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> Problem is if landlords lower rents it reduces the computed capital value of the property. If there’s a mortgage this will trigger Bad Things. > Btw I also t
by vageli 8y ago
> Problem is if landlords lower rents it reduces the computed capital value of the property. If there’s a mortgage this will trigger Bad Things.
> Btw I also think excessive rents are strangling society, but it’s not as simple as it seems to fix.
But if the property is vacant, isn't the effective rent $0? I have no experience with commercial mortgage lending and appreciate more details on the Bad Things and why they don't occur without repricing rent.
- User23 8y agoI'm not an expert on the subject, but I did learn this from a banker who is. So here's a simple and hopefully not too wrong description. Commercial real estate is an investment property, and it's expected to return some percentage. For argument's sake let's just say 5%. So if the rent is reduced, that expected return holds constant, meaning the capital value of the building drops proportionately. With a mortgage, this can bring the owner into negative equity, and banks really dislike that in commercial real estate. On the other hand, if a space is empty, but for lease at "market rate" then that continues to be the value used for computing the capital value of the property. Of course this means in some cities you have entire blocks with half the store fronts for lease at "market rate" sitting there for years. This is clearly lousy for everyone, so these perverse incentives ought to be fixed, but to be honest I have no idea how to do that practically and equitably.
- vageli 8y agoFrom your description, commercial real estate sounds like a bubble waiting to burst, in that vacant properties exist to prevent the mortgage from going underwater to protect the property owners.
- User23 8y agoREITs are a very risky investment, yes. That's why they advertise to suckers on AM radio stations.