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I don’t get it though, as a building owner, what do I gain by kicking out a tenant and then letting a building stay empty?

by dilap 7y ago

diogenescynic 7y ago
Commercial real estate companies assume they will have X% vacancy so it’s factored in. Meanwhile, they pass rent increases onto their other tenants/properties and overall they just keep pushing prices up. They can just sit on the property as prices continue to rise and it won’t really matter. In the end they still come out ahead.
scarejunba 7y ago
If you own a one million dollar property that appreciates 10% unencumbered and loses 7% of value encumbered then you need to get a lot on your lease to make it make sense. What you gain from leaving the building empty is that you can sell to a big guy who wants the whole space. He won't do that if you give him six out of ten units and say "The other guys move out in five years" especially since the other guys will fleece you on buyout.
peteradio 7y ago
Keep the buyers strained so you can charge 2200/month for 6 months rather than 1000/month for a year.
HarryHirsch 7y ago
You are seeing sticky prices in action, commercial leases often last several years.
sbuccini 7y ago
Given the duration of business leases, it's often more worthwhile to wait for a tenant who's willing to pay "market rate", especially if you own many buildings which can help smooth out any temporary blips in rental income.
waisbrot 7y ago
Having a tenant is some risk -- they might mess the place up and cost you some money. If you've got profitable housing above then a new tenant might make noise or smells that upset the neighbors. If it's empty you can wait for a really excellent tenant to come along. Of course, that's only sane if the cost of leaving it empty is very low. Which is indeed the case. I lived next to some church property that was similarly blighted: the church paid little or no taxes and wasn't fined for having the property in disrepair. The congregation had all fled to the suburbs. So what was the incentive to put in work finding someone to rehabilitate and then buy or rent the property?
claudeganon 7y ago
Why invest money in the maintenance and management of a building at the level required for its ongoing use, when you can do so at a much lower margin when it’s unoccupied and (potentially) capture a greater future return.
kasey_junk 7y ago
I believe (but would love someone to prove) that it has to do with the way real estate is financed. The value of the property for loan collateral is based on rental rates and assessors understand vacancies happen. Therefore it makes more sense to have some vacancy to trade up for a higher rental rate. Given how leveraged commercial real estate companies are it wouldn’t surprise me to learn that they optimize around this rather than true cash flow.
bluedino 7y ago
Not sure, there's a bank building near me that was built, used for two years, and it's sat empty for the last 20. How does that work?
- eropple 7y ago
  That usually means there’s something worse going on with the property but fixing it, if it’s even fixable (location, for example, isn’t unless the local situation changes) is even more expensive on whatever timeframe is being used to evaluate that.
smileysteve 7y ago
This is a question I have; We have a similar problem in Atlanta. A new residential apartment building goes in with 300+ units; leases to 70%, but 2 of 3 shops/restaurants closes/moves to the next high rise at the 1 year mark for lease renewal.
mywittyname 7y ago
Managing tenants can be more trouble than it's worth. The people buying up these properties likely prefer security and liquidity more than maximizing their return. Tenants make the building more difficult to sell because they often come with very long leases. There's also a strategy of waiting for rent prices to appreciate enough before leasing to corporate clients. You could get 10y $1000/mo from a small time coffee shop, or you can wait 5 years and maybe get Starbucks locked into a 10y, $5000/mo lease after the area grows up a bit.
- jaypeg25 7y ago
  Seeing this exact story happen all over DC right now. Just yesterday a locally owned bar announced it was closing because it couldn't come to terms on a new lease with the property owner. The insinuation was that the owner would happily let the place sit empty until a national chain was willing to take it. Similarly, 14th St in DC even just a few years ago was becoming a vibrant, fun spot to shop, drink, and eat in. This was after years of neglect in the area. Over the last year or so though a string of bars and shops have closed and all been replaced with banks. Capital One Cafes, Citi, etc. I have no idea how all these banks are functioning (I thought brick and mortar banks were on their way out?) but it's a damn shame.
  - ghaff 7y ago
    It's always a matter of some surprise to me just how much prime retail real estate banks fill up. As you say, it's not so much for the tellers any longer. But I guess it's to project an image for people getting loans or doing other types of more complex financial transactions. In general, they're likely profitable enough that even though the branches are inefficient in some sense, the fact that people will be more inclined to use financial institutions with local branches they can go into in person probably makes it a worthwhile tradeoff.
ritchiea 7y ago
Usually the pattern is allow a local small business lease to expire and wait for a big company that will pay at the highest end of the market or above market rents. So kick out local business with thin margins who wants to negotiate the rent and wait for Starbucks or Chipotle to pay you $$$. No clue if it is actually financially beneficial for the renter but many believe it's beneficial to keep a store empty to wait around for a big company to want the property rather than committing to a small entity who can't pay big company rates. Tenants also make the building more difficult to sell, if you are trying to sell.
- mynegation 7y ago
  I do not know much about commercial real estate but why would big chains pay top dollar? McDonalds is famous for seeking bargains on real estate and here in dowtown Toronto Starbucks did not flinch to axe several underperforming locations.
  - ritchiea 7y ago
    Gentrifying neighborhoods tend to have more of this behavior from renters because the big corps are new to the neighborhood and expect to have a long future presence there as neighborhood property values and incomes only increase. Whereas an existing competitive market like downtown Toronto with lots of big corporate chains should have renters with less optimism their space will be particularly desirable. Another somewhat related problem that I know happens in NYC is a building is owned by a parent who dies and leaves the property into split ownership amongst the children. Then the children cannot agree on a strategy to rent the building. And the fight results in an empty property.
    - ghaff 7y ago
      I was talking to a friend last night about just such a thing. It was a rural rather than urban property but same idea. Two siblings inherited a property and couldn't agree on what to do with it going forward--and I gather maybe didn't get along under the best of circumstances--and ended up selling it at a cheap price just to be done with it.
fallingfrog 7y ago
Because the value of the property will increase exponentially, forever. Don’t think about it too hard.

