8 ms·

Why do commercial spaces sit vacant? (2025)

172 points by Redoubts 4mo ago

Schiendelman 4mo ago
I actually think there's a business to be had here. As described, the landlord can't offer a traditional lease for the actual value of the space. However, the landlord could offer essentially day rentals without creating a lease. There are systems for this already, such as Peerspace and their ilk, which I've used for small events. I believe these don't trigger the foreclosure clauses. I think that a property management company managing deeply underwater buildings could play in this, reducing their cost structure by offering day rates. They've often already got a solid NFC entry system. Most of what you need is automated pricing, onboarding and offboarding, and figuring out how you avoid needing physical cleaning/setup/teardown overhead.
- grebc 4mo ago
  I own a commercial property, I wouldn’t want to have day to day rentals. I don’t enjoy dealing with property management or the fees they charge.
  - Schiendelman 4mo ago
    Tell me more - is your commercial property vacant? I'm a landlord myself, and the calculus gets very different when you have a long term vacancy.
    - grebc 4mo ago
      Tenanted. I know regardless of the vacancy I would not consider day rates, I’d eat the loss and deal with the cashflow via other means. Consider what sort of fit out would be necessary for what’s lets be honest is being suggested - hot desking - compared to a standard office: lots of IT systems necessary, lots of additional security, lots more cleaning, and likely lots more repairs for wear & tear which probably isn’t recoverable easily.
      - Schiendelman 4mo ago
        I'm not suggesting hotdesking at all; you may have seen someone else's comments suggesting they thought that! My best example (provided in my original comment) was Peerspace, but there are many others like that. Zero infrastructural investment past giving someone a key (or setting up an HID reader and such).
        grebc 4mo ago
        What sort of property do you own and do you utilise this service? I can’t fathom just putting some dinky reader on the front door and letting absolutely anyone in. The current tenants of mine started a lithium battery fire, almost burnt my property down.
        Schiendelman 4mo ago
        I own both commercial and residential property. I have used the company I mentioned, but I'm not trying to advertise for them, I just know other examples exist. I didn't install a reader, I provided a physical key copy. Readers make it slicker. I haven't had any problems, most of my rentals have been for small events. They brought their own supplies, minus a few tables I provided. Generally people renting space have no incentive to create a problem. They pay, I get paid, they want to take some pictures or get some people together.
      - deleted 4mo ago
        [deleted]
- mstade 4mo ago
  So, wework? :o)
  - sam_lowry_ 4mo ago
    Gosh... someone finally explained the WeWork business model that is more reasonable than "walk barefoot and expect money to rain from the sky".
  - Schiendelman 4mo ago
    Ha, cute, but no, very different. Wework is a tenant, and does significant buildouts. This would be "you can use the space for a few days or weeks". I've seen companies provide some moveable furniture in a space like this - some desks, some extension cords - but it has to be up to the temporary user to configure and put things away when they're done.
  - adityaathalye 4mo ago
    Came here to say the same thing... A "building-sized financial product that incentivises extend and pretend" is fertile ground for an organised player like wework to "lease and sublet, except on a subscription basis". viz. wework could apply the "single-use low-priced shampoo sachet" model [0] to SaaS-style rent-seeking of long-lived infrastructure. Infra. that is guaranteed to be always under-utilised... even in boom markets, because nothing functions at 100% capacity. Adobe, as another example of (software) infrastructure --- i.e. traditionally, lifetime licence and ownership desktop software --- figured out their own "shampoo sachet" pricing. viz. how to make and ship desktop software product but kill-switch them with metered SaaS subscriptions. The monthly price is just high enough to make gobs of cash for Adobe, while causing the typically-feast-and-famine freelancer to take the capitalist shellacking because it's just convenient enough. They can align software spends with active projects, and avoid the anxiety of cracked software doing nefarious things to their computers and data. But over a long enough time, they pay Adobe a (presumably) huge premium over up-front priced software. And they stay locked into a planned obsolescence cycle controlled by Adobe... "The new version of your beloved editing software will only work with the latest Windoze which means hardware upgrade and oh, you have to do it because well we are soon kill-switching the current version you are dependent on." Wework like operators can do exactly similar shenanigans with access to commercial infrastructure. Crowd out competition by aggressive long-term leasing on their buy-side, and on their sell-side build daily-subscription-dependency (buying ease, google-ish facilities which feeds into cult-and-status-signalling games), and convert a percentage of that into routine-subscription-dependency. Meanwhile also run rent-seeking games inside the main rent-seeking game... now you have a captive wallets who will buy the add-ons and extras because it's easier than walking two blocks for some cheaper and better alternative (e.g. food, coffee, lovely meeting space etc.). edit: add reference for "daily sachet pricing". [0] Buying less, more often: An evaluation of sachet marketing strategy in an emerging market https://www.researchgate.net/publication/233676293_Buying_less_more_often_An_evaluation_of_sachet_marketing_strategy_in_an_emerging_market https://www.researchgate.net/publication/233676293_Buying_le...
