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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

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.
piva00 3y ago
> It's wild that incentives exist to make vacancy profitable. As usual with financial instruments, it's probably the result of a model being applied and the limits of the model institute some perverse incentive that is not rational. In this case seems that the convoluted way of tying up property value to last rental price, and using that proxy to extend margin for loans is where this model breaks down.

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.

piva00 3y ago

> It's wild that incentives exist to make vacancy profitable. As usual with financial instruments, it's probably the result of a model being applied and the limits of the model institute some perverse incentive that is not rational. In this case seems that the convoluted way of tying up property value to last rental price, and using that proxy to extend margin for loans is where this model breaks down.