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Bank financing and bad urban planning make the retail apocalypse worse
- bell-cot 3y agoDaydream I - The SEC and bank regulators start requiring banks (& such) to disclose how badly their portfolios are impaired by $Pretend/month "rents" that nobody is paying. Daydream II - When local zoning authorities require ground-floor retail in new developments, but the local vacancy rate for such space is over (say) 5%, then the developer receives a "lease put option" - allowing him to rent that retail space to the zoning municipality at (say) 80% of the then-current local rental rates for similar spaces. If the municipality fails to pay up, it loses its zoning authority.
- deleted 3y ago[deleted]
- VinLucero 3y agoVery cool ideas, but so difficult to execute. Reminds me of income share agreements from personal Fintech, but applied to Commercial Real Estate.
- helen___keller 3y ago> When local zoning authorities require ground-floor retail in new developments, but the local vacancy rate for such space is over (say) 5%, then the developer receives a "lease put option" - allowing him to rent that retail space to the zoning municipality at (say) 80% of the then-current local rental rates for similar spaces. If the municipality fails to pay up, it loses its zoning authority. I see what you’re getting at but for all of americas zoning woes, I don’t think the answer is to make a patchwork of laws that say “if current zoning causes a bad outcome, cover their losses or lose your zoning authority”
- mattnewton 3y agoYou’re right, if we have this authority we could just radically relax zoning laws in the first place. Most of the things people are using zoning for, like not living near noise or pollution are already directly regulated, and directly regulating the bad thing works better anyways.
- nottorp 3y agoI don't think zoning laws need relaxation... just a radical overhaul towards walkable more dense cities :)
- s1artibartfast 3y agoI think it is interesting in concept. It would basically hold the government and public accountable for the negative externalities of zoning decisions. This is obviously attractive if you already think free use of private property is the natural state. Eg if the state says you can't live in or rent your property, they should compensate you for the value they get. Obviously, I think it would be ripe for corruption
- nikanj 3y agoAs a landlord, I could rent to a tenant for $2k/mo with all the risks and wear/tear from that lease - or I could hijack the rent to $20k/mo, let the property sit empty for the predetermined time, and then force-feed the lease to the city.
- s1artibartfast 3y agoNo, you couldn't, your list price near comes into it the way it was written up
- andrewjl 3y agoHow does a valid range of list prices get determined?
- s1artibartfast 3y agoIn the parent post, they said: >80% of the then-current local rental rates for similar spaces. That is to say, you benchmark it. If someone across the street is renting their place for $1000, and the city says you cant rent yours, they would have to pay you $800 to keep it empty. Benchmarking sounds complicated, but is extremely common. My city reassesses my property value using benchmarks every year to determine property taxes. Of course, they use totally unrealistic numbers, and I have to call them out on it, and then they back down because they are indefensible.
- cyanydeez 3y ago
- firedaemon 3y agoTrying to understand what you are going for here. In my experience in 2 separate cities, lack of ground floor retail leads to barren neighborhoods of luxury condos that aren’t in walking distance of anything meaningful. And frequently, the ground floor retail that is put in is priced unreasonably so as to stay vacant. But you think that we should encourage everyone to overprice so as to increase the put option value? And you like the idea of vacant space?
- cyanydeez 3y agothey're building these ground floor retail everywhere here. the only useful one is a grocer that sources labor from volunteers for discounts on food. the rest appear empty or have bars /(also empty) or some other useless high expense niche purpose. it's definitely a situation that zoning alone won't fix. I'm definitely in a food desert and the closest grocer is a coop that probably doesn't support low cost food options. there's no capitalism or market based fixes here. you need to actually get your hands dirty if you want to improve quality of life
- BigRedDog1669 3y agozoning and business laws prevent market based solutions, so we don't know that there aren't market fixes. The retail space prices are so absurd because there was only a limited part of the city where you can do retail. Go to 'third world countries' and there are plenty of groceries in neighborhoods as well as street vendors that are illegal in the US.
- bsder 3y agoThe solution is actually an "occupancy tax". If you aren't renting out a space within some number of months, you start owing tax on what your financial agreement says is your "rent". The longer you go unoccupied, the higher that tax should get since your unoccupied front winds up contributing to "blight".
