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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 th
by 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 agoExactly, 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 agoThey should just make them into storage units
- lotsofpulp 2y agoThis 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 agoIt'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.
- mjevans 2y agoRight, those bubbles need to be popped so the cysts can be drained and the patient (economy) recover.
- lazide 2y agoThe size of this cyst is so large, it will likely cause sepsis if it gets punctured. Which is why regulators are being so careful around it.
- scottLobster 2y agoSo back to ZIRP, let's supersize this cyst until it pops all on its own, and then we can spend the entire federal budget on a bailout and hyperinflate the currency, but damn those equities will moon! I know I left the analogy, but the point is being "careful" and being unwilling to endure productive pain is what got us here.
- lazide 2y agoYup. So are you signing up to go bankrupt first?
- scottLobster 2y agoIf you told me my options were go bankrupt now with a chance at long-term recovery, or retire into/put my kids and grandkids into the worst depression in US history after a few more decades of can-kicking and treating the symptoms over the disease, you're damn right I'd be the first to sign up so long as the necessary reforms were made. But hey, I think long term. Which in our system means I'm not in charge of anything substantial.
- lazide 2y agoUnfortunately I 100% agree/am in the same boat.
- joe_the_user 2y ago
- charlie0 2y agoThis 1000%. The only real solution is to let it all crash and burn, but they keep getting bailouts.
- dreamcompiler 2y agoSo, much like stablecoins then.