5 ms·

>ghost towns ...if rents don't fall. And maybe they should.

by Digory 6y ago

derefr 6y ago
I think I've seen it stated that property developers and property-management companies are often heavily leveraged, such that they can't lower rents; in about the same way that a VC firm with a ten-year investment time horizon on their fund can't invest in your startup if all your valuation-growth will come only after 11 years. In both cases, the lenders and shareholders of the firm, have contractually obligated the firm to have specific returns (and often have built financial instruments on top of those predictable returns, which is why they bothered to invest in the first place!) So the firm itself is destined to either return the predicted profit, or die, with no middle road.
- simonh 6y ago
  Then they are doomed. Their current tenants can’t afford the current rent, and no new tenants are going to come along at that rent level while this crisis is still ongoing, so what are they going to do? If the current tenants can be viable if rents are reduced, along with other cost saving measures, then maybe that’s a least worst outcome for society and the landlords. Ultimately though, to me, the actual business leasing the property, employing people and providing service to customers is doing more for society and the real economy than a heavily leveraged management company. Those retail businesses don’t deserve to exist on any terms, but if they do have value, then I think they’re worth giving a second chance.
  - derefr 6y ago
    The property management company isn't really a company per se; it's more like a conduit for money, an instrument. If that instrument defaults, it's not of so much concern that a property management company will die; but rather, that the companies who were on either side of it, relying on it as a conduit for money to flow through, will end up illiquid, unable to exchange through that instrument. On one side, that's large investors, e.g. mutual funds. So the markets will go down. On the other side, that's the businesses themselves. Having no access to financially-healthy property management companies to rent from, is a lot like having no access to loans: it limits your choices as a business. Maybe the valuations of these properties will crash without property-management companies around to compete over them, and businesses will be able to afford to buy them directly. But more likely, as we saw in 2007, the commercial real-estate market will just become illiquid, with everyone who is currently holding empty commercial property (i.e. mostly banks, after a presumed default or bailout of PMCs) refusing to sell it "until things recover", so that they don't have to write down a loss. And that means there won't necessarily be any commercial properties on the market for these businesses to buy into in place of their previous rentals.
    - WanderPanda 6y ago
      And yet again the cleanest method would be to not bail out the banks and let the assets be actioned to the highest bidder. Everything else is trading off long term efficient ressource allocation in favor of short term stability.
      - rodgerd 6y ago
        Funny how it's a moral hazard to bail out individuals weighed down by debt, but an economic necessity to bail out millionaires and billionaires who didn't do their risk analysis.
        int_19h 6y ago
        Or maybe they did do their risk analysis, and incorporated the likelihood of getting bailed out into that?
        munk-a 6y ago
        At this point they'd be fiscally irresponsible if they didn't assume a certain level of bailing out - and they're likely "investing" in relations with various senators and representatives to make sure their name is on the list of those eligible for the bailouts.
        simonh 6y ago
        I agree bailouts should not benefit shareholders, but it can be pragmatic to rescue businesses, including banks, that are systemically important. That may mean the government temporarily assuming equity in, or ownership of the enterprise. The important thing is that it's the interests of the economy that are being safeguarded, not those of investors.
      - munk-a 6y ago
        That would cause a massive economic disruption that could potentially lead to actually bad economic effects. Right now things aren't all sunny and happy for everyone but they can get a lot worse if infrastructural components of the economy start getting eroded - either by being chopped up for vulture capitalists or by having their lending chain & backers divided up similarly. If Fedex & UPS were to be forced to sell off package delivery in NYC to cover losses while USPS continues to be hamstrung by the administration then things will get bad - and there are a lot of other operators that are a lot less visible but just as essential. Let slip retailers and banks are less stable - let slip banks and companies that are operating through the pandemic on shoe-strings and a whole bunch of backed credits lose the ability to keep the lights on.
  - 01100011 6y ago
    Inflation to the rescue? If rents decline in real dollars but go up in fiat dollars, does it resolve the situation where renters can't afford rent and property owners need a certain profit?
- vsareto 6y ago
  >So the firm itself is destined to either return the predicted profit, or die, with no middle road. Nah, the third option is bailouts, and they are not wrong for having high confidence in getting bailouts.
  - thisisnico 6y ago
    It's interesting, where I live in Ontario, the mall pre-recession was doing extremely well. They changed focus primarily to services, clothing, and food. Massive food court, 80% of the mall are clothing/fashion, and then there are services, like dr's office, optometrist, gym etc. They were killing it.
- brudgers 6y ago
  What happens is someone with money buys out the deal for pennies on the dollar or there is a successful renegotiation with lenders or there is a successful renegotiation with the limited partners (in the US most real-estate deals are structured as limited partnerships with the general partner as an LLC). Basically, except in the first scenario everyone agrees to suffer together. In the first scenario, the initial investors suffer and the new investors think they got a good deal. It's worth noting that LP's are usually built from people who have worked together before or from people with track records of being good to work with.
  - PaulDavisThe1st 6y ago
    What does the good deal look like here if there no new tenants ?
- valuearb 6y ago
  No not all developers/commercial property owners are that leveraged or locked into those kind of cash distribution obligations. The smart ones will survive fine. The irresponsible will just file bankruptcy, and a more responsible owner gets to buy their properties and run them better.