- JumpCrisscross 3y ago> If you aren't renting out a space within some number of months, you start owing tax on what your financial agreement says is your "rent" This cascades into consolidation in crisis. Small landholders can’t afford to ride out the trouble. Large ones can.
- toyg 3y agoThresholds are a thing.
- ikiris 3y agoWhat is the problem with removing landlords from an area if their property isn't being utilized?
- blitzar 3y agoYou mind if I remove some money from your bank account that I dont think you are properly utilizing?
- kasey_junk 3y agoThat’s precisely what our current inflationary monetary policy does. You can argue whether that’s good or bad but we have governmental policies that encourage productive use of assets so it’s not out of bounds to suggest other policies for land assets.
- BlueTemplar 3y agoCompanies aren't people.
- JumpCrisscross 3y ago> SEC and bank regulators start requiring banks (& such) to disclose how badly their portfolios are impaired by $Pretend/month "rents" that nobody is paying You are looking for non-performing loan reporting. The FDIC collects these in detail to the degree that, should you want to override GAAP, you have sufficient model inputs to calculate in the aggregate.
- p0ckets 3y agoI think your first proposal addresses the root cause. But the second proposal - forcing municipalities to write options with unlimited potential losses - is silly. The whole point of the zoning authority is to say "it'll be best for the neighborhood in the long run for there to be some retail shops here", and it makes sense whether you're talking about a lot or the first floor of a building. If the development isn't profitable with the ground-floor retail requirement, then just don't build it. Some sort of option might work, but it would have to be something like: the municipality can choose to rent the space for a fixed price if it's vacant for long enough. This encourages the landlord to rent it for some higher price.
- mjevans 3y agoMaybe something like: If a property is vacant for 6 or more months out of a year, the (government regulating this) can forcefully change the 'offered' terms to be as good as the best for any active lease's term item among all leases within 10 miles, and also go beyond with up to 50% discounts on any monetary restrictions imposed in those terms. This includes deposit and lease rate. The former part is to break unusually onerous terms that might exist which I'm not aware of. The latter is the club to encourage flexibility and settling on not long term national retail clients.
- RecycledEle 3y ago> forcing municipalities to write options with unlimited potential losses - is silly I think local governments forcing someone to lose everything they own with silly zoning rules is silly.
- eru 3y ago> Daydream II - When local zoning authorities require ground-floor retail in new developments, but the local vacancy rate for such space is over (say) 5%, then the developer receives a "lease put option" - allowing him to rent that retail space to the zoning municipality at (say) 80% of the then-current local rental rates for similar spaces. If the municipality fails to pay up, it loses its zoning authority. Why so complicated? If you want a legal fix, look into overturning https://en.wikipedia.org/wiki/Village_of_Euclid_v._Ambler_Realty_Co https://en.wikipedia.org/wiki/Village_of_Euclid_v._Ambler_Re....
- Animats 3y agoThe ground-floor retail thing in residential developments seems to be a dud. There's a huge amount of such retail being built in Silicon Valley, but not much interesting moves in. I've been looking at Google Earth. Nail salons, phone stores, ice cream, and rental offices that stretch half a block to fill up the space. No place to park, and the buildings themselves won't generate enough traffic for their ground floor retail. Even in areas with much foot traffic, such as downtown Redwood City, about a third of the retail space is vacant.
- bobthepanda 3y agoPart of the problem is that the new retail spaces are very large. They get built out to the size of a chain pharmacy or bank, because chain tenants are like the golden ticket of stability, yet very few businesses can profitably, reliably fill spaces that large. If you look at thriving ground floor retail in traditional cities, often the storefronts are as small as 25 feet wide.