I don’t get it though, as a building owner, what do I gain by kicking out a tenant and then letting a building stay empty?

by dilap 7y ago

I don’t get it though, as a building owner, what do I gain by kicking out a tenant and then letting a building stay empty?

diogenescynic 7y ago

Commercial real estate companies assume they will have X% vacancy so it’s factored in. Meanwhile, they pass rent increases onto their other tenants/properties and overall they just keep pushing prices up. They can just sit on the property as prices continue to rise and it won’t really matter. In the end they still come out ahead.

scarejunba 7y ago

If you own a one million dollar property that appreciates 10% unencumbered and loses 7% of value encumbered then you need to get a lot on your lease to make it make sense. What you gain from leaving the building empty is that you can sell to a big guy who wants the whole space. He won't do that if you give him six out of ten units and say "The other guys move out in five years" especially since the other guys will fleece you on buyout.

peteradio 7y ago

Keep the buyers strained so you can charge 2200/month for 6 months rather than 1000/month for a year.

HarryHirsch 7y ago

You are seeing sticky prices in action, commercial leases often last several years.

sbuccini 7y ago

Given the duration of business leases, it's often more worthwhile to wait for a tenant who's willing to pay "market rate", especially if you own many buildings which can help smooth out any temporary blips in rental income.

waisbrot 7y ago

Having a tenant is some risk -- they might mess the place up and cost you some money. If you've got profitable housing above then a new tenant might make noise or smells that upset the neighbors. If it's empty you can wait for a really excellent tenant to come along. Of course, that's only sane if the cost of leaving it empty is very low. Which is indeed the case. I lived next to some church property that was similarly blighted: the church paid little or no taxes and wasn't fined for having the property in disrepair. The congregation had all fled to the suburbs. So what was the incentive to put in work finding someone to rehabilitate and then buy or rent the property?

claudeganon 7y ago

Why invest money in the maintenance and management of a building at the level required for its ongoing use, when you can do so at a much lower margin when it’s unoccupied and (potentially) capture a greater future return.

