4 ms·

Maybe less so New York, but around the country there is a huge amount of extremely overpriced commercial real estate/leases. Owners are going to want to bleed

Maybe less so New York, but around the country there is a huge amount of extremely overpriced commercial real estate/leases. Owners are going to want to bleed everything they can out of their existing long term renters who are going to have a hard time exiting because nobody is going to be particularly eager to pick up their overpriced leases. It's a bit strange to be in an economy where businesses are empty and failing because their prices are too high to accommodate for rent which is too high. I just had breakfast in an entirely empty restaurant. It was excellent and I was the only person there. There are tons of just empty storefronts that nobody can make use of because the overhead is too high. I had lunch on Saturday at noon in an empty restaurant with one group sitting outside. There are just a lot of commercial real estate owners which need to go bankrupt. Then cities need to implement and enforce severe tax penalties for commercial vacancy to incentivize rent reductions.

bluGill 2y ago
It is the banks which in turn respond to federal rules at fault here. If you reduce rents to attract customers you can potentially fill up the building - but at the reduced rate which means the building is worth less and so the bank will reduce the value of the building and then declare you don't have enough equity and foreclose on you. If you maintain too high rents you can tell the bank that this is a temporary issue of rent too low and they will keep the high validation. The above is why you can't negotiate the monthly rent, but you can often get a few months free rent - change the rent you pay and the building value changes, while a few months free is just a marketing thing. If you don't like the above you need to start with federal bank and accounting rules.
- com2kid 2y ago
  But under the current system, banks also lose. Banks need to realize they are better off earning 80% now and helping the economy recover so they can earn 120% later, then earn 100% now and earn zilch later. However I'm willing to bet there are some misaligned incentives within the large banks that prevent this from happening. (I only say that because misaligned incentives are seemingly the cause of 90% of the issues that plague the actions of any group of people beyond a couple dozen!)
  - Projectiboga 2y ago
    Yep the narrow focus on the next few quarters is a root cause of these short term focused blunders
  - rincebrain 2y ago
    There's a sort of prisoner's dilemma here, where the banks that don't take the 80% now make out better in both cases - they get 100% now and 100% later, or 100% now and 120% later, versus 80% now and 120% later.
- worstspotgain 2y ago
  A lot of the locales where commercial is underwater are the same locales where residential prices are through the roof. This is because of decades of regulatory capture by the housing cartel. Supply has been strangled through various land-use regulations, particularly height and volume limits, byzantine red tape, and the anti-sprawl push. Now many of those municipalities are flirting with residential conversion of commercial buildings. Obviously this only works in the densest areas, but would be a great exit plan for many properties. If the regulations were streamlined enough, it could take a nice bite out of the residential pyramid scheme. Which is why these plans are being sabotaged behind the scenes. Conversion is pretty much guaranteed to be limited to a trickle. Commercial owners have a lot less political leverage than the residential cartel.
  - underlipton 2y ago
    I've noticed quite a bit of astroturfing on this matter, for certain.
  - bluGill 2y ago
    Commercial conversion isn't a bad idea, but it isn't as easy as it sounds. Commercial generally is setup wrong for residential. Residential needs windows in each bedroom (fire code). Residential tends to have a lot more bathrooms. Residential has more plumbing. While you can make it work, the above often means the commercial building isn't setup right and so there is a lot of useless space.
    - worstspotgain 2y ago
      Of course it's not trivial but it's typically very cost-effective, particularly because much of the (intentionally-prohibitive) costs of residential construction apply before breaking ground. It obviously depends on appreciation minus conversion cost, but if that figure was negative we wouldn't be talking about this at all. The arguments that you put forth are being used by the cartel to rationalize why there's so little conversion going on. In truth it's mostly because of obstruction.
      - 2y ago
- rdtsc 2y ago
  > The above is why you can't negotiate the monthly rent, but you can often get a few months free rent - change the rent you pay and the building value changes, while a few months free is just a marketing thing. That's a good point. Last company I worked for made that kind of a deal: they threw in renovations, new carpet, a bunch of other such concessions but not a lower monthly rent.
- underlipton 2y ago
  >The above is why you can't negotiate the monthly rent, but you can often get a few months free rent - change the rent you pay and the building value changes, while a few months free is just a marketing thing. Residential property owners do this, too, and I strongly (I cannot being to convey how strongly) believe that this should be illegal. Beyond the obvious injury it does to renters and potential renters (annual rent increases are based on the stated rent, not the rate you pay after discounts), so much in the economy is based on purported property value. When you consistently have to offer "discounts" to find renters, what it means is that other aspects of the economy are being distorted by your fake property value. You're misusing or underutilizing that property, and market forces should force you to divest. Go after banks, too, but start with this simple issue: if you can't rent at a certain price, you should have to lower the price or offer material incentives. Period.
  - sroussey 2y ago
    Property value pro forma will be based on contracted rents and expectations. Property value based on cash flows will be based on, well, real cash flows. Take the contracted rent or cash flows and divide by the cap rate (tends to follow interest rates) and you get the value. On the pro-forma plan your lowering rents to one implies lowering others and you just cut your building value in half pretty easily.
    - underlipton 2y ago
      Okay. Your building is now worth half of what it used to be. That's capitalism. Hiding value drops distorts the market and makes the balance sheet of property owners seem stronger than it actually is. This "discount" regime essentially pushes the risk of an economic slowdown, which owners should naturally carry, onto renters instead.
sroussey 2y ago
The cost of building is so high now, that based on what you said, no building should be built anywhere. People will pay for residential though, so best to tear it all down and remove commercial real estate from cities. Local banks will need to fail.