- yellow_lead 4mo ago
  well, isn't the rent estimated as the daily rate * 30 then?
  - Schiendelman 4mo ago
    By whom, for what purpose?
- zipy124 4mo ago
  I can't comment on that specific structure, but pop-up shops are one method that in the UK councils will often help vacant buildings with for exactly this reason, with the upside that they may convert into permanent tenants.
  - GJim 4mo ago
    Yup.... And the downside is loads of reasonably successful decent small shops in the UK now have to close after 12-24 months when the rents get jacked-up from sensible to astronomical levels. None of them become permeant tenants unless they are a front for money laundering (hence the explosion of nail bars and barbers on the UK high street) or illegal goods (dodgy vape shops). https://www.bbc.co.uk/news/articles/cqj1rkqqrgro https://www.bbc.co.uk/news/articles/cqj1rkqqrgro Your local press (if yours still exists) will also be full of such stories.
    - Schiendelman 4mo ago
      Anything over 30 days is likely not to be a pop-up shop. There's no way to give a tenant 12+ months without triggering the foreclosure clauses, AFAIK.
      - GJim 4mo ago
        The UK is different old boy.
        Schiendelman 4mo ago
        Of course it is! But I don't think it's different in this way. Did you have a specific data point about a 12-24 month rental getting kicked out in order to prevent foreclosure?
  - Schiendelman 4mo ago
    Isn't that through council subsidy rather than avoiding a foreclosure-trigger tenant agreement?
weli 4mo ago
It all comes back to fractional reserve banking. It is the root of all evil in our financial system. If Rothbard could only see the current state of affairs...
- VulgarExigency 4mo ago
  Rothbard would probably lament that we have not yet turned children into "financial products" as well. https://mises.org/mises-daily/children-and-rights https://mises.org/mises-daily/children-and-rights
- pjc50 4mo ago
  This is a crank opinion that is somehow everywhere. The building is real, it's not fractional.
  - weli 4mo ago
    The bank lended more money than it has in reserves allowing for speculation and extra inflation of perceived value of an asset
    - quickthrowman 4mo ago
      [dead]
- Ekaros 4mo ago
  You do not even need fractional banking for this. Same thing could happen without it. Someone lends money and is unable to pay it back. Both sides pretend that things will eventually go well. As at least on paper they have not lost anything until prices are realised.
  - weli 4mo ago
    Without fractional banking the bank needs to be way more cautious when appraising an asset and be more conservative with the future gains estimation. Decreasing speculation and inflation of value.
spwa4 4mo ago
TLDR: lowering the rent would create a direct problem for banks to convince investors the building is worth more. And since they've already given the money of the investor away (usually to construct the building in the first place), effectively the bank would have to pay back the difference if they did this. So it's a choice between honesty and profit towards investors ... Oh and obviously the "solution" is waiting for inflation to change the price of the rent effectively. So the real fix is for government to take the initiative and start paying people (by now, a lot) more.
flotzam 4mo ago
How come this obvious workaround isn't used much more often: >> If the system allows you to pretend that the vacancy is temporary, why doesn’t it allow you to lower rents on the pretense that lower rents are also temporary? > This does happen sometimes: it’s packaged as “incentive offers,” like 50% off the first 12 or 24 months rent, or 6 months without rent, etc, that lower the average rent over the life of the lease without lowering the “list price.” That’s common in residential leases, and I know it happens sometimes in commercial leases, but I don’t know how prevalent it is.
