8 ms·

Small businesses in crisis as rising numbers unable to pay rent

65 points by rolph 2y ago

jauntywundrkind 2y ago
Meanwhile there's unoccupied storefronts en-masse all over my city (DC). Its not something I thought I d miss in the world, but this small retail store thing seems like it's totally crushed out, between Walmart-ification & Amazon. What I haven't seen is the return of more affordable interesting local spots. We have a couple dive-y places that've hung on, but there's been very few below-average cost places that have opened. It seems unlikely but maybe someday there'll be some rebalancing, rents will go down, people will start trying to put up more down to earth accessible experiences & options.
- tharmas 2y ago
  I don't share your view. I think rhe landlords will eat everyone's wages. We are entering neo feudalism.
  - awksedbashesc 2y ago
    Yep we just work online from home and will have to hustle to make rent each day
  - chiefalchemist 2y ago
    Residential and commercial real estate will price what the market can bear. Raise the min wage... Housing will follow suit. Commercial, as I understand it, can't lower prices because that devalues the unit / building. To them, empty is better than offering a lower lease price
    - AlexandrB 2y ago
      So it's a "market" where prices can only increase. Seems like something will have to give eventually.
      - chiefalchemist 2y ago
        It's not only that particular market, it's effectively the whole credit based economy, underwritten by a financial system that fuels it. When credit and large assets are involve, these system(s) are intentionally tuned to avoid decrease in price. That would ccompletely undermine those entities making the loans. The Fed is on record as saying, "Our target is 2% interest". Imagine that, we're going to devalue your hard earned money 2% a year, and no one cases (because it's passed off with the euphemism "inflation"). We get more efficient and more effective and prices go...up??!! I highly recommend the book "Broken Money". Not so much for the Bitcoin and crypos stuff, but for the lessons on the history of money, the financial system, etc. https://www.lynalden.com/broken-money/ https://www.lynalden.com/broken-money/
    - nothercastle 2y ago
      Illiquid markets have poor price discovery. If the price drops below stated value typically transactions stop but prices take a long time to drop
- nothercastle 2y ago
  Real estate is owned by large firms that use the real estate as loan collateral. If you rent out space for less than you state it’s worth you have to restate the asset value and possibly put up more collateral which you don’t have or is better allocated elsewhere. There are a lot of shell games being played and eventually the music stop, assets get liquidated, loses get realized but until then property stays empty. There is no natural clearing mechanism that forces firms to take market value losses when they happen so the incentive is to pretend there are no losses until they are so spectacular that the entire firm goes bankrupt
  - kurthr 2y ago
    Exactly, came here to say this. For many that do operate the real estate there are loans to leverage the property and those loans come due if rental rates (or sale prices) fall below a limit stated in the loan. That's part of why you'll get free months rather than a reduced rate, but also why so much is empty. Often the commercial part of 5/1 and 5/2 designs is a loss where all the profit is in the residential above it (and for code acceptance).
    - AtlasBarfed 2y ago
      They should just make them into storage units
    - lotsofpulp 2y ago
      This is not true. Lenders are not stupid, they are not going to be fooled by giving away 11 months free and charging a higher rent for 1 month. Or for giving away 1 month and charging a higher rent for 11 months. Commercial real estate loans will have a provision to periodically analyze the property’s revenue (not just monthly sticker price). See debt service coverage ratios. https://www.investopedia.com/terms/d/dscr.asp https://www.investopedia.com/terms/d/dscr.asp
      - kurthr 2y ago
        It's not about fooling. It's about the contract. The property can have met the debt service (cash flow) ratio, but still be in violation of the the rental price covenant. Those covenants require immediate repayment of the loan.
- underseacables 2y ago
  Where? I live in Dupont Circle. Are you talking about in Southeast? I'm not seeing empty storefronts except in really high crime areas.
  - downrightmike 2y ago
    poverty creates crime
adamcoolguy 2y ago
[flagged]
ethbr1 2y ago
Relevant bits: >> A majority of 54 percent of small business owners surveyed by Alignable said that their landlords were charging them more now than six months ago, with 11 percent saying their rent has increased by over 20 percent. >> According to Alignable, only 32 percent of small businesses founded before March 2020 are now earning as much every month as they were before the pandemic. So landlords are probably rotating financing onto higher rates and trying to pass their interest charges to tenants, who haven't sufficiently increased prices to compensate.
- entangledqubit 2y ago
  From what I understand, commercial real estate is also going through some devaluing so maybe those rents should be going in the other direction? This seems like a last ditch attempt to keep things together long enough until rates come down (I'm not sure they'll come down enough in the near term.). I'm hoping businesses choose to move - or maybe go storefront free for a while - to speed up the correction. (I've noticed several businesses operating (purely?) out of a nearby storage place for a while now.)
  - downrightmike 2y ago
    Yes, the delay and deflect mentality is in full swing in CRE and in the other bubbles as well. CRE has been a zombie since 2008.
  - chatmasta 2y ago
    Intuitively, it seems rare for any rent-seeking business (such as a landlord) to decrease prices, especially for an active tenancy. But even for a vacancy, they will only do that when they are absolutely forced to, and they will delay it for as long as possible (better to wait two months to fill a $1k/month vacancy than to reduce it to $800/month). On the other hand, they will happily increase prices without being forced to, especially since they can do that while they have an active tenant. Why would a landlord ever decrease the price of an active tenancy? It would only happen if the tenant threatened to end the tenancy. That’s more likely for commercial tenants than residential, but it still requires a higher “activation energy” than its corollary, where the landlord increases the price on a whim.
petermcneeley 2y ago
A country that stops making things will eventually stop buying things.
whoknowsidont 2y ago
When are we going to address the landlord problem? Utilizing places as assets is so incredibly damaging to our society.
- nathanaldensr 2y ago
  That depends on what you mean by "the landlord problem." Are you alluding to ending private property ownership (communism) or something else?
  - lotsofpulp 2y ago
    Marginal land value taxes, with even higher taxes the longer the space stays empty. Wonder if enough young/working people will ever wake up to realize earned income tax is penalizing them for working, and flat (and extremely low) land value taxes with myriad loopholes like 1031 exchange, senior discounts, and faux exemptions for things like agriculture are basically a feudal system to maintain the socioeconomic order.
    - _heimdall 2y ago
      That's a proposed solution not a problem definition. What's the "landlord problem" that needs to get fixed and why is a land value tax the best option?
      - drekk 2y ago
        I'll just quote from Adam Smith as to the problem. I think the proposed solution is good. I think "best option" is needlessly specific, and subjective. No need to let the perfect be the enemy of the good. “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them, and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities, makes a third” ― Adam Smith, Wealth of Nations
_spduchamp 2y ago
A big problem is Real Estate Investment Trusts. They buy up properties, shorten leases, and raise rents. They borrow money against future rents so they rather a space stay vacant than lower a single rent. If they lower a rent it signals that they are borrowing against an inflated asset, which would cause a domino effect on their loans. REITs are considered stable investments, so everyone's mutual funds and pensions are full of this stuff. As a small business owner, I'm very lucky to have mostly decent landlords, but I worry for the day that they sell out to REITs. Our business won't survive that.
- OptionOfT 2y ago
  And then the problem is that the rent increase is limitless (unless limited by your lease). If your business is doing well, they'll raise it to the maximum, and moving businesses is way harder than moving homes. No wonder that all the restaurants in the nearby newly built strip mall are large chains. They can pay the rent. But there is no space for the local couple that has a taco place. They can't compete on cost ingredients with say Chipotle. Sad.

