7 ms·

This all has to do with how commercial real estate is valued; rent determines the valuation. If companies are unwilling to pay the rent the space sits empty wai

This all has to do with how commercial real estate is valued; rent determines the valuation. If companies are unwilling to pay the rent the space sits empty waiting for a tenant willing to. The reason for this is if you take lower rent than previously your building value changes and your lenders make you cough up the difference to cover additional principal. Since the loans come due every 5ish years we’re now seeing buildings unable to justify their previous value, and having to walk away or get valued at their current rent. It’s going to be ugly for a while.

VHRanger 2y ago
Understanding this structure clarifies commercial rent negotiations for business owners: The landlord can't negotiate on rent, but he can negotiate on a ton of other things that are financially equivalent.
- wrs 2y ago
  Indeed, it’s even common to negotiate for some months of discounted (or zero) rent, as long as you don’t change the official rent!
  - blackeyeblitzar 2y ago
    Isn’t this deceptive? If a buyer thinks they’re getting a priority with one kind of rent potential but the truth is that there’s a lot of these negotiations that distort things, couldn’t they be fraudulent? Also how does property tax get affected by all this?
    - lotsofpulp 2y ago
      Free rent doesn’t fool a lender or commercial property buyer. It’s elementary to take annual income and divide by 12 to get actual monthly rents. Appraisals for property tax are similarly unaffected. “Free” months are to prevent advertised rents from being lower to prospective and current tenants. It helps set a higher price anchor so that future negotiations are based off of that.
      - bruce511 2y ago
        It's also an important offset against the cost of moving. Obviously norms in different places will vary. We have not moved a lot as a business, but when we have it's been -expensive-. Leaving aside the cost of actual movers (reasonably low) it costs money to prepare a new office for us. Granted, we place a premium on employee comfort, so we spend a bit on kitchens etc, but also networking, furniture, the offices themselves and so on. Then there's down-time for the move itself (packing, moving, unpacking.) And "rent overlap". Once construction starts we're effectively renting 2 offices, the old one and the new one. In cases where serious work was done this can span 2 to 3 months. So we've always negotiated "rent free" starter months. This mitigates (some of) the extra expenses incurred. In some cases this translates as discounts for the first year or whatever.
        wrs 2y ago
        Speaking of construction, another thing that might be surprising is the “tenant improvement allowance”. If your lease is long enough (at least 5-7 years), it’s often expected that the landlord will pay to hire an architect, rip out whatever interior the previous tenant had, and build out the interior to your specs. (Up to some limit, which is the “allowance”). But again, that isn’t counted as a rent discount. In the other direction, there’s the whole area of “net” rent (and “triple-net” rent), and the bizarre calculation for shared spaces that makes “square foot” a semi-imaginary unit.
    - CydeWeys 2y ago
      You have to look at the actual income statements to see how much they're actually being paid in a year, and look at the signed leases to see how much the building will actually make in future years. It's all part of due diligence for buying a high value commercial property.
  - pfannkuchen 2y ago
    I thought that was about rent control?
    - deleted 2y ago
      [deleted]
- Waterluvian 2y ago
  Ah this clarifies why I’ve had an employer talk about “millions in free upgrades” for office space they looked at.
  - rdtsc 2y ago
    That's how it works. We signed a new agreement but to be "convinced" to stay the lender did some renovation in the space, added some extra amenities, new carpet everywhere, and a bunch of other stuff like that.
  - quickthrowman 2y ago
    ‘Tenant improvement allowance’ is what that is called. Your employer’s facilities director/real estate person is a bit naive if they claimed it’s free money since it’s not free money. The TIA cost is just priced into the 10 year lease over the duration. Nothing is free.
    - Waterluvian 2y ago
      Nothing is free?!
      - quickthrowman 2y ago
        Not if a landlord is involved :) I do business with CBRE, JLL, and Cushman Wakefield. All of them make me pay them a fee to send them an invoice, and that fee is built into my price since as I’ve said,
deleted 2y ago
[deleted]
ben_jones 2y ago
