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From the article rents aren't responding properly. I saw this also in the 2008 crisis: landlords would prefer to have a building empty (not just class A office

by gumby 4y ago

From the article rents aren't responding properly. I saw this also in the 2008 crisis: landlords would prefer to have a building empty (not just class A office, but retail space too) then rent for a lower amount. On the other hand, in SV we got a year's free rent, so we took enough space to fit our guess for what we'll need in 18 months. I imagine that will be reported as what rent we'll pay when we finally do start paying, without averaging in that year of no revenue.

epistasis 4y ago
Real estate has very very sticky prices when it comes to down markets, because those who hold real estate have every reason to believe that their speculation on ever-increasing prices will be well rewarded. San Francisco in particular has done everything it can to reward speculation and higher prices by opposing development, thereby greatly enriching those in real estate. Weathering one to two years of missed rent might be very well worth what they can get on the other side. In anti-development areas like San Francisco, the profits from real estate appreciation are one of the most important aspects of the financial side of the property, and rents often take a back seat.
- JumpCrisscross 4y ago
  > those who hold real estate have every reason to believe that their speculation on ever-increasing prices will be well rewarded They’re also leveraged. Renting at a lower rate threatens insolvency.
  - epistasis 4y ago
    Yes, though that's mostly with newer builds that are just starting to rent out. After a few years, rent appreciation in SF makes the initial mortgage requirements for renting moot, for the most part.
    - JumpCrisscross 4y ago
      > rent appreciation in SF makes the initial mortgage requirements for renting moot Assuming they don’t refinance. Which a lot of them did when rates were low.
      - epistasis 4y ago
        Oh good point!!
labcomputer 4y ago
> landlords would prefer to have a building empty (not just class A office, but retail space too) then rent for a lower amount. Interestingly: I have heard that, for loans on commercial real estate, having vacant space with a high rent is better for the landlord than having a paying tenant and lower rent. Specifically, that banks: 1. Often allow the landlord to defer a fraction of the mortgage payment (proportional to vacant space) to the end of the loan 2. Often require an additional payment (to reduce the LTV) if the average rent of non-vacant units falls below the level when the loan was originated. So, landlords keep the space vacant because a) they can; and b) reducing rent means they have to pay the bank extra money they may not have.
- singleshot_ 4y ago
  I think (and am maybe imagining?) that there is some kind of tax deduction for empty warehouse space and that technically a floor in an office building with absolutely no employees there qualifies as a warehouse. Not my area of expertise though. But nevertheless I’ve heard there are some cost optimizations to be had when the office is fully empty too.
swalling 4y ago
This is also the lingering effects of zoning and San Francisco business tax policy. De-regulating downtown zoning for conversion and tax breaks (https://sfstandard.com/business/mayor-breed-introduces-tax-breaks-to-lure-business-back-downtown/ https://sfstandard.com/business/mayor-breed-introduces-tax-b...) are both likely to be tried, though what impact it will have seems limited in the near term. If it does rebound, it might not be until the next generation of startups reaches mid to late stage on the other side of the current lending crunch, presuming they don't exclusively work remote or choose NYC as their primary hub.
- gumby 4y ago
  > If it does rebound, it might not be until the next generation of startups reaches mid to late stage on the other side of the current lending crunch, Building boomed in SF during the GFC (2008 et seq) so there was extra capacity as things recovered, and eventually space was at a premium again. The real estate glut helped early stage startups. > presuming they don't exclusively work remote or choose NYC as their primary hub. I love NYC, and am even on a couple of boards of actual tech companies in NY, but c'mon it doesn't make a lot of sense for tech businesses, except I suppose some fintech. Advertising, online retail, sure, I suppose, but those rarely need bespoke technology, much less anything novel. But California's level of investment last year slumped to only 3.5X NY...it has a long way to go. And much of that slump was in SF -- SV held up much more strongly, as you could also see in the real estate article posted on HN today (NYC commercial vacancy rate isn't as high as SF's, but is higher than SV). These hot spots thrive on network, and nowhere are the networks more intense than NY, but on the tech side the biggest, most active network in the USA, err, world, is still in the Bay Area.
  - swalling 4y ago
    My casual observation that drove that thought, which was admittedly off the cuff, is the people who really want to go back in-office are new grads who want to live in an exciting city, and NYC is way more livable and exciting than SF. That urge to live and work in SF, instead of the suburban Valley, was part of the gravity that brought big companies back to the city 2010-2020. Secondary NY hubs seem to be doing much better than pre-2020, though to your points, making the leap to NY primary is a much higher bar.
diogenescynic 4y ago
There are a few prime locations on Market street that have been vacant since at least 2019.