- userinanother 3y agoWhy not just force land lords to lease out the space at whatever the market will bear even if that amount is near zero. That way we can have local art space or makers or pottery spots or just cowork spaces? Most of those land lords are asking more than market rates hence the vacancy
- toomuchtodo 3y agohttps://emoszkowski.github.io/ericamoszkowski.com/Moszkowski_JMP.pdf https://emoszkowski.github.io/ericamoszkowski.com/Moszkowski... ("Option Value and Storefront Vacancy in New York City") > Why do storefronts remain empty for more than a year in some of the world’s highest-rent retail districts? Landlords with vacancies derive option value from two sources of uncertainty. First, increasing downstream retail demand may drive up market rents tomorrow. Second, different tenants may have different willingness to pay for the same space, creating an incentive for landlords to wait for a particularly high rent offer. High move-in costs, search frictions, and high contract dissolution costs for landlords amplify this option value. We estimate the model parameters by matching quarterly vacancy rates, lease-up rates, and tenant exit rates from a comprehensive, high-frequency storefront tracking service, combined with micro data on commercial leases. In a counterfactual exercise, we find that reducing the variance of the match quality distribution by 50% reduces long-run vacancy rates by 33% on average, while reducing the variance of the aggregate state variable has almost no effect. Finally, we use the estimated model to quantify the impact of a retail vacancy tax on long-run vacancy rates, average rents, and social welfare. Vacancies would have to generate negative externalities of $18.72 per square foot per quarter (about 30% of average rents) to justify a 1% vacancy tax on assessed property values.
- jareklupinski 3y ago> High move-in costs, search frictions, and high contract dissolution costs for landlords amplify this option value. i was excited to see the number of popups and temporary exhibits / art galleries increase during the pandemic, and was hoping this would lead to the commodification of starting a business in a vacant storefront turning a lot into an H&M or a bank would definitely require a lot of capital, but is there a way to help encourage short-term businesses like holiday markets and popups to fill these vacancies until a 'real' tenant can take over?
- mym1990 3y agoI imagine for landlords this would be like picking up pennies on the street while hundred dollar bills are flying out of your pocket. Real estate isn’t exactly a “creative solutioning” space…it’s extremely cutthroat.
- ChuckMcM 3y agoTL;DR -- The banks demand a certain level of rent and the landlord has no leverage over the bank. It would be interesting if this sort of covenant was made illegal/unenforceable. The downside to such a move is that it would make banks more cautious about lending on commercial properties, the upside is that landlords would likely optimize for cash flow and that would reduce vacancies. From a public policy perspective I could see it as a jobs creator since these storefronts hire people and create jobs.
- splitstud 3y ago[dead]
- kjkjadksj 3y agoIt seems like the market should favor a riskier bank who finances builds without such rent obligations. Are there barriers to this in the market perhaps, legal or otherwise, from preventing this theoretical free market approach from solving the inefficiency?
- fallingknife 3y agoThis won't make any difference to the number of retail jobs. People will buy the same amount of stuff and the retail industry will stay the same size. Would just be moving retail from one location to another.
- ChuckMcM 3y agoThat is a counter intuitive take, care to expand? Clearly it absolutely will "increase" the number of retail jobs in the neighborhood where the storefront is by virtue of a vacant space has zero jobs available and a leased space has non-zero number of jobs available. In the SF Bay Area that would also increase sales tax revenue for the city where the storefront was if they were selling taxable goods. Another subtlety is that "storefront" sounds like "retail" but it really is just a place to do business, it could be a mini-mart, a clothing boutique, or some other goods for sale location, but it could also be a service business like a restaurant, a salon, or pet grooming Etc.
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- Graziano_M 3y agoI remember Louis Rossmann talking about this in one of his [many] rant-against-New York video. In fact, he was talking about a building across the street from where I had just moved in. It was vacant from at least when I moved in in late 2020 to a few months ago.
- xnx 3y agoThere's been a lot of conversation around rezoning/repurposing office space into residential, but I have not seen the same amount of conversation around retail. Changing a small storefront into a studio apartment seems like a very easy task.
- bell-cot 3y ago> ...seems like a very easy task. Talk to an architect. Even ignoring zoning and fire codes, new-ish small storefronts tend to be long and narrow, with windows only on the street end. That's not a popular footprint for residential.
