7 ms·

I think the reason they preferred the vacancies is that the value of the property is related to the rent price, so if they lowered the rent they’d have to lower

by rcme 3y ago

I think the reason they preferred the vacancies is that the value of the property is related to the rent price, so if they lowered the rent they’d have to lower the book value of the asset as well.

metajon 3y ago
And compensate creditors.
bashinator 3y ago
Sounds like a regulatory failure; an unoccupied building shouldn't be able to retain book value.
- bobthepanda 3y ago
  At one point there were suddenly dozens of new bank branches a year because that was the only kind of business that could afford the rent. So the banks ended up propping up the values of their loans. There were subway ads touting how convenient Chase was with 3k locations in Manhattan alone.
- nradov 3y ago
  It's not a regulatory issue. The issue is loan covenants negotiated between private lenders and borrowers. No one forced them to agree to those terms, and they are free to renegotiate at any time. But cities that want to retain vibrant downtowns should consider imposing some sort of vacancy tax on commercial real estate. That would give landlords an incentive to lease their space out at a lower rate rather than waiting for a more lucrative tenant to come along.
  - bashinator 3y ago
    Curious and just brainstorming a possibility here; is it possible for a city to rezone an existing property? Say a building that's unoccupied for N years triggers an automatic zoning review.
    - nradov 3y ago
      Cities in most states have some freedom to rezone existing properties. They already conduct periodic zoning reviews when updating their master plans, and real estate owners can request zoning variances at any time. So I don't know that a vacancy trigger would really change anything.
wnolens 3y ago
Right, and so lower collateral for other loans. This is apparently rampant in NYC. It's wild that incentives exist to make vacancy profitable. But there's a LOT of vacant storefronts and apparently vacant apartments (though it's hard to get this data..)
- bobthepanda 3y ago
  IIRC a big issue is also the rise of REITs and other large landlords, which unlike small time landlords have a large enough portfolio to use the losses on a vacant property to deduct taxes.
  - NickM 3y ago
    Deducting losses doesn't make losses profitable, it just eases the sting of the loss a little bit. If you lose $100, and you get to deduct that $100 loss, then that saves you the taxes on $100, but unless the marginal tax rate is somehow greater than 100% then you have still lost money.
    - acdha 3y ago
      I think the question is around scale and distribution: if I own one office building, I’m going to make sure it’s as close to 100% booked as possible or I’m out of business. If I own a hundred office buildings in different cities, I can afford to eat a fair number of vacant spaces waiting for a high-revenue tenant and still make a lot of money - and if those vacancies aren’t randomly distributed that could mean that one downtown can be hit a lot harder than my entire portfolio. Where I live this has also shown up in the retail/office split: some of the loudest voices calling for the end of telework are the same real estate moguls who jacked the ground level retail rents up and are now surprised that most of the good restaurants out, and most people don’t go across town for chains. They could afford that when all of the offices were booked but now most office workers are asking why they should be taking time away from work to buy mediocre $16 salads.
- freedude 3y ago
  With a tighter money policy coming from the FED in an attempt to control inflation, the availability of commercial building loans is negligible. The market will self correct. Hopefully it won't take a bunch of people with it.
JauntTrooper 3y ago
I've heard that theory but it still doesn't quite make sense to me. Investors know that book values are usually stale. They're rarely used as a primary justification for valuation except in industries where mark-to-market is common like financial institutions. Real estate investors tend to focus on Net Operating Income, which a vacant property won't generate, and Net Asset Values, which are based on market values. Sophisticated investors and lenders aren't going to be fooled into investing in it based on some historical or hypothetical value. Cash flow is important. If rental properties really were sitting vacant because managers were hoping to preserve book value through an accounting gimmick, I would think property manager that focused on actual cash generation yield would drive them out of business.
- bobthepanda 3y ago
  It’s not the investor but about the loan. Commercial loans IIRC tie default rates to the last rent charged. So long as the payment can be made at all, it doesn’t seem like people look that hard if the space is vacant or not. Usually only the ground floor is retail.
  - sahila 3y ago
    If the bank is not looking at whether the space is vacant or not, why would they look closely at what the rental price is if payments are being made?
    - bobthepanda 3y ago
      * All loans are priced based on the paper rental price, among other things. Pretty much no one buys commercial property with cash, so if the rent is lower the next purchaser won't be able to get as big of a loan, and the original landowner will be underwater. * Posted rents are sticky, in that they are the basis of the negotiation for the next round of rents, and especially so for commercial real estate where leases are multiple years long and landlords often throw in renovation for leasees. Banks would prefer a space be empty rather than lower rent and then you have to negotiate from a lower base, and getting another tenant would mean having to rip out everything you put in for the current tenant at your own cost. You see similar issues in multifamily where landlords would rather offer you "X free weeks" instead of lowering the actual rent by an equivalent amount.
p_j_w 3y ago
This sounds like a house of cards itching to collapse.