by gumby 4y ago

epistasis 4y ago

Real estate has very very sticky prices when it comes to down markets, because those who hold real estate have every reason to believe that their speculation on ever-increasing prices will be well rewarded. San Francisco in particular has done everything it can to reward speculation and higher prices by opposing development, thereby greatly enriching those in real estate. Weathering one to two years of missed rent might be very well worth what they can get on the other side. In anti-development areas like San Francisco, the profits from real estate appreciation are one of the most important aspects of the financial side of the property, and rents often take a back seat.

JumpCrisscross 4y ago
> those who hold real estate have every reason to believe that their speculation on ever-increasing prices will be well rewarded They’re also leveraged. Renting at a lower rate threatens insolvency.
- epistasis 4y ago
  Yes, though that's mostly with newer builds that are just starting to rent out. After a few years, rent appreciation in SF makes the initial mortgage requirements for renting moot, for the most part.
  - JumpCrisscross 4y ago
    > rent appreciation in SF makes the initial mortgage requirements for renting moot Assuming they don’t refinance. Which a lot of them did when rates were low.
    - epistasis 4y ago
      Oh good point!!

labcomputer 4y ago

> landlords would prefer to have a building empty (not just class A office, but retail space too) then rent for a lower amount. Interestingly: I have heard that, for loans on commercial real estate, having vacant space with a high rent is better for the landlord than having a paying tenant and lower rent. Specifically, that banks: 1. Often allow the landlord to defer a fraction of the mortgage payment (proportional to vacant space) to the end of the loan 2. Often require an additional payment (to reduce the LTV) if the average rent of non-vacant units falls below the level when the loan was originated. So, landlords keep the space vacant because a) they can; and b) reducing rent means they have to pay the bank extra money they may not have.

singleshot_ 4y ago
I think (and am maybe imagining?) that there is some kind of tax deduction for empty warehouse space and that technically a floor in an office building with absolutely no employees there qualifies as a warehouse. Not my area of expertise though. But nevertheless I’ve heard there are some cost optimizations to be had when the office is fully empty too.

swalling 4y ago

This is also the lingering effects of zoning and San Francisco business tax policy. De-regulating downtown zoning for conversion and tax breaks (https://sfstandard.com/business/mayor-breed-introduces-tax-breaks-to-lure-business-back-downtown/ https://sfstandard.com/business/mayor-breed-introduces-tax-b...) are both likely to be tried, though what impact it will have seems limited in the near term. If it does rebound, it might not be until the next generation of startups reaches mid to late stage on the other side of the current lending crunch, presuming they don't exclusively work remote or choose NYC as their primary hub.

gumby 4y ago
> If it does rebound, it might not be until the next generation of startups reaches mid to late stage on the other side of the current lending crunch, Building boomed in SF during the GFC (2008 et seq) so there was extra capacity as things recovered, and eventually space was at a premium again. The real estate glut helped early stage startups. > presuming they don't exclusively work remote or choose NYC as their primary hub. I love NYC, and am even on a couple of boards of actual tech companies in NY, but c'mon it doesn't make a lot of sense for tech businesses, except I suppose some fintech. Advertising, online retail, sure, I suppose, but those rarely need bespoke technology, much less anything novel. But California's level of investment last year slumped to only 3.5X NY...it has a long way to go. And much of that slump was in SF -- SV held up much more strongly, as you could also see in the real estate article posted on HN today (NYC commercial vacancy rate isn't as high as SF's, but is higher than SV). These hot spots thrive on network, and nowhere are the networks more intense than NY, but on the tech side the biggest, most active network in the USA, err, world, is still in the Bay Area.
- swalling 4y ago
  My casual observation that drove that thought, which was admittedly off the cuff, is the people who really want to go back in-office are new grads who want to live in an exciting city, and NYC is way more livable and exciting than SF. That urge to live and work in SF, instead of the suburban Valley, was part of the gravity that brought big companies back to the city 2010-2020. Secondary NY hubs seem to be doing much better than pre-2020, though to your points, making the leap to NY primary is a much higher bar.

diogenescynic 4y ago

There are a few prime locations on Market street that have been vacant since at least 2019.