization effort starting around the WW1 era that non-interference and neutrality leads to even worse outcomes. Deep structural changes in real estate (and finance more generally) would have to take place in some similar context as globalization, and historically conflict arising to the level of blood shed accompanies changes on such scales because the architects of such changes do not model conflicts into their projections. Like programmers that don't model debugging time into their project plans. I personally think globalization is patchable, but only starts to make real progress again (we've done a lot so far, possibly stretching beyond our reach by now) by the time we start getting much better modeling of societies that makes today's Summit-based modeling look like a Tinker Toy. There's also the problem that we simply don't know how to model societies at a fine enough granularity to tell with a high degree of confidence (>99%) and consistency (>99%) how broad swathes of people will vote. Lenin thought central planning projection was possible, but it took until today's computer-driven supply chain management to even begin to realistically approach just a pale shade of semblance of his vision of how to perform economic projection, and only at the short-term, reactive micro-economic level at that. [1] http://fortune.com/2016/01/26/rea-estate-global-economy/ http://fortune.com/2016/01/26/rea-estate-global-economy/
seandougall 8y ago
Thanks for that — it helps start to make sense of it. I wonder how sustainable the practice is; presumably a property owner making that sort of calculated decision is also looking at the negative impact on their other tenants.
duxup 8y ago
I figured it had to be something with the tax laws, otherwise it makes no sense how much I see empty some places.
kgwgk 8y ago
It's easy to avoid taxes by not making money, but as someone states in the third article you link to: "A wise colleague told me that until effective income tax rates reach 100 percent, a dollar of income is worth more than a dollar of deduction". That's just the apparently-not-so-well-known First Law of Tax: It is always better to have more money than less money.
- oliwarner 8y ago
  This is only true if there is only one type of tax and it's non-negotiable and immutable over time. For little people like you and me, taking rent is a simple income and forgoing it would be a simple loss. As you say, it wouldn't make any difference for our net taxes. When you own thousands of square meters of [what will be] prime brownfield development space, leaving it unoccupied just hastens the local government to offer incentives for redevelopment. Tax, rates, planning, VAT. Even if they don't subscribe to broken window theory, an unoccupied building pays them no business rates or council tax (UK) so doing anything else is preferable to doing nothing. They'll bend over backwards to make that happen.
  - kgwgk 8y ago
    I understand that there are many reasons why it may make sense to leave a building unnoccupied, I just don't think that "dodging taxes" (because losing money reduces your tax bill) is one of them. A job-seeker may pass on an offer that he considers too low (because he's confident he will find something better later), no one would say he's doing so to avoid paying income taxes.
    - yourapostasy 8y ago
      Talking about very large real estate portfolio holders like the Vornados of the world, not small investors. In American terms, even newly-minted "accredited investors" can't avail themselves as private individuals to these kinds of strategies. In that context, when you are capitalized enough to land bank the worst-performing parcels until the next boom cycle, it makes sense to let them lay fallow and rejecting rent decreases until the asset appreciation bails out the parcel, and in the meantime use the rental income loss to offset the gains in other parts of your portfolio. The overall portfolio cash flows profit, and capitalization is sufficient to ride out 10-20 year cycle minima on the minority of the portfolio sitting vacant until asset appreciation works in their favor again. These holdings are so large they overwhelm lay people's sense of what is feasible. This model only breaks down in "perfect storm" secular changes set within a dysfunctional government context like Detroit, and only then do you see true abandonment and not just vacancy. To these holders, how these vacancies work is a feature, not a bug.
stealthmodeclan 8y ago
As someone who also owns such vacant properties, loses can't continue indenfinately i believe. I sold my company (had a legal battle with my partners which destroyed me emotionally and now I find it hard to trust others, naturally i am risk reverse now), and deployed excess capital in these vacant kept properties. I simply have no desire to earn extra income on them. I hope I'll make some amount on appraisal. Secondly, not everyone is in the market for maximizing their gains. It would cost more of my time if I ran into a bad tenant who sued me (if partners i known for years couldn't resist, what makes a random one any different? No amount of rational explanation is going to change my belief. Once you are burned, you even start hating candles). I optimize for less risk and if it comes at zero return or slight loss, all good.
lr4444lr 8y ago
You cannot dodge taxes on revenue you don't make.

raverbashing 8y ago

Sounds they're being 'penny-wise pound-foolish' Nothing guarantees the higher rent will come eventually Also "According to Plasky, landlords who wait for their ideal tenant are generally approached by small businesses but reject them because they want a national chain—like TD Bank, CVS or Starbucks—and a corporate guarantor... But this leads to a vicious cycle, into which the entire retail corridor is sucked. When a retail corridor deteriorates because of its empty spaces, the first tenants to leave because of low foot traffic (and consequently fewer customers) are the mom-and-pop businesses. " It seems this is another bubble that will burst.

yourapostasy 8y ago
> Nothing guarantees the higher rent will come eventually People in real estate are pretty satisfied with the current global monetary configuration that guarantees asset appreciation of most real estate over long enough (decades) time spans, over positions spread geographically wide enough (tens of millions of square feet/meters). At large enough capitalization scales, real estate starts to behave like passive indexing when set within our current monetary and legislative backdrop.

daodedickinson 8y ago

Why do you think riots or war are necessary to change this?