65 points by rolph 2y ago

Meanwhile there's unoccupied storefronts en-masse all over my city (DC). Its not something I thought I d miss in the world, but this small retail store thing seems like it's totally crushed out, between Walmart-ification & Amazon. What I haven't seen is the return of more affordable interesting local spots. We have a couple dive-y places that've hung on, but there's been very few below-average cost places that have opened. It seems unlikely but maybe someday there'll be some rebalancing, rents will go down, people will start trying to put up more down to earth accessible experiences & options.

tharmas 2y ago
I don't share your view. I think rhe landlords will eat everyone's wages. We are entering neo feudalism.
- awksedbashesc 2y ago
  Yep we just work online from home and will have to hustle to make rent each day
- chiefalchemist 2y ago
  Residential and commercial real estate will price what the market can bear. Raise the min wage... Housing will follow suit. Commercial, as I understand it, can't lower prices because that devalues the unit / building. To them, empty is better than offering a lower lease price
  - AlexandrB 2y ago
    So it's a "market" where prices can only increase. Seems like something will have to give eventually.
    - chiefalchemist 2y ago
      It's not only that particular market, it's effectively the whole credit based economy, underwritten by a financial system that fuels it. When credit and large assets are involve, these system(s) are intentionally tuned to avoid decrease in price. That would ccompletely undermine those entities making the loans. The Fed is on record as saying, "Our target is 2% interest". Imagine that, we're going to devalue your hard earned money 2% a year, and no one cases (because it's passed off with the euphemism "inflation"). We get more efficient and more effective and prices go...up??!! I highly recommend the book "Broken Money". Not so much for the Bitcoin and crypos stuff, but for the lessons on the history of money, the financial system, etc. https://www.lynalden.com/broken-money/ https://www.lynalden.com/broken-money/
  - nothercastle 2y ago
    Illiquid markets have poor price discovery. If the price drops below stated value typically transactions stop but prices take a long time to drop
nothercastle 2y ago
Real estate is owned by large firms that use the real estate as loan collateral. If you rent out space for less than you state it’s worth you have to restate the asset value and possibly put up more collateral which you don’t have or is better allocated elsewhere. There are a lot of shell games being played and eventually the music stop, assets get liquidated, loses get realized but until then property stays empty. There is no natural clearing mechanism that forces firms to take market value losses when they happen so the incentive is to pretend there are no losses until they are so spectacular that the entire firm goes bankrupt
- kurthr 2y ago
  Exactly, came here to say this. For many that do operate the real estate there are loans to leverage the property and those loans come due if rental rates (or sale prices) fall below a limit stated in the loan. That's part of why you'll get free months rather than a reduced rate, but also why so much is empty. Often the commercial part of 5/1 and 5/2 designs is a loss where all the profit is in the residential above it (and for code acceptance).
  - AtlasBarfed 2y ago
    They should just make them into storage units
  - lotsofpulp 2y ago
    This is not true. Lenders are not stupid, they are not going to be fooled by giving away 11 months free and charging a higher rent for 1 month. Or for giving away 1 month and charging a higher rent for 11 months. Commercial real estate loans will have a provision to periodically analyze the property’s revenue (not just monthly sticker price). See debt service coverage ratios. https://www.investopedia.com/terms/d/dscr.asp https://www.investopedia.com/terms/d/dscr.asp
    - kurthr 2y ago
      It's not about fooling. It's about the contract. The property can have met the debt service (cash flow) ratio, but still be in violation of the the rental price covenant. Those covenants require immediate repayment of the loan.
underseacables 2y ago
Where? I live in Dupont Circle. Are you talking about in Southeast? I'm not seeing empty storefronts except in really high crime areas.
- downrightmike 2y ago
  poverty creates crime

