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You seems to be understanding this better than I do. I understand that if a commercial property gets rented out at 80% of its previous rent that causes a reduc

You seems to be understanding this better than I do. I understand that if a commercial property gets rented out at 80% of its previous rent that causes a reduction in the valuation of the property. What I don't understand, shouldn't not-renting it out cause an even bigger dip? An 80% reduced property brings in 20% less income to the owner, but if the property is empty that means the owner has to pay for maintenance out of their pocket. (maintaining the roof, keeping the squatters away etc. However cheap these expenses are, it is clearly not zero dollar.) The property becomes from an asset to a liability. (in the colloquial sense at least, as you can hear I'm not well versed in economics.) How does that not decimate the valuation like crazy?

sokoloff 5y ago
Commercial property as a category has some characteristic vacancy rate. (For office and retail, this can be around 10% under typical market conditions. It's not at all weird for "good" property to sit vacant for 18 months at a stretch.) The valuation is based* on looking forward multiple decades. If you think COVID (or recession or other short-term event) is a blip in the future prospects, you aren't overly concerned if a property sits vacant for a year or two, when you're looking at the overall income over the next 30 years. On the other hand, if you drop the rents 20% because you're feeling an urgent need to fill the property now, your fixed costs don't change (property tax may eventually go down slightly), you have 20% less income to cover them and leave a profit, and your next 10 years' of rental income outlook is now nerfed by about 20% (and profit by perhaps 30% or more). It's the reason that rent rebates are a thing. You don't drop the monthly rental rate; you instead credit free months of rent over the initial period of the lease, give larger allowances for landlord-paid improvements, or other "one time" credits. * - every market participant does something slightly different, of course, but they're all more or less looking over a multi-decade period to judge what the property is worth now.

sokoloff 5y ago

Commercial property as a category has some characteristic vacancy rate. (For office and retail, this can be around 10% under typical market conditions. It's not at all weird for "good" property to sit vacant for 18 months at a stretch.) The valuation is based* on looking forward multiple decades. If you think COVID (or recession or other short-term event) is a blip in the future prospects, you aren't overly concerned if a property sits vacant for a year or two, when you're looking at the overall income over the next 30 years. On the other hand, if you drop the rents 20% because you're feeling an urgent need to fill the property now, your fixed costs don't change (property tax may eventually go down slightly), you have 20% less income to cover them and leave a profit, and your next 10 years' of rental income outlook is now nerfed by about 20% (and profit by perhaps 30% or more). It's the reason that rent rebates are a thing. You don't drop the monthly rental rate; you instead credit free months of rent over the initial period of the lease, give larger allowances for landlord-paid improvements, or other "one time" credits. * - every market participant does something slightly different, of course, but they're all more or less looking over a multi-decade period to judge what the property is worth now.