- the_sleaze9 3y ago> new-ish small storefronts tend to be long and narrow ... not popular Take a look at the picture of the boarded up storefronts in the article. Those storefronts share the widths almost exactly of the apartments directly above them, all of which seem to show signs of being occupied. This would be an easy re-purpose and a good idea, but finance isn't incentivized to do so.
- AtlasBarfed 3y agoWould it be a cheap footprint for residential? Because Millenials and the like will take whatever they can economically get in the city. And it seems the entirety of non-luxury apartments in Manhattan also are long and narrow.
- salynchnew 3y agoWas waiting until commercial mortgage-backed securities were mentioned. Isn't financialization great?
- SoftTalker 3y agoWhat do the lenders do when the owner can't make the loan payments because he is not taking in enough rent? They don't want to own vacant property, and they don't want to own delinquent loans.
- Elucalidavah 3y ago> What do the lenders do when the owner can't make the loan payments Doesn't that cause a repossession? So the banks somehow pushed a minimum rent clause to the mortgages, and now they're going to win big by repossessing in a market where the rent doesn't get high enough?
- mattnewton 3y agoI don’t think winning big looks like owning property that couldn’t be profitably rented out by a professional land lord. Maybe on long time horizons it will, but in the short term that looks like losing your shirt but getting to keep your hat and pants.
- SkyPuncher 3y agoIf someone has already paid you x% of a property, it’s a lot easier to sell that and still make a massive profit.
- keep_reading 3y agoBut they have to lower its value to sell it. This has a domino effect on property values
- marcus_holmes 3y agoBut this is the market at work, surely? If the lender lent money to someone when the market was good, and then the market changed and the debtor can't repay, then that's just bad luck and they lose their money. That's what's supposed to happen in a market.
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- uoaei 3y agoNow that "violent riots" is not so politically salient we can talk about the real reasons. Only three years too late!
- hotnfresh 3y agoPretty sure this is a problem lots of places that haven't had "violent riots" lately. And was a problem before those. So. What're those real reasons you wanted to talk about?
- p_j_w 3y agoI may be misunderstanding, but I think what GP was getting at is that people were blaming retail vacancies on crime/riots, but that position has become impossible to defend, so now we can talk about the actual reasons. I think you and they are in agreement.
- deleted 3y ago[deleted]
- alexb_ 3y agoIf you just tax land, people will have to actually generate revenue from the land they own instead of letting it rot a city from the inside out.
- alexfromapex 3y agoWhile introducing some entropy is great in theory, the result in reality would be a de facto rent which is just passed further upstream. Please play the game Monopoly and you'll see what I mean.
- mattnewton 3y agoThe tax is payed to the state not the banks and would replace some of the patchwork of other taxes they use, many of which indirectly discourage land improvement (by taxing the value of the property built on the land) or being productive (income tax, which does not tax vacant lots, only productive ones)
- savanaly 3y agoIt's ironic you would cite Monopoly given its connection to Henry George, the historical figure who first proposed the land tax the poster you're responding to was certainly referencing.
- Terr_ 3y agoYou've got it backwards, that stuff doesn't even exist in Monopoly™: There is no property tax nor land-value tax, because once you've purchased some land you can hold on to it forever for no additional cost. (Fees from moving across the board doesn't count, those aren't tied to how much you own.) That's not an oversight either, the original game was made to demonstrate that landlords were bad and with gobble everything up to become despots if not stopped. Even if those factors did exist, the rules still don't allow players to arbitrarily raise rent, otherwise you could just demand infinity money from another player and it would be a short game indeed.
- alexfromapex 3y ago
- jauntywundrkind 3y agoDoes this have any relationship to little mini banks springing up all over cities? There's dozens of Bank Of America Financial Center's all over my city. Old storefronts feel like there's a sizable chance they get converted. I'm not sure but many seem to have automated & video services only, albeit you can schedule in-person meetings?
- joecool1029 3y ago> There's dozens of Bank Of America Financial Center's all over my city. I wonder if they are also collecting some sort of tax credit for serving impoverished areas, thinking something around the lines of the NMTC: https://www.irs.gov/pub/irs-utl/atgnmtc.pdf https://www.irs.gov/pub/irs-utl/atgnmtc.pdf (I'm aware of the CRA that's not what I mean, this is different)
- adfm 3y agoCommercial real estate is falling in on itself. When you start to notice banks outnumbering actual businesses in your area, it’s already too late. Another thing to look for is development around big box stores. If your only option is to drive there, somebody’s trying to offset or unload.