adamcoolguy 2y ago

[flagged]

ethbr1 2y ago

Relevant bits: >> A majority of 54 percent of small business owners surveyed by Alignable said that their landlords were charging them more now than six months ago, with 11 percent saying their rent has increased by over 20 percent. >> According to Alignable, only 32 percent of small businesses founded before March 2020 are now earning as much every month as they were before the pandemic. So landlords are probably rotating financing onto higher rates and trying to pass their interest charges to tenants, who haven't sufficiently increased prices to compensate.

entangledqubit 2y ago
From what I understand, commercial real estate is also going through some devaluing so maybe those rents should be going in the other direction? This seems like a last ditch attempt to keep things together long enough until rates come down (I'm not sure they'll come down enough in the near term.). I'm hoping businesses choose to move - or maybe go storefront free for a while - to speed up the correction. (I've noticed several businesses operating (purely?) out of a nearby storage place for a while now.)
- downrightmike 2y ago
  Yes, the delay and deflect mentality is in full swing in CRE and in the other bubbles as well. CRE has been a zombie since 2008.
- chatmasta 2y ago
  Intuitively, it seems rare for any rent-seeking business (such as a landlord) to decrease prices, especially for an active tenancy. But even for a vacancy, they will only do that when they are absolutely forced to, and they will delay it for as long as possible (better to wait two months to fill a $1k/month vacancy than to reduce it to $800/month). On the other hand, they will happily increase prices without being forced to, especially since they can do that while they have an active tenant. Why would a landlord ever decrease the price of an active tenancy? It would only happen if the tenant threatened to end the tenancy. That’s more likely for commercial tenants than residential, but it still requires a higher “activation energy” than its corollary, where the landlord increases the price on a whim.

petermcneeley 2y ago

A country that stops making things will eventually stop buying things.

whoknowsidont 2y ago

When are we going to address the landlord problem? Utilizing places as assets is so incredibly damaging to our society.

nathanaldensr 2y ago
That depends on what you mean by "the landlord problem." Are you alluding to ending private property ownership (communism) or something else?
- lotsofpulp 2y ago
  Marginal land value taxes, with even higher taxes the longer the space stays empty. Wonder if enough young/working people will ever wake up to realize earned income tax is penalizing them for working, and flat (and extremely low) land value taxes with myriad loopholes like 1031 exchange, senior discounts, and faux exemptions for things like agriculture are basically a feudal system to maintain the socioeconomic order.
  - _heimdall 2y ago
    That's a proposed solution not a problem definition. What's the "landlord problem" that needs to get fixed and why is a land value tax the best option?
    - drekk 2y ago
      I'll just quote from Adam Smith as to the problem. I think the proposed solution is good. I think "best option" is needlessly specific, and subjective. No need to let the perfect be the enemy of the good. “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them, and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities, makes a third” ― Adam Smith, Wealth of Nations

_spduchamp 2y ago

A big problem is Real Estate Investment Trusts. They buy up properties, shorten leases, and raise rents. They borrow money against future rents so they rather a space stay vacant than lower a single rent. If they lower a rent it signals that they are borrowing against an inflated asset, which would cause a domino effect on their loans. REITs are considered stable investments, so everyone's mutual funds and pensions are full of this stuff. As a small business owner, I'm very lucky to have mostly decent landlords, but I worry for the day that they sell out to REITs. Our business won't survive that.

OptionOfT 2y ago
And then the problem is that the rent increase is limitless (unless limited by your lease). If your business is doing well, they'll raise it to the maximum, and moving businesses is way harder than moving homes. No wonder that all the restaurants in the nearby newly built strip mall are large chains. They can pay the rent. But there is no space for the local couple that has a taco place. They can't compete on cost ingredients with say Chipotle. Sad.