> It’s going to be ugly for a while. As a life long Bay Area resident I’ve gotta assume 10 years+ before non tech businesses find some casus belli to operate the ex-warehouse converted to open office buildings throughout SF. I say non tech because if you’re a burgeoning tech company why on gods green earth would you choose SF? Because you want to poach all the ex-googlers at 300k+ TC expectations? Because you want to compete with Meta for Stanford and Berkeley grads (because they truly are so much better than all the other CS grads in the world)? Because you’re really really trying to nail down that contract with Kaiser Permensorrythreemonthsuntilyourappointmente? Because it’s the only way you can raise $100m on a $5b valuation for your macaroni and cheese only microwave? SF is a gorgeous amazing city with a rich history and jaw dropping views and weather (bring a jacket) but man even as a major proponent I can’t make a business case outside of checks notes access to League of Legends themed investor meetings.
- seanmcdirmid 2y ago
  What other options do you have? All cities have the same issue to lesser degree: Seattle is a bit cheaper than SF but also maybe has a bit less talent, Portland is cheaper still than Seattle with less talent still. Unless you are a FAANG who can convince people to relocate to Durham for a bit lesser pay, it’s going to tough going trying to recruit the right talent in that LCOL even though compensation is less. You are stuck making trade offs wherever you base your office, the market remains sort of efficient like that. If you have the network to hire the right talent in say Atlanta, go for it. But many will still do better in SF.
  - photonbeam 2y ago
    These companies have been importing people from all over the US (and elsewhere) to the bay area. Its not efficient at all
    - seanmcdirmid 2y ago
      Yes, but not just from one singular location they could go instead. It isn’t easy setting up in Shanghai and Bangalore.
lotsofpulp 2y ago
> The reason for this is if you take lower rent than previously your building value changes and your lenders make you cough up the difference to cover additional principal. A good portion of loans (I would even say most, especially for CMBS) come with minimum DSCR requirements, so not having any rental income for too long can be worse than having less income. https://www.investopedia.com/terms/d/dscr.asp https://www.investopedia.com/terms/d/dscr.asp
kyleyeats 2y ago
There's a shopping center on Geary that has a Domino's, a Walgreens, a former Ross, and a former Blockbuster. It still has the slot for dropping off movies.
- fy20 2y ago
  This is pretty apparent in UK high streets too. Whenever I visit my parents, the high street of their local town feels dead compared to when I was a kid. 100 years ago this town was the trade capital of the region. Half the shops are boarded up, and whatever is left feels like it's running on limited time. Banks make up a good chunk of units, and they still only exist as my parents' generation don't do online banking. When I was a kid it would be common to see vans (food trucks) selling locally produced meats, pastries, cheese, bread, etc. Last time I visited there was only one, selling vapes. In bigger cities it's not uncommon for areas near high streets to be redeveloped into mixed used, with commercial on the ground floor and apartments above. I'm guessing in 20 or 30 years the concept of a 'high street' I knew as a kid will only exist as a tourist destination. This has an issue in itself though, as a lot of these are are historic buildings. You are restricted to what changes can be done, and as-is they wouldn't make very good apartments (low ceilings, weird layouts, poor insulation/sound proofing, questionable fire safety, no parking).
  - anal_reactor 2y ago
    Honestly, I go to local market maybe once a year. As lovely as they are, I just can't adjust my life to the rhythm of those small shops, supermarkets are way too convenient. Besides that, I don't really have a reason to go cafes or bars. Spend an hour of my day to have 10% chance of talking to someone and then again 10% of actually enjoying the conversation? No thank you, especially not after an exhausting work week. I'd rather put my coffee into a thermos and drink it on a bench in a park outside the city. Or at home. God I love drinking at home.
    - KptMarchewa 2y ago
      Pretty much no one goes there alone. If you go with someone else you have 100% chance of conversation and much higher at enjoying it.
dylan604 2y ago