kasey_junk 7y ago

I believe (but would love someone to prove) that it has to do with the way real estate is financed. The value of the property for loan collateral is based on rental rates and assessors understand vacancies happen. Therefore it makes more sense to have some vacancy to trade up for a higher rental rate. Given how leveraged commercial real estate companies are it wouldn’t surprise me to learn that they optimize around this rather than true cash flow.

bluedino 7y ago

Not sure, there's a bank building near me that was built, used for two years, and it's sat empty for the last 20. How does that work?

eropple 7y ago
That usually means there’s something worse going on with the property but fixing it, if it’s even fixable (location, for example, isn’t unless the local situation changes) is even more expensive on whatever timeframe is being used to evaluate that.

smileysteve 7y ago

This is a question I have; We have a similar problem in Atlanta. A new residential apartment building goes in with 300+ units; leases to 70%, but 2 of 3 shops/restaurants closes/moves to the next high rise at the 1 year mark for lease renewal.

mywittyname 7y ago

Managing tenants can be more trouble than it's worth. The people buying up these properties likely prefer security and liquidity more than maximizing their return. Tenants make the building more difficult to sell because they often come with very long leases. There's also a strategy of waiting for rent prices to appreciate enough before leasing to corporate clients. You could get 10y $1000/mo from a small time coffee shop, or you can wait 5 years and maybe get Starbucks locked into a 10y, $5000/mo lease after the area grows up a bit.

jaypeg25 7y ago
Seeing this exact story happen all over DC right now. Just yesterday a locally owned bar announced it was closing because it couldn't come to terms on a new lease with the property owner. The insinuation was that the owner would happily let the place sit empty until a national chain was willing to take it. Similarly, 14th St in DC even just a few years ago was becoming a vibrant, fun spot to shop, drink, and eat in. This was after years of neglect in the area. Over the last year or so though a string of bars and shops have closed and all been replaced with banks. Capital One Cafes, Citi, etc. I have no idea how all these banks are functioning (I thought brick and mortar banks were on their way out?) but it's a damn shame.
- ghaff 7y ago
  It's always a matter of some surprise to me just how much prime retail real estate banks fill up. As you say, it's not so much for the tellers any longer. But I guess it's to project an image for people getting loans or doing other types of more complex financial transactions. In general, they're likely profitable enough that even though the branches are inefficient in some sense, the fact that people will be more inclined to use financial institutions with local branches they can go into in person probably makes it a worthwhile tradeoff.

ritchiea 7y ago

Usually the pattern is allow a local small business lease to expire and wait for a big company that will pay at the highest end of the market or above market rents. So kick out local business with thin margins who wants to negotiate the rent and wait for Starbucks or Chipotle to pay you $$$. No clue if it is actually financially beneficial for the renter but many believe it's beneficial to keep a store empty to wait around for a big company to want the property rather than committing to a small entity who can't pay big company rates. Tenants also make the building more difficult to sell, if you are trying to sell.

mynegation 7y ago
I do not know much about commercial real estate but why would big chains pay top dollar? McDonalds is famous for seeking bargains on real estate and here in dowtown Toronto Starbucks did not flinch to axe several underperforming locations.
- ritchiea 7y ago
  Gentrifying neighborhoods tend to have more of this behavior from renters because the big corps are new to the neighborhood and expect to have a long future presence there as neighborhood property values and incomes only increase. Whereas an existing competitive market like downtown Toronto with lots of big corporate chains should have renters with less optimism their space will be particularly desirable. Another somewhat related problem that I know happens in NYC is a building is owned by a parent who dies and leaves the property into split ownership amongst the children. Then the children cannot agree on a strategy to rent the building. And the fight results in an empty property.
  - ghaff 7y ago
    I was talking to a friend last night about just such a thing. It was a rural rather than urban property but same idea. Two siblings inherited a property and couldn't agree on what to do with it going forward--and I gather maybe didn't get along under the best of circumstances--and ended up selling it at a cheap price just to be done with it.

fallingfrog 7y ago

Because the value of the property will increase exponentially, forever. Don’t think about it too hard.