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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

by 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.
  - mnky9800n 2y ago
    I suppose then you are simply arguing for strict regulation on when a landlord can increase rents.
  - lazide 2y ago
    The answer is when the market turns - from going up or steady, to down. If they can. The big issue with rents right now IMO, is that commercial real estate typically has short length adjustable rate (or even ballon) financing, which causes catastrophic problems when you have a combination of: + rising vacancies and/or decreasing rents (aka reduced cash flow) + increasing finance costs. Which is common when we enter a recession due to increasing borrowing costs. The landlord either has to burn their free cash hoping for a recovery, or default. If it’s a short period of time, the first can happen. If it’s a fake out, then they’re left with no cash and still go bankrupt - so then need to liquidate, but it’s often when a bunch of other folks are doing the same, so prices go through the floor and it’s a bloodbath for existing investors. And since the low interest rate environment was going on so long (with QE even!) almost everyone was leveraged to the gills on cheap credit, often to the point they had little to no free cash flow even at that point. It wasn’t just commercial of course - residential properties stopped having positive cash flow in some cases nearly a decade ago, but still kept going up. Residential financing offers more opportunities to insulate oneself from this kind of crazy though. It happens normally of course due to the business cycle, but this has been an exceptionally long time without real monetary tightening (since well before ‘08), so the overhang is bigger. It’s why all those dead malls are still sitting there. So, in the fashion of wil-e-coyote off the cliff, no one wants to look down. Because it’s a long way down.
  - marcosdumay 2y ago
    That's basically the reason why many people claim a bit of inflation is good for an economy. The same thing happens on lots of different contracts.
    - EnigmaFlare 2y ago
      Yep. Importantly, employment contracts. Employees are extremely resistant to wage decreases but they'll passively tolerate it in the form of inflation. Without inflation, they'd have to be fired and replaced with someone else just to get around that psychological obstacle.
- darth_avocado 2y ago
  The simple answer is: “Because they can” Moving for most small businesses comes with a heavy cost. If you’re in a high regulation area like California, even moving down the block would first of all require a ton of permitting and time. Second, foot traffic is not equal everywhere. Even if you move buildings in the same neighborhood, availability or lack of something as simple as parking, can affect your business significantly. Lastly, even if you figure everything out, moving comes with the costs of making the new place up to date to align with your business. For some businesses these costs can run into millions (big restaurants). In most cases, businesses will either pay the higher rent or simply shut down.
dugmartin 2y ago
When I had a commercial building mortgage it was on a 30-year note that rate adjusted every 5-years. Landlord's whose mortgages are adjusting this year are going to have to increase rents to keep their cash flow in place as rates are a _lot_ higher than 5 years ago.
- theptip 2y ago
  Additionally, I believe you can also get a margin call on your financing if you lower the rent, so there are perverse incentives to keep spaces empty which can push against a correction in prices.
jrmg 2y ago
Calling out stats like this makes me suspicious about the quality of the statistical analysis: >> 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 Doesn’t rent, even at the best (worst?) of times, basically always rise every year, at least matching inflation? Half of businesses experiencing a rent rise in half a year would be normal.
- uxp100 2y ago
  It doesn’t have to match inflation, and there is a little circularity here, since (residential) rent is factored into inflation. I don’t have any insight into commercial rents, but my experiences in residential renting in the 2000s and 2010s would indicate no, yearly rent increases are not expected. They happened from time to time, but far from yearly. Maybe Twice in 10 years? And rents have gone down when the housing market drops, though you might have to move. I’m not sure this really means anything though. It’s more like, how often do you want to evaluate the market. It’s made easier by (possibly cartel creating) software that automates the process now though, so things could be different. But the survey question does seem like it doesn’t mean that much on its own to me as well.
fxtentacle 2y ago
Bankruptcy by greedy landlord is also becoming more common in Germany, for example "owner of iconic Berlin department store KaDeWe has filed for bankruptcy, citing drastically increase renting costs" https://www.dw.com/en/germany-kadewe-department-store-group-files-for-bankruptcy/a-68114209 https://www.dw.com/en/germany-kadewe-department-store-group-...
listenallyall 2y ago
> who haven't sufficiently increased prices to compensate Increasing prices doesn't automatically result in more revenue for the business. Customers have choices, and small businesses are the most vulnerable.
EasyMark 2y ago
Do you think they’re using monopoly adjacent companies to set/analyze rents like real page to collude for rent pricing with other real estate companies, but for commercial rather than residential?
- fuzzfactor 2y ago
  No need. So much real estate investment was made by extending way beyond relatively minuscule net worth, based solely on ZIRP. For the longest time, income-generating properties provided positive cash flow at returns lower than the current interest rate has risen to. Now all of these speculators are in trouble at the same time. And if small-business tenants were providing the cash flow, lots of them were barely viable, and only as long as expenses and interest rates on other loans did not rise at a faster rate than during the ZIRP period when things had been considered stable for quite some time.
nunez 2y ago
It's a death trap. Commercial real estate pushes higher interest rates into SMB rents, but many SMB customers are super price sensitive and will go elsewhere if prices increase. The only businesses that can survive this are the already-huge ones.