I moved a company out of a high rise. The company was a media post type company in a building full of financial and lawyer types. After the company moved, the 8600+ sqft of office space remained vacant for at least 4 years. After that, life moved on and I didn't spend much time in that area any more to see how long it stayed empty. There was a pub that was next door, and at night the empty space had the security lights on that allowed seeing into the space to see in that it looked exactly how it looked when we left. It became a running joke each time I went to the pub to see the exact same bit of armored cable hanging from the ceiling where the tiles were never put back in place. I just assumed it was more valuable as a loss for a write off since 8600 * >$30/sqft seems like a lot of money to not be made.
- CydeWeys 2y ago
  > I just assumed it was more valuable as a loss for a write off since 8600 * >$30/sqft seems like a lot of money to not be made. That's not how it works. You don't get to write off foregone rent as a loss, only the actual cost of running/maintaining the building. The guy you replied to had it right; accepting a cheaper rent would cause the building's value to plummet (buildings are valued as a multiple of rents), which would plunge the owners into bankruptcy as they would now owe more than the building is worth. But you can survive a temporary market downturn by never accepting a lower rent so long as it comes back up in time. The whole thing is silly, and the market is rife for a saner way to valuate properties. Personally I would use a decay factor on top of the last paid rent for vacant properties. E.g. the imputed rent for a vacant lease would decrease by 2% every month (this figure is open to fine-tuning), so that the property is worth less and less with every month that it cannot find a new tenant at its previous rent. Then, when a new actual rent is established and is being paid, you use that figure.
  - dylan604 2y ago
    I wasn't trying to state that my assumptions were right. Just adding some color to the story. I am fully aware that the $/sqft wasn't negotiable. That's why we left. On top of not budging on the rent, they were also not providing any of these other incentives/perks to make it worth while. Having the space occupied because you gave enough incentives to equate to lower rent on the renter's books vs vacant and visibly demolished has got to be better in justifying the $/sqft. Then again, I'm not in real estate and am okay with my soul that this doesn't make sense to me.
nullc 2y ago
Came here to say this-- and to also point out that if you look through loop at SF real-estate you will see lots of stuff at $/sqft that just don't make sense in the current market.
xbmcuser 2y ago
A lot of real estate commercial or residential is left vacant in many cities around the world because of this. Add to the fact that property taxes are directly tied to the tax income of city governments there are few cities willing to do something about it. Even the banks don't want to touch it as if the market crashes they will also get over leveraged. Now we have a large amount of empty and unused real estate and large number of unable to afford rent on houses or businesses.
- bruce511 2y ago
  This is undoubtedly correct for commercial, but I think not so much for residential. Partly because only investors care about rental returns (people buying houses to live in won't be getting rent.) And partly because residential rent demand remains strong, even as commercial rent is weaker. Where there might be cross-over is less with houses and more with large apartment blocks with a single owner. In that specific case it's probably better to keep rent high, especially if the building wants to maintain an aura of exclusivity. For housing generally there's no need to refinance every 5 years so the need to revalue doesn't come up. And unless a revalue happened soon after a purchase the house is unlikely to be underwater anyway. Residential prices (excluding large scale external events like 2008) are not volatile and trend steadily upwards. Ultimately the root fundamentals of commercial and residential real estate are quite different.
  - deleted 2y ago
    [deleted]
  - neom 2y ago
    There are ghost floors in condo buildings in Toronto. Like really. I've seen it, a whole floor. Family office would fly to Canada, buy floors of buildings, leave. The government finally banned this, but the empty units still exist.
    - bboygravity 2y ago
      For the lesser informed: family office is like a hedge fund but with less regulation.
mitthrowaway2 2y ago
There ought to be a law that the rental valuation drops by 1% for every month that the space remains without a tenant.
shellfishgene 2y ago
How does a rent of zero for years not change the valuation?
- bequanna 2y ago
  Because the banks are in on the scam. They have to be or they would be forced to report huge losses from marking down loans. Can’t have that screwing up the exec bonuses. Best to let the next guy deal with it, or heck, maybe they will get lucky and the market will turn around! “Extend and pretend”
bitcharmer 2y ago
> It’s going to be ugly for a while Why are we calling it ugly?