- smcin 3y agoCan you explain the "Another thing to look for is development around big box stores. If your only option is to drive there, somebody’s trying to offset or unload." part? I think there are some stores that make lots of sense colocated beside a Home Depot/CostCo/Best Buy/Walmart/Sam's Club/Target/outlets, and some that don't. But of course walkability/car ownership levels are changing.
- adfm 3y agoIf you have to ask yourself whether it's more convenient to walk or drive across the sea of asphalt to get there, you're missing the point. Are you seriously going to walk from CostCo to Target? How about from Target to Best Buy? Sure, you might be able to grab something to eat at the MOD Pizza, but you're driving to your next destination. Are you starting to get it?
- phendrenad2 3y agoTL;DR: Most of these are owned by huge mega-banks, and they are happy to eat the losses and play the long game waiting for real estate to be valuable again.
- tabtab 3y agoOligopolies ruin everything. There are a few industries where they make sense, but most, not.
- busterarm 3y agoIn NYC a corner lot at 55th street and 8th avenue sat vacant for nearly 30 years while a developer waited for the leases in the surrounding buildings to expire and those tenants could be removed. 30 years of us neighborhood residents suffering with a blighted, overgrown lot so that a developer could build their overpriced high-rise. During a good chunk of those 30 years, criminals used the unlit, boarded up lot as a convenient place to victimize passersby from the street. Right in the middle of Midtown Manhattan. Land Value Tax needs to happen.
- ejstronge 3y agoHow would a land value tax change this? The developer was paying a property tax the whole time, and this tax explicitly considers the value of the land. A vacancy tax may have helped but maybe not. A useful disincentive would need to reduce the developers anticipated return on combining the parcels - and it’s not even clear that this would be a good goal
- eightysixfour 3y agoProperty tax has a low tax value for the land itself and a high value for the improvements on the property. This means a very valuable, but empty, plot of land has a low taxable value in most jurisdictions in the US.
- ejstronge 3y ago> Property tax has a low tax value for the land itself and a high value for the improvements on the property. This is not true in cities like NYC or Boston; also likely not true in many parts of LA. This is why people tear down houses to build new houses.
- eightysixfour 3y agoDo you have examples from any of these cities we can look at? I am in Seattle, for example, and the land my property is on is 1/10th of the total taxed value. The real value is inverted.
- 1letterunixname 3y agoThere are some cities like Austin that are still over-building commercial and residential space downtown. I'm shocked the regular shopping mall (Barton Creek) is at high occupancy (>95%) and has substantial foot traffic on a weekday. I incorrectly assumed shopping malls were all but dead.
- altairprime 3y agoThere’s a lot of problems described here that are resolved by the city auctioning the property when it is not providing the services it is zoned for; at no reserve price, and using the auction price as the amount paid out by the eminent domain process to the owner (as the auction represents the fair market value of their vacant property on the market). The bank will be forced to mark down the loan’s value to whatever they get from the auction, over their objections, as it was their business risk decision to issue a loan for the property that exceeds its fair market value.
- jeffbee 3y agoPerhaps this is possible in your state, but under the California state constitution eminent domain powers can only be used for enumerated state interests, when there is no other choice than to take private property, and the taking has to be the minimal taking that achieves the purpose. I know under Kelo eminent domain can be used for any and all purposes in Connecticut, but that's not true everywhere.
- altairprime 3y agoYes, that would have to change. California is definitely turning hostile to wasteful property management in their localities, so I hope they consider it!
- occz 3y agoOne thing I didn't quite understand from the article is why the credit tenants, who are paying rents on vacant retail space, wouldn't just sublet their lease to another tenant to claw back some of their rental costs. With my admittedly limited understanding of the matter, I believe this is common in Sweden where I live, and I have anecdotally not observed any notable amount of long-term vacancies of retail space here. Are there some rules prohibiting them from doing so?