by ethbr1 2y ago

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.
- mnky9800n 2y ago
  I suppose then you are simply arguing for strict regulation on when a landlord can increase rents.
- lazide 2y ago
  The answer is when the market turns - from going up or steady, to down. If they can. The big issue with rents right now IMO, is that commercial real estate typically has short length adjustable rate (or even ballon) financing, which causes catastrophic problems when you have a combination of: + rising vacancies and/or decreasing rents (aka reduced cash flow) + increasing finance costs. Which is common when we enter a recession due to increasing borrowing costs. The landlord either has to burn their free cash hoping for a recovery, or default. If it’s a short period of time, the first can happen. If it’s a fake out, then they’re left with no cash and still go bankrupt - so then need to liquidate, but it’s often when a bunch of other folks are doing the same, so prices go through the floor and it’s a bloodbath for existing investors. And since the low interest rate environment was going on so long (with QE even!) almost everyone was leveraged to the gills on cheap credit, often to the point they had little to no free cash flow even at that point. It wasn’t just commercial of course - residential properties stopped having positive cash flow in some cases nearly a decade ago, but still kept going up. Residential financing offers more opportunities to insulate oneself from this kind of crazy though. It happens normally of course due to the business cycle, but this has been an exceptionally long time without real monetary tightening (since well before ‘08), so the overhang is bigger. It’s why all those dead malls are still sitting there. So, in the fashion of wil-e-coyote off the cliff, no one wants to look down. Because it’s a long way down.
- marcosdumay 2y ago
  That's basically the reason why many people claim a bit of inflation is good for an economy. The same thing happens on lots of different contracts.
  - EnigmaFlare 2y ago
    Yep. Importantly, employment contracts. Employees are extremely resistant to wage decreases but they'll passively tolerate it in the form of inflation. Without inflation, they'd have to be fired and replaced with someone else just to get around that psychological obstacle.
darth_avocado 2y ago
The simple answer is: “Because they can” Moving for most small businesses comes with a heavy cost. If you’re in a high regulation area like California, even moving down the block would first of all require a ton of permitting and time. Second, foot traffic is not equal everywhere. Even if you move buildings in the same neighborhood, availability or lack of something as simple as parking, can affect your business significantly. Lastly, even if you figure everything out, moving comes with the costs of making the new place up to date to align with your business. For some businesses these costs can run into millions (big restaurants). In most cases, businesses will either pay the higher rent or simply shut down.

dugmartin 2y ago

When I had a commercial building mortgage it was on a 30-year note that rate adjusted every 5-years. Landlord's whose mortgages are adjusting this year are going to have to increase rents to keep their cash flow in place as rates are a _lot_ higher than 5 years ago.

theptip 2y ago
Additionally, I believe you can also get a margin call on your financing if you lower the rent, so there are perverse incentives to keep spaces empty which can push against a correction in prices.

jrmg 2y ago

Calling out stats like this makes me suspicious about the quality of the statistical analysis: >> 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 Doesn’t rent, even at the best (worst?) of times, basically always rise every year, at least matching inflation? Half of businesses experiencing a rent rise in half a year would be normal.

uxp100 2y ago
It doesn’t have to match inflation, and there is a little circularity here, since (residential) rent is factored into inflation. I don’t have any insight into commercial rents, but my experiences in residential renting in the 2000s and 2010s would indicate no, yearly rent increases are not expected. They happened from time to time, but far from yearly. Maybe Twice in 10 years? And rents have gone down when the housing market drops, though you might have to move. I’m not sure this really means anything though. It’s more like, how often do you want to evaluate the market. It’s made easier by (possibly cartel creating) software that automates the process now though, so things could be different. But the survey question does seem like it doesn’t mean that much on its own to me as well.

fxtentacle 2y ago

Bankruptcy by greedy landlord is also becoming more common in Germany, for example "owner of iconic Berlin department store KaDeWe has filed for bankruptcy, citing drastically increase renting costs" https://www.dw.com/en/germany-kadewe-department-store-group-files-for-bankruptcy/a-68114209 https://www.dw.com/en/germany-kadewe-department-store-group-...

listenallyall 2y ago

> who haven't sufficiently increased prices to compensate Increasing prices doesn't automatically result in more revenue for the business. Customers have choices, and small businesses are the most vulnerable.

EasyMark 2y ago

Do you think they’re using monopoly adjacent companies to set/analyze rents like real page to collude for rent pricing with other real estate companies, but for commercial rather than residential?

fuzzfactor 2y ago
No need. So much real estate investment was made by extending way beyond relatively minuscule net worth, based solely on ZIRP. For the longest time, income-generating properties provided positive cash flow at returns lower than the current interest rate has risen to. Now all of these speculators are in trouble at the same time. And if small-business tenants were providing the cash flow, lots of them were barely viable, and only as long as expenses and interest rates on other loans did not rise at a faster rate than during the ZIRP period when things had been considered stable for quite some time.

nunez 2y ago

It's a death trap. Commercial real estate pushes higher interest rates into SMB rents, but many SMB customers are super price sensitive and will go elsewhere if prices increase. The only businesses that can survive this are the already-huge ones.