VHRanger 2y ago

Understanding this structure clarifies commercial rent negotiations for business owners: The landlord can't negotiate on rent, but he can negotiate on a ton of other things that are financially equivalent.

wrs 2y ago
Indeed, it’s even common to negotiate for some months of discounted (or zero) rent, as long as you don’t change the official rent!
- blackeyeblitzar 2y ago
  Isn’t this deceptive? If a buyer thinks they’re getting a priority with one kind of rent potential but the truth is that there’s a lot of these negotiations that distort things, couldn’t they be fraudulent? Also how does property tax get affected by all this?
  - lotsofpulp 2y ago
    Free rent doesn’t fool a lender or commercial property buyer. It’s elementary to take annual income and divide by 12 to get actual monthly rents. Appraisals for property tax are similarly unaffected. “Free” months are to prevent advertised rents from being lower to prospective and current tenants. It helps set a higher price anchor so that future negotiations are based off of that.
    - bruce511 2y ago
      It's also an important offset against the cost of moving. Obviously norms in different places will vary. We have not moved a lot as a business, but when we have it's been -expensive-. Leaving aside the cost of actual movers (reasonably low) it costs money to prepare a new office for us. Granted, we place a premium on employee comfort, so we spend a bit on kitchens etc, but also networking, furniture, the offices themselves and so on. Then there's down-time for the move itself (packing, moving, unpacking.) And "rent overlap". Once construction starts we're effectively renting 2 offices, the old one and the new one. In cases where serious work was done this can span 2 to 3 months. So we've always negotiated "rent free" starter months. This mitigates (some of) the extra expenses incurred. In some cases this translates as discounts for the first year or whatever.
      - wrs 2y ago
        Speaking of construction, another thing that might be surprising is the “tenant improvement allowance”. If your lease is long enough (at least 5-7 years), it’s often expected that the landlord will pay to hire an architect, rip out whatever interior the previous tenant had, and build out the interior to your specs. (Up to some limit, which is the “allowance”). But again, that isn’t counted as a rent discount. In the other direction, there’s the whole area of “net” rent (and “triple-net” rent), and the bizarre calculation for shared spaces that makes “square foot” a semi-imaginary unit.
  - CydeWeys 2y ago
    You have to look at the actual income statements to see how much they're actually being paid in a year, and look at the signed leases to see how much the building will actually make in future years. It's all part of due diligence for buying a high value commercial property.
- pfannkuchen 2y ago
  I thought that was about rent control?
  - deleted 2y ago
    [deleted]
Waterluvian 2y ago
Ah this clarifies why I’ve had an employer talk about “millions in free upgrades” for office space they looked at.
- rdtsc 2y ago
  That's how it works. We signed a new agreement but to be "convinced" to stay the lender did some renovation in the space, added some extra amenities, new carpet everywhere, and a bunch of other stuff like that.
- quickthrowman 2y ago
  ‘Tenant improvement allowance’ is what that is called. Your employer’s facilities director/real estate person is a bit naive if they claimed it’s free money since it’s not free money. The TIA cost is just priced into the 10 year lease over the duration. Nothing is free.
  - Waterluvian 2y ago
    Nothing is free?!
    - quickthrowman 2y ago
      Not if a landlord is involved :) I do business with CBRE, JLL, and Cushman Wakefield. All of them make me pay them a fee to send them an invoice, and that fee is built into my price since as I’ve said,

deleted 2y ago

[deleted]