yourapostasy 8y ago
Capital wields asymmetrically greater negotiating leverage in legislative and judicial spheres, and is far more connected through revolving doors in executive arms of government. While tech is the darling of the business press today, a plurality of wealth around the world is represented in real estate. In other words, there are far more landlords than tech bros/<<insert female equivalent>> around the world. Worldwide real estate valuation is >$217 Trillion [1], working out to about $5896 USD/ac or 12340 EUD/ha. That kind of valuation isn't materially deflating absent a pretty foundational change. Considering how much other asset markets derive off of real estate, the valuation at stake is much higher, and the resistance to change correspondingly greater. The way credit and tax are structured around real estate is deeply entwined with how our civilization generally conceptualizes money and the act of exchanging. And the big realty interests (trusts, big brokers, etc.) are using the small players as human shields, what I call the "Grandma Shield" political strategy. Any move to configure the gears of globalization to also crush real estate pricing with competition like it has with supply chains puts up a storm of "think of G'ma's rental income receipts!!!111!!!". This gives them the emotional charge to gin up a lot of political support, and structure "way of life being threatened" political battles. Globalization has shed blood. The grand hope of globalization was deeply intertwined national economies propel with enmeshed economic pressures an evolution to Western liberal progressive postures and increased global harmony. There are today gaps in that narrative; it remains to be seen if they are patchable or structural. Globalization is the overarching thematic fundament that lends legitimacy to sovereign interference in Syria, Iraq, Afghanistan, South China Sea, Crimea, Falkland Islands, etc., predicated on the current mainstream foreign policy conjecture that turned into the modern globalization effort starting around the WW1 era that non-interference and neutrality leads to even worse outcomes. Deep structural changes in real estate (and finance more generally) would have to take place in some similar context as globalization, and historically conflict arising to the level of blood shed accompanies changes on such scales because the architects of such changes do not model conflicts into their projections. Like programmers that don't model debugging time into their project plans. I personally think globalization is patchable, but only starts to make real progress again (we've done a lot so far, possibly stretching beyond our reach by now) by the time we start getting much better modeling of societies that makes today's Summit-based modeling look like a Tinker Toy. There's also the problem that we simply don't know how to model societies at a fine enough granularity to tell with a high degree of confidence (>99%) and consistency (>99%) how broad swathes of people will vote. Lenin thought central planning projection was possible, but it took until today's computer-driven supply chain management to even begin to realistically approach just a pale shade of semblance of his vision of how to perform economic projection, and only at the short-term, reactive micro-economic level at that. [1] http://fortune.com/2016/01/26/rea-estate-global-economy/ http://fortune.com/2016/01/26/rea-estate-global-economy/

seandougall 8y ago

Thanks for that — it helps start to make sense of it. I wonder how sustainable the practice is; presumably a property owner making that sort of calculated decision is also looking at the negative impact on their other tenants.

duxup 8y ago

I figured it had to be something with the tax laws, otherwise it makes no sense how much I see empty some places.

kgwgk 8y ago

It's easy to avoid taxes by not making money, but as someone states in the third article you link to: "A wise colleague told me that until effective income tax rates reach 100 percent, a dollar of income is worth more than a dollar of deduction". That's just the apparently-not-so-well-known First Law of Tax: It is always better to have more money than less money.

oliwarner 8y ago
This is only true if there is only one type of tax and it's non-negotiable and immutable over time. For little people like you and me, taking rent is a simple income and forgoing it would be a simple loss. As you say, it wouldn't make any difference for our net taxes. When you own thousands of square meters of [what will be] prime brownfield development space, leaving it unoccupied just hastens the local government to offer incentives for redevelopment. Tax, rates, planning, VAT. Even if they don't subscribe to broken window theory, an unoccupied building pays them no business rates or council tax (UK) so doing anything else is preferable to doing nothing. They'll bend over backwards to make that happen.
- kgwgk 8y ago
  I understand that there are many reasons why it may make sense to leave a building unnoccupied, I just don't think that "dodging taxes" (because losing money reduces your tax bill) is one of them. A job-seeker may pass on an offer that he considers too low (because he's confident he will find something better later), no one would say he's doing so to avoid paying income taxes.
  - yourapostasy 8y ago
    Talking about very large real estate portfolio holders like the Vornados of the world, not small investors. In American terms, even newly-minted "accredited investors" can't avail themselves as private individuals to these kinds of strategies. In that context, when you are capitalized enough to land bank the worst-performing parcels until the next boom cycle, it makes sense to let them lay fallow and rejecting rent decreases until the asset appreciation bails out the parcel, and in the meantime use the rental income loss to offset the gains in other parts of your portfolio. The overall portfolio cash flows profit, and capitalization is sufficient to ride out 10-20 year cycle minima on the minority of the portfolio sitting vacant until asset appreciation works in their favor again. These holdings are so large they overwhelm lay people's sense of what is feasible. This model only breaks down in "perfect storm" secular changes set within a dysfunctional government context like Detroit, and only then do you see true abandonment and not just vacancy. To these holders, how these vacancies work is a feature, not a bug.

stealthmodeclan 8y ago

As someone who also owns such vacant properties, loses can't continue indenfinately i believe. I sold my company (had a legal battle with my partners which destroyed me emotionally and now I find it hard to trust others, naturally i am risk reverse now), and deployed excess capital in these vacant kept properties. I simply have no desire to earn extra income on them. I hope I'll make some amount on appraisal. Secondly, not everyone is in the market for maximizing their gains. It would cost more of my time if I ran into a bad tenant who sued me (if partners i known for years couldn't resist, what makes a random one any different? No amount of rational explanation is going to change my belief. Once you are burned, you even start hating candles). I optimize for less risk and if it comes at zero return or slight loss, all good.

lr4444lr 8y ago

You cannot dodge taxes on revenue you don't make.