by rcme 3y ago

I think the reason they preferred the vacancies is that the value of the property is related to the rent price, so if they lowered the rent they’d have to lower the book value of the asset as well.

metajon 3y ago

And compensate creditors.

bashinator 3y ago

Sounds like a regulatory failure; an unoccupied building shouldn't be able to retain book value.

bobthepanda 3y ago
At one point there were suddenly dozens of new bank branches a year because that was the only kind of business that could afford the rent. So the banks ended up propping up the values of their loans. There were subway ads touting how convenient Chase was with 3k locations in Manhattan alone.
nradov 3y ago
It's not a regulatory issue. The issue is loan covenants negotiated between private lenders and borrowers. No one forced them to agree to those terms, and they are free to renegotiate at any time. But cities that want to retain vibrant downtowns should consider imposing some sort of vacancy tax on commercial real estate. That would give landlords an incentive to lease their space out at a lower rate rather than waiting for a more lucrative tenant to come along.
- bashinator 3y ago
  Curious and just brainstorming a possibility here; is it possible for a city to rezone an existing property? Say a building that's unoccupied for N years triggers an automatic zoning review.
  - nradov 3y ago
    Cities in most states have some freedom to rezone existing properties. They already conduct periodic zoning reviews when updating their master plans, and real estate owners can request zoning variances at any time. So I don't know that a vacancy trigger would really change anything.

wnolens 3y ago

Right, and so lower collateral for other loans. This is apparently rampant in NYC. It's wild that incentives exist to make vacancy profitable. But there's a LOT of vacant storefronts and apparently vacant apartments (though it's hard to get this data..)

bobthepanda 3y ago
IIRC a big issue is also the rise of REITs and other large landlords, which unlike small time landlords have a large enough portfolio to use the losses on a vacant property to deduct taxes.
- NickM 3y ago
  Deducting losses doesn't make losses profitable, it just eases the sting of the loss a little bit. If you lose $100, and you get to deduct that $100 loss, then that saves you the taxes on $100, but unless the marginal tax rate is somehow greater than 100% then you have still lost money.
  - acdha 3y ago
    I think the question is around scale and distribution: if I own one office building, I’m going to make sure it’s as close to 100% booked as possible or I’m out of business. If I own a hundred office buildings in different cities, I can afford to eat a fair number of vacant spaces waiting for a high-revenue tenant and still make a lot of money - and if those vacancies aren’t randomly distributed that could mean that one downtown can be hit a lot harder than my entire portfolio. Where I live this has also shown up in the retail/office split: some of the loudest voices calling for the end of telework are the same real estate moguls who jacked the ground level retail rents up and are now surprised that most of the good restaurants out, and most people don’t go across town for chains. They could afford that when all of the offices were booked but now most office workers are asking why they should be taking time away from work to buy mediocre $16 salads.
freedude 3y ago
With a tighter money policy coming from the FED in an attempt to control inflation, the availability of commercial building loans is negligible. The market will self correct. Hopefully it won't take a bunch of people with it.

JauntTrooper 3y ago

I've heard that theory but it still doesn't quite make sense to me. Investors know that book values are usually stale. They're rarely used as a primary justification for valuation except in industries where mark-to-market is common like financial institutions. Real estate investors tend to focus on Net Operating Income, which a vacant property won't generate, and Net Asset Values, which are based on market values. Sophisticated investors and lenders aren't going to be fooled into investing in it based on some historical or hypothetical value. Cash flow is important. If rental properties really were sitting vacant because managers were hoping to preserve book value through an accounting gimmick, I would think property manager that focused on actual cash generation yield would drive them out of business.

bobthepanda 3y ago
It’s not the investor but about the loan. Commercial loans IIRC tie default rates to the last rent charged. So long as the payment can be made at all, it doesn’t seem like people look that hard if the space is vacant or not. Usually only the ground floor is retail.
- sahila 3y ago
  If the bank is not looking at whether the space is vacant or not, why would they look closely at what the rental price is if payments are being made?
  - bobthepanda 3y ago
    * All loans are priced based on the paper rental price, among other things. Pretty much no one buys commercial property with cash, so if the rent is lower the next purchaser won't be able to get as big of a loan, and the original landowner will be underwater. * Posted rents are sticky, in that they are the basis of the negotiation for the next round of rents, and especially so for commercial real estate where leases are multiple years long and landlords often throw in renovation for leasees. Banks would prefer a space be empty rather than lower rent and then you have to negotiate from a lower base, and getting another tenant would mean having to rip out everything you put in for the current tenant at your own cost. You see similar issues in multifamily where landlords would rather offer you "X free weeks" instead of lowering the actual rent by an equivalent amount.

p_j_w 3y ago

This sounds like a house of cards itching to collapse.