ben_jones 2y ago

> It’s going to be ugly for a while. As a life long Bay Area resident I’ve gotta assume 10 years+ before non tech businesses find some casus belli to operate the ex-warehouse converted to open office buildings throughout SF. I say non tech because if you’re a burgeoning tech company why on gods green earth would you choose SF? Because you want to poach all the ex-googlers at 300k+ TC expectations? Because you want to compete with Meta for Stanford and Berkeley grads (because they truly are so much better than all the other CS grads in the world)? Because you’re really really trying to nail down that contract with Kaiser Permensorrythreemonthsuntilyourappointmente? Because it’s the only way you can raise $100m on a $5b valuation for your macaroni and cheese only microwave? SF is a gorgeous amazing city with a rich history and jaw dropping views and weather (bring a jacket) but man even as a major proponent I can’t make a business case outside of checks notes access to League of Legends themed investor meetings.

seanmcdirmid 2y ago
What other options do you have? All cities have the same issue to lesser degree: Seattle is a bit cheaper than SF but also maybe has a bit less talent, Portland is cheaper still than Seattle with less talent still. Unless you are a FAANG who can convince people to relocate to Durham for a bit lesser pay, it’s going to tough going trying to recruit the right talent in that LCOL even though compensation is less. You are stuck making trade offs wherever you base your office, the market remains sort of efficient like that. If you have the network to hire the right talent in say Atlanta, go for it. But many will still do better in SF.
- photonbeam 2y ago
  These companies have been importing people from all over the US (and elsewhere) to the bay area. Its not efficient at all
  - seanmcdirmid 2y ago
    Yes, but not just from one singular location they could go instead. It isn’t easy setting up in Shanghai and Bangalore.

lotsofpulp 2y ago

> The reason for this is if you take lower rent than previously your building value changes and your lenders make you cough up the difference to cover additional principal. A good portion of loans (I would even say most, especially for CMBS) come with minimum DSCR requirements, so not having any rental income for too long can be worse than having less income. https://www.investopedia.com/terms/d/dscr.asp https://www.investopedia.com/terms/d/dscr.asp

kyleyeats 2y ago

There's a shopping center on Geary that has a Domino's, a Walgreens, a former Ross, and a former Blockbuster. It still has the slot for dropping off movies.

fy20 2y ago
This is pretty apparent in UK high streets too. Whenever I visit my parents, the high street of their local town feels dead compared to when I was a kid. 100 years ago this town was the trade capital of the region. Half the shops are boarded up, and whatever is left feels like it's running on limited time. Banks make up a good chunk of units, and they still only exist as my parents' generation don't do online banking. When I was a kid it would be common to see vans (food trucks) selling locally produced meats, pastries, cheese, bread, etc. Last time I visited there was only one, selling vapes. In bigger cities it's not uncommon for areas near high streets to be redeveloped into mixed used, with commercial on the ground floor and apartments above. I'm guessing in 20 or 30 years the concept of a 'high street' I knew as a kid will only exist as a tourist destination. This has an issue in itself though, as a lot of these are are historic buildings. You are restricted to what changes can be done, and as-is they wouldn't make very good apartments (low ceilings, weird layouts, poor insulation/sound proofing, questionable fire safety, no parking).
- anal_reactor 2y ago
  Honestly, I go to local market maybe once a year. As lovely as they are, I just can't adjust my life to the rhythm of those small shops, supermarkets are way too convenient. Besides that, I don't really have a reason to go cafes or bars. Spend an hour of my day to have 10% chance of talking to someone and then again 10% of actually enjoying the conversation? No thank you, especially not after an exhausting work week. I'd rather put my coffee into a thermos and drink it on a bench in a park outside the city. Or at home. God I love drinking at home.
  - KptMarchewa 2y ago
    Pretty much no one goes there alone. If you go with someone else you have 100% chance of conversation and much higher at enjoying it.

dylan604 2y ago

I moved a company out of a high rise. The company was a media post type company in a building full of financial and lawyer types. After the company moved, the 8600+ sqft of office space remained vacant for at least 4 years. After that, life moved on and I didn't spend much time in that area any more to see how long it stayed empty. There was a pub that was next door, and at night the empty space had the security lights on that allowed seeing into the space to see in that it looked exactly how it looked when we left. It became a running joke each time I went to the pub to see the exact same bit of armored cable hanging from the ceiling where the tiles were never put back in place. I just assumed it was more valuable as a loss for a write off since 8600 * >$30/sqft seems like a lot of money to not be made.

