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AIUI valuation of commercial real estate is driven almost entirely by NPV of rents. The lender loans against a value derived from some expected $/ft rent. If

AIUI valuation of commercial real estate is driven almost entirely by NPV of rents. The lender loans against a value derived from some expected $/ft rent. If the space is empty, but offered at or above that level, then the landlord (and maybe the bank) might have some issues making payments, but both their balance sheets are the right way up. If the landlord leases some of the space cheaper than the target, then cashflow improves, but the value of the building drops because the current lease sets expectations for future rents. If they lease cheap enough, the landlord and lender might end up underwater and undercollateralized, and be forced to sell at a loss, wipe out equity, etc. All else equal, both sides prefer paper equity to hard cash, so lose money short term rather than mark the asset to market.

mrgoldenbrown 3y ago
What I don't get is the endgame. When the lack of cashflow makes the landlord go bankrupt and the lender has to repossess, doesn't that look bad for them? If you try to sell me a property with the promise that it can bring in $100/sq foot, but nobody has wanted it at that rate for 3 years, and it's in a neighborhood full of other vacant storefronts, why would anyone believe you? There's gotta be some externality that I don't understand.
- entropicdrifter 3y ago
  >There's gotta be some externality that I don't understand. The banks are over-invested in commercial real estate, is my guess, and they're attempting to price fix to prevent the price from dropping too quickly and putting the banks themselves under water
- jjk166 3y ago
  If you're betting that the lull in demand is a temporary thing and in the not too distant future people will start paying the prices they did before, then it makes perfect sense. On a larger scale, even if you know some locations are never going to see the demand they once did, so long as some fraction do recover, then it's an overall winning strategy. Where that breakeven point is exactly is tough to say, but I'm sure you can find a good number of people bullish on long term commercial real estate.
- callalex 3y ago
  The endgame does not matter. Banks are publicly traded, and like every publicly traded company, the only timespan that matters is 1-4 quarters.

mrgoldenbrown 3y ago

What I don't get is the endgame. When the lack of cashflow makes the landlord go bankrupt and the lender has to repossess, doesn't that look bad for them? If you try to sell me a property with the promise that it can bring in $100/sq foot, but nobody has wanted it at that rate for 3 years, and it's in a neighborhood full of other vacant storefronts, why would anyone believe you? There's gotta be some externality that I don't understand.

entropicdrifter 3y ago
>There's gotta be some externality that I don't understand. The banks are over-invested in commercial real estate, is my guess, and they're attempting to price fix to prevent the price from dropping too quickly and putting the banks themselves under water
jjk166 3y ago
If you're betting that the lull in demand is a temporary thing and in the not too distant future people will start paying the prices they did before, then it makes perfect sense. On a larger scale, even if you know some locations are never going to see the demand they once did, so long as some fraction do recover, then it's an overall winning strategy. Where that breakeven point is exactly is tough to say, but I'm sure you can find a good number of people bullish on long term commercial real estate.
callalex 3y ago
The endgame does not matter. Banks are publicly traded, and like every publicly traded company, the only timespan that matters is 1-4 quarters.