- roenxi 4mo ago
  It is worth noting that the reason they are pretending is almost certainly because of regulatory demands - if it were just between the bank and the owner they'd agree to do what is in both of their best interests - rent the space out at market rates. If there is a market-based 3rd party involved they will figure out that the bank is playing games and start acting whether or not the bank officially recognises the losses. Surely only a regulator or other similar heavily law-bound body would tolerate this sort of sillyness. So as a blind guess, it probably depends on how legal incentive offers are. The axis being optimised here will be what the regulatory bodies can tolerate before they start handing out fines and punishments.
  - flotzam 4mo ago
    Ah. That makes sense. Maybe the polite fiction would clash too obviously with accounting standards once the (de facto) lowered rent payments roll in: https://news.ycombinator.com/item?id=48567769 https://news.ycombinator.com/item?id=48567769 Could the situation be improved then if financial regulators started treating both versions ("temporary" vacancy / "temporarily" lowered rent) equally? Tolerate both or crack down on both.
    - grebc 4mo ago
      Banks maintain the capital/liquidity ratio’s they’re told they have too. People are actually advocating for looser lending requirements, which I’m perfectly fine with but the result might not be what they expect either.
bsder 4mo ago
The "problem" is that we let people claim the "rent" is X for certain people and "Y" for other people--both at the same time. Just stop that. The "solution" is that you should have to pay tax on what you claim the rent is after a small grace period (Less than 24 months certainly. Probably less than 12 or at least prorated starting before that.). If your financial agreement requires and claims that the rent is $5000, no problem! Then the tax authority should expect to receive the tax revenue they would expect if someone was actually paying $5,000 in rent to you. If you want to leave the space vacant even after paying the tax on the revenue--have a blast. That would short circuit all the financialization shenanigans.
- Anon4Now 4mo ago
  If the property is devalued, the property taxes lower accordingly. Portland, Oregon has been facing this problem recently. The devaluations caused the tax revenues for the city to drop, which in turn has caused budget issues. For example, "Big Pink" is an office tower in downtown Portland. It's last sale was for about $370 million. Out of desperation in a saturated market, the owners sold it last year for about $45 million. No one - the owners, the city, or the citizens - wants to have the vicious downturn of values, and there is no easy solution. Adding a vacancy tax just exacerbates the problem.
  - nairboon 4mo ago
    Adding taxes in a downturn obviously adds additional friction. One might ask, what happened to the tax revenue of that $370M transaction, where is it now when the city needs it.
    - Anon4Now 4mo ago
      It's gone. So are many services that the city provided.
  - Ekaros 4mo ago
    As citizen I might prefer downturn of values. At least in medium term. Yes there is lot less tax income. But on other hand lowering values would mean lower rents which would mean lower overheads and potentially cheaper prices or more business being viable.
jwarden 4mo ago
This explanation seems very implausible to me. By lowering the rent by X%, and therefore reducing annual revenue by X%, you admit the building is worth X% less. But by leaving the building X% vacant, also reducing the annual income stream by X%, you and the bank can somehow pretend the building is worth what it would be if full? I doubt owners and banks actually believe this. Is there some policy that forces this?
- postepowanieadm 4mo ago
  How do you asses the value? You use the x last transactions. No transactions, no data, the last value remains.
  - arcza 4mo ago
    If a coffee shop is charging $25 for a latte and sells none, we don't say everything's fine because no sales data. The sales are $0 and it's not fine. There is no escaping the powers of supply and demand.
  - AnthonyMouse 4mo ago
    "Last value" is pretty meaningless when it's stale though. Suppose there is a building that was built in 1970, last rented out in 1975 and then bought by a company that has used it as their own offices until now. The last transaction was in 1975, what's the value if they apply for a mortgage today? Surely they have some formula to use for this based on e.g. other buildings in the area. Moreover, "failure to find a tenant" is also a type of transaction. It's the landlord acting as the high bidder for the space, essentially the involuntary edition of imputed rent, and implies something negative about the financial prospects of the building when it continues for a significant period of time or large percentage of units. Ignoring that it is either incompetence or some kind of perverse incentive.