bluGill 2y ago

It is the banks which in turn respond to federal rules at fault here. If you reduce rents to attract customers you can potentially fill up the building - but at the reduced rate which means the building is worth less and so the bank will reduce the value of the building and then declare you don't have enough equity and foreclose on you. If you maintain too high rents you can tell the bank that this is a temporary issue of rent too low and they will keep the high validation. The above is why you can't negotiate the monthly rent, but you can often get a few months free rent - change the rent you pay and the building value changes, while a few months free is just a marketing thing. If you don't like the above you need to start with federal bank and accounting rules.

com2kid 2y ago
But under the current system, banks also lose. Banks need to realize they are better off earning 80% now and helping the economy recover so they can earn 120% later, then earn 100% now and earn zilch later. However I'm willing to bet there are some misaligned incentives within the large banks that prevent this from happening. (I only say that because misaligned incentives are seemingly the cause of 90% of the issues that plague the actions of any group of people beyond a couple dozen!)
- Projectiboga 2y ago
  Yep the narrow focus on the next few quarters is a root cause of these short term focused blunders
- rincebrain 2y ago
  There's a sort of prisoner's dilemma here, where the banks that don't take the 80% now make out better in both cases - they get 100% now and 100% later, or 100% now and 120% later, versus 80% now and 120% later.
worstspotgain 2y ago
A lot of the locales where commercial is underwater are the same locales where residential prices are through the roof. This is because of decades of regulatory capture by the housing cartel. Supply has been strangled through various land-use regulations, particularly height and volume limits, byzantine red tape, and the anti-sprawl push. Now many of those municipalities are flirting with residential conversion of commercial buildings. Obviously this only works in the densest areas, but would be a great exit plan for many properties. If the regulations were streamlined enough, it could take a nice bite out of the residential pyramid scheme. Which is why these plans are being sabotaged behind the scenes. Conversion is pretty much guaranteed to be limited to a trickle. Commercial owners have a lot less political leverage than the residential cartel.
- underlipton 2y ago
  I've noticed quite a bit of astroturfing on this matter, for certain.
- bluGill 2y ago
  Commercial conversion isn't a bad idea, but it isn't as easy as it sounds. Commercial generally is setup wrong for residential. Residential needs windows in each bedroom (fire code). Residential tends to have a lot more bathrooms. Residential has more plumbing. While you can make it work, the above often means the commercial building isn't setup right and so there is a lot of useless space.
  - worstspotgain 2y ago
    Of course it's not trivial but it's typically very cost-effective, particularly because much of the (intentionally-prohibitive) costs of residential construction apply before breaking ground. It obviously depends on appreciation minus conversion cost, but if that figure was negative we wouldn't be talking about this at all. The arguments that you put forth are being used by the cartel to rationalize why there's so little conversion going on. In truth it's mostly because of obstruction.
    - 2y ago
rdtsc 2y ago
> The above is why you can't negotiate the monthly rent, but you can often get a few months free rent - change the rent you pay and the building value changes, while a few months free is just a marketing thing. That's a good point. Last company I worked for made that kind of a deal: they threw in renovations, new carpet, a bunch of other such concessions but not a lower monthly rent.
underlipton 2y ago
>The above is why you can't negotiate the monthly rent, but you can often get a few months free rent - change the rent you pay and the building value changes, while a few months free is just a marketing thing. Residential property owners do this, too, and I strongly (I cannot being to convey how strongly) believe that this should be illegal. Beyond the obvious injury it does to renters and potential renters (annual rent increases are based on the stated rent, not the rate you pay after discounts), so much in the economy is based on purported property value. When you consistently have to offer "discounts" to find renters, what it means is that other aspects of the economy are being distorted by your fake property value. You're misusing or underutilizing that property, and market forces should force you to divest. Go after banks, too, but start with this simple issue: if you can't rent at a certain price, you should have to lower the price or offer material incentives. Period.
- sroussey 2y ago
  Property value pro forma will be based on contracted rents and expectations. Property value based on cash flows will be based on, well, real cash flows. Take the contracted rent or cash flows and divide by the cap rate (tends to follow interest rates) and you get the value. On the pro-forma plan your lowering rents to one implies lowering others and you just cut your building value in half pretty easily.
  - underlipton 2y ago
    Okay. Your building is now worth half of what it used to be. That's capitalism. Hiding value drops distorts the market and makes the balance sheet of property owners seem stronger than it actually is. This "discount" regime essentially pushes the risk of an economic slowdown, which owners should naturally carry, onto renters instead.

sroussey 2y ago

The cost of building is so high now, that based on what you said, no building should be built anywhere. People will pay for residential though, so best to tear it all down and remove commercial real estate from cities. Local banks will need to fail.