>ghost towns ...if rents don't fall. And maybe they should.

by Digory 6y ago

>ghost towns ...if rents don't fall. And maybe they should.

I think I've seen it stated that property developers and property-management companies are often heavily leveraged, such that they can't lower rents; in about the same way that a VC firm with a ten-year investment time horizon on their fund can't invest in your startup if all your valuation-growth will come only after 11 years. In both cases, the lenders and shareholders of the firm, have contractually obligated the firm to have specific returns (and often have built financial instruments on top of those predictable returns, which is why they bothered to invest in the first place!) So the firm itself is destined to either return the predicted profit, or die, with no middle road.

simonh 6y ago
Then they are doomed. Their current tenants can’t afford the current rent, and no new tenants are going to come along at that rent level while this crisis is still ongoing, so what are they going to do? If the current tenants can be viable if rents are reduced, along with other cost saving measures, then maybe that’s a least worst outcome for society and the landlords. Ultimately though, to me, the actual business leasing the property, employing people and providing service to customers is doing more for society and the real economy than a heavily leveraged management company. Those retail businesses don’t deserve to exist on any terms, but if they do have value, then I think they’re worth giving a second chance.
- derefr 6y ago
  The property management company isn't really a company per se; it's more like a conduit for money, an instrument. If that instrument defaults, it's not of so much concern that a property management company will die; but rather, that the companies who were on either side of it, relying on it as a conduit for money to flow through, will end up illiquid, unable to exchange through that instrument. On one side, that's large investors, e.g. mutual funds. So the markets will go down. On the other side, that's the businesses themselves. Having no access to financially-healthy property management companies to rent from, is a lot like having no access to loans: it limits your choices as a business. Maybe the valuations of these properties will crash without property-management companies around to compete over them, and businesses will be able to afford to buy them directly. But more likely, as we saw in 2007, the commercial real-estate market will just become illiquid, with everyone who is currently holding empty commercial property (i.e. mostly banks, after a presumed default or bailout of PMCs) refusing to sell it "until things recover", so that they don't have to write down a loss. And that means there won't necessarily be any commercial properties on the market for these businesses to buy into in place of their previous rentals.
  - WanderPanda 6y ago
    And yet again the cleanest method would be to not bail out the banks and let the assets be actioned to the highest bidder. Everything else is trading off long term efficient ressource allocation in favor of short term stability.
    - rodgerd 6y ago
      Funny how it's a moral hazard to bail out individuals weighed down by debt, but an economic necessity to bail out millionaires and billionaires who didn't do their risk analysis.
      - int_19h 6y ago
        Or maybe they did do their risk analysis, and incorporated the likelihood of getting bailed out into that?
        munk-a 6y ago
        At this point they'd be fiscally irresponsible if they didn't assume a certain level of bailing out - and they're likely "investing" in relations with various senators and representatives to make sure their name is on the list of those eligible for the bailouts.
      - simonh 6y ago
        I agree bailouts should not benefit shareholders, but it can be pragmatic to rescue businesses, including banks, that are systemically important. That may mean the government temporarily assuming equity in, or ownership of the enterprise. The important thing is that it's the interests of the economy that are being safeguarded, not those of investors.
    - munk-a 6y ago
      That would cause a massive economic disruption that could potentially lead to actually bad economic effects. Right now things aren't all sunny and happy for everyone but they can get a lot worse if infrastructural components of the economy start getting eroded - either by being chopped up for vulture capitalists or by having their lending chain & backers divided up similarly. If Fedex & UPS were to be forced to sell off package delivery in NYC to cover losses while USPS continues to be hamstrung by the administration then things will get bad - and there are a lot of other operators that are a lot less visible but just as essential. Let slip retailers and banks are less stable - let slip banks and companies that are operating through the pandemic on shoe-strings and a whole bunch of backed credits lose the ability to keep the lights on.
- 01100011 6y ago
  Inflation to the rescue? If rents decline in real dollars but go up in fiat dollars, does it resolve the situation where renters can't afford rent and property owners need a certain profit?
vsareto 6y ago
>So the firm itself is destined to either return the predicted profit, or die, with no middle road. Nah, the third option is bailouts, and they are not wrong for having high confidence in getting bailouts.
- thisisnico 6y ago
  It's interesting, where I live in Ontario, the mall pre-recession was doing extremely well. They changed focus primarily to services, clothing, and food. Massive food court, 80% of the mall are clothing/fashion, and then there are services, like dr's office, optometrist, gym etc. They were killing it.
brudgers 6y ago
What happens is someone with money buys out the deal for pennies on the dollar or there is a successful renegotiation with lenders or there is a successful renegotiation with the limited partners (in the US most real-estate deals are structured as limited partnerships with the general partner as an LLC). Basically, except in the first scenario everyone agrees to suffer together. In the first scenario, the initial investors suffer and the new investors think they got a good deal. It's worth noting that LP's are usually built from people who have worked together before or from people with track records of being good to work with.
- PaulDavisThe1st 6y ago
  What does the good deal look like here if there no new tenants ?
valuearb 6y ago
No not all developers/commercial property owners are that leveraged or locked into those kind of cash distribution obligations. The smart ones will survive fine. The irresponsible will just file bankruptcy, and a more responsible owner gets to buy their properties and run them better.