CydeWeys 2y ago
> I just assumed it was more valuable as a loss for a write off since 8600 * >$30/sqft seems like a lot of money to not be made. That's not how it works. You don't get to write off foregone rent as a loss, only the actual cost of running/maintaining the building. The guy you replied to had it right; accepting a cheaper rent would cause the building's value to plummet (buildings are valued as a multiple of rents), which would plunge the owners into bankruptcy as they would now owe more than the building is worth. But you can survive a temporary market downturn by never accepting a lower rent so long as it comes back up in time. The whole thing is silly, and the market is rife for a saner way to valuate properties. Personally I would use a decay factor on top of the last paid rent for vacant properties. E.g. the imputed rent for a vacant lease would decrease by 2% every month (this figure is open to fine-tuning), so that the property is worth less and less with every month that it cannot find a new tenant at its previous rent. Then, when a new actual rent is established and is being paid, you use that figure.
- dylan604 2y ago
  I wasn't trying to state that my assumptions were right. Just adding some color to the story. I am fully aware that the $/sqft wasn't negotiable. That's why we left. On top of not budging on the rent, they were also not providing any of these other incentives/perks to make it worth while. Having the space occupied because you gave enough incentives to equate to lower rent on the renter's books vs vacant and visibly demolished has got to be better in justifying the $/sqft. Then again, I'm not in real estate and am okay with my soul that this doesn't make sense to me.

nullc 2y ago

Came here to say this-- and to also point out that if you look through loop at SF real-estate you will see lots of stuff at $/sqft that just don't make sense in the current market.

xbmcuser 2y ago

A lot of real estate commercial or residential is left vacant in many cities around the world because of this. Add to the fact that property taxes are directly tied to the tax income of city governments there are few cities willing to do something about it. Even the banks don't want to touch it as if the market crashes they will also get over leveraged. Now we have a large amount of empty and unused real estate and large number of unable to afford rent on houses or businesses.

bruce511 2y ago
This is undoubtedly correct for commercial, but I think not so much for residential. Partly because only investors care about rental returns (people buying houses to live in won't be getting rent.) And partly because residential rent demand remains strong, even as commercial rent is weaker. Where there might be cross-over is less with houses and more with large apartment blocks with a single owner. In that specific case it's probably better to keep rent high, especially if the building wants to maintain an aura of exclusivity. For housing generally there's no need to refinance every 5 years so the need to revalue doesn't come up. And unless a revalue happened soon after a purchase the house is unlikely to be underwater anyway. Residential prices (excluding large scale external events like 2008) are not volatile and trend steadily upwards. Ultimately the root fundamentals of commercial and residential real estate are quite different.
- deleted 2y ago
  [deleted]
- neom 2y ago
  There are ghost floors in condo buildings in Toronto. Like really. I've seen it, a whole floor. Family office would fly to Canada, buy floors of buildings, leave. The government finally banned this, but the empty units still exist.
  - bboygravity 2y ago
    For the lesser informed: family office is like a hedge fund but with less regulation.

mitthrowaway2 2y ago

There ought to be a law that the rental valuation drops by 1% for every month that the space remains without a tenant.

shellfishgene 2y ago

How does a rent of zero for years not change the valuation?

bequanna 2y ago
Because the banks are in on the scam. They have to be or they would be forced to report huge losses from marking down loans. Can’t have that screwing up the exec bonuses. Best to let the next guy deal with it, or heck, maybe they will get lucky and the market will turn around! “Extend and pretend”

bitcharmer 2y ago

> It’s going to be ugly for a while Why are we calling it ugly?