4 ms·

> 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

> 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.
refulgentis 2y ago
(earnest voice, not scoffing) How would that differ from the status quo? In both cases, the rent accepted is lower and the new valuation is based on it? Except now you can't defer pain at all?
- glompers 2y ago
  Might differ in the way that it plays out across an entire regional office market. If deferring pain is no longer expected or even possible, then the market price should rise and fall to find the right price with fewer impediments to the local activities of commerce.
- CydeWeys 2y ago
  It would encourage buildings to lower asking rents as vacancy periods grow longer, rather than having incentives to leave a commercial unit vacant, as with my proposal they'd already be taking a hit to valuation anyway as soon as the unit went vacant, and a new tenant paying 80% of the last tenant's rent is still much better than leaving it vacant longer while it decays through 70%, then 60%, etc. So overall the market would be more efficient, rents would go downwards more quickly in terms of CRE downturns, and you'd have fewer vacancies with more units reaching a market-clearing rate.
stale2002 2y ago
> 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. That is not really how property valuation works. A building is not worth whatever a mathematical formula outputs. Instead a building, or anything at all, is worth exactly how much other people are willing to pay for it. No more, no less. Presumably, any prospective buyer who isn't stupid would be very much aware of the concept of a cyclical market, and they wouldn't change how much they valued a building just because the owner stupidly didn't rent it out during a downturn. > Then, when a new actual rent is established and is being paid, you use that figure. Nothing is stopping someone from simply doing that, and offering to buy the property for whatever this "better" formula outputs. And if this new formula is actually correct, then presumably such a person would be able to make tons of money from doing that.
- deleted 2y ago
  [deleted]
- CydeWeys 2y ago
  > Instead a building, or anything at all, is worth exactly how much other people are willing to pay for it. No more, no less. The point you're missing is that buildings need valuations much more frequently than they are sold. CRE is generally mortgaged to the maximum extent possible (to use maximum leverage), and those mortgages need frequent re-upping as the commercial real estate market does not work like residential where you can get a 30-year fixed. So the property needs to be constantly valuated so that the banks know how much equity the owners have in the building (and if the loans are underwater), and this is being done constantly, way more frequently than the individual building is actually sold. The most common way to do this is to look at the price the building was last sold for, see how rents have changed since then, and use that as a modifier on the last sold price. (Or just a flat multiplier on top of total rents.)
mikhailfranco 2y ago
Agree with your micro analysis. I also think in the current macroeconomic climate, CRE owners, and their banks/hedgies/reits or other bond/loan owners are crossing their fingers, turning a blind-eye to the telescope, holding their breath, and waiting for the Fed to lower interest rates. Of course, if the Fed holds higher-for-longer (as many expect in the face of continuing high inflation), they will be waiting to exhale to the point of asphyxiation. How did CRE go completely bankrupt? "Slowly, then suddenly."
- pas 2y ago
  It would be prudent for the Fed and various market/banking authorities to start poking this as soon as possible. Either via commercial-to-residential conversion grants, or providing targeted restructuring loans to owners, and owners/managers should start offering the vacant space for free for non-commercial stuff. Vacancy is bad for cities and bad for inflation. Sure, maybe it's politically unfeasible, but still, turning up vacancy taxes would motivate commercial landlords to finally stop this wile-e-coyote running-in-the-air.

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.

refulgentis 2y ago

(earnest voice, not scoffing) How would that differ from the status quo? In both cases, the rent accepted is lower and the new valuation is based on it? Except now you can't defer pain at all?

glompers 2y ago
Might differ in the way that it plays out across an entire regional office market. If deferring pain is no longer expected or even possible, then the market price should rise and fall to find the right price with fewer impediments to the local activities of commerce.
CydeWeys 2y ago
It would encourage buildings to lower asking rents as vacancy periods grow longer, rather than having incentives to leave a commercial unit vacant, as with my proposal they'd already be taking a hit to valuation anyway as soon as the unit went vacant, and a new tenant paying 80% of the last tenant's rent is still much better than leaving it vacant longer while it decays through 70%, then 60%, etc. So overall the market would be more efficient, rents would go downwards more quickly in terms of CRE downturns, and you'd have fewer vacancies with more units reaching a market-clearing rate.

stale2002 2y ago

> 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. That is not really how property valuation works. A building is not worth whatever a mathematical formula outputs. Instead a building, or anything at all, is worth exactly how much other people are willing to pay for it. No more, no less. Presumably, any prospective buyer who isn't stupid would be very much aware of the concept of a cyclical market, and they wouldn't change how much they valued a building just because the owner stupidly didn't rent it out during a downturn. > Then, when a new actual rent is established and is being paid, you use that figure. Nothing is stopping someone from simply doing that, and offering to buy the property for whatever this "better" formula outputs. And if this new formula is actually correct, then presumably such a person would be able to make tons of money from doing that.

deleted 2y ago
[deleted]
CydeWeys 2y ago
> Instead a building, or anything at all, is worth exactly how much other people are willing to pay for it. No more, no less. The point you're missing is that buildings need valuations much more frequently than they are sold. CRE is generally mortgaged to the maximum extent possible (to use maximum leverage), and those mortgages need frequent re-upping as the commercial real estate market does not work like residential where you can get a 30-year fixed. So the property needs to be constantly valuated so that the banks know how much equity the owners have in the building (and if the loans are underwater), and this is being done constantly, way more frequently than the individual building is actually sold. The most common way to do this is to look at the price the building was last sold for, see how rents have changed since then, and use that as a modifier on the last sold price. (Or just a flat multiplier on top of total rents.)

mikhailfranco 2y ago

Agree with your micro analysis. I also think in the current macroeconomic climate, CRE owners, and their banks/hedgies/reits or other bond/loan owners are crossing their fingers, turning a blind-eye to the telescope, holding their breath, and waiting for the Fed to lower interest rates. Of course, if the Fed holds higher-for-longer (as many expect in the face of continuing high inflation), they will be waiting to exhale to the point of asphyxiation. How did CRE go completely bankrupt? "Slowly, then suddenly."

pas 2y ago
It would be prudent for the Fed and various market/banking authorities to start poking this as soon as possible. Either via commercial-to-residential conversion grants, or providing targeted restructuring loans to owners, and owners/managers should start offering the vacant space for free for non-commercial stuff. Vacancy is bad for cities and bad for inflation. Sure, maybe it's politically unfeasible, but still, turning up vacancy taxes would motivate commercial landlords to finally stop this wile-e-coyote running-in-the-air.