    - embedding-shape 4mo ago
      > "Last value" is pretty meaningless when it's stale though. For who and in what way though? Every entity involved wants to keep the price high, except the renter/new buyer, so with that in mind, "Last Value" seems optimal for achieving that. Maybe it's different in the US, but in Spain there is a ton of properties that sit completely empty and unused, even since earlier than 2008, just because the owners don't think the value is enough to sell yet, and they wouldn't earn enough renting it out, so everyone (except renters/new buyers) seems to prefer it just sits empty for decades.
BrenBarn 4mo ago
Here is the problem: > Half empty, the building is only generating $500k per year in net income instead of $1M. > Let’s imagine the owner lowers the rent by 30% to fill the building. > Now, reality has proven the operator can only make $700k per year. No. When the building sat half empty, reality had already proven that it could not generate what they thought it could. This is the insane fallacy driving this whole thing, and no amount of explanations about commercial mortgages will prove anything other than that a larger number of people than we thought are participating in the same delusion. If you cannot rent the space for what you thought it could rent for, your building is already worth less than you thought, and it is sheer folly to think that you can alter that fact by pretending you are waiting for higher rent later. > So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts. There is another problem. What we need is to dig deeper into that theory and push harder and harder for solutions where all the financial loss gets pushed onto the people at the top who have a lot of money. If the banks are making money off this kind of nonsense then they should fail. > I’ll give this some more thought, but if any actual commercial real estate professionals have ideas I’d love to hear from you in the comments! No! Commercial real estate professionals are mostly just more people buying into these same fallacies! What we need is more people outside that self-deluding system saying "this is nuts, I'm taking $100 million from you" and resetting the entire system.
- alper 4mo ago
  > a larger number of people than we thought are participating in the same delusion Congratulations, you have just described high finance.
- dj_axl 4mo ago
  > Let’s imagine the owner lowers the rent by 30% to fill the building. Thought I'd comment with some concrete numbers. New buildings near me (West LA) are at $4100/month for a studio, where average rent in the area is $2300 for a studio, $2650 for a 1-bedroom. To fit in with "average" rent they'd need to lower 44% however 30% might be about right. Otherwise at 4% inflation wait 9 years? 1.04^9 = 1.42 ~ 100/(100 - 30).
joshka 4mo ago
Sounds like fraud with extra steps.
- Scaled 4mo ago
  Yes, but seems unlikely to be prosecuted... The government directly benefits from higher tax valuation.
- advisedwang 4mo ago
  Who is being defrauded? Who even is the fraudster? The operator of the building is losing money, so clearly they're not making a gain from anyone
  - joshka 4mo ago
    Yeah, I probably don’t mean fraud in the narrow criminal sense. The thing that feels fraud-ish to me is that the loss doesn’t just disappear because nobody books it. A huge amount of capital and useful urban land is tied up preserving a fictional valuation and someone is paying for that somewhere. Maybe it’s not a clean “X stole from Y” thing here, but it still means real businesses are displaced, worse downtowns, and less of the city that could have existed otherwise. I haven't seen this sort of thing as much in Australian cities where I'm from, but have a lot in the US where I live. So maybe a better way phrasing "fraud on the public commons" is closer to what I mean. Everyone involved is probably acting rationally inside the system. The public still gets stuck living inside the dead space created by the fiction created by it and ends up eating that cost.
  - dredmorbius 4mo ago
    Somewhere in this chain are parties who are able to claim assets or collateral with values far in excess of actual market worth. To me that smells like the creditors are defrauding their counterparties. The defrauded parties might include secondary lenders (to the property mortgage holders), regulators to whom financial instruments and solvency are being misrepresented, tenants who are paying higher-than-market rents, potential tenants who are denied market-rate rents on existing space, and arguably communities in which business and commercial opportunities are depressed due to the denial of access to real estate at market terms. The operator of the building isn't the key point to fraud, as their interest (reducing rent to attract tenants) is actively thwarted by their creditors. The element of fraud is misrepresentation of true market value / income potential by projecting partial tenancy at elevated rates as if it were full tenancy, rather than the actual income stream at full occupancy (allowing for a nominal vacancy rate) at actually-supportable lease rates.
grebc 4mo ago
It’s very clear there is no commercial property investors here, nor commercial borrowers.
- dazc 4mo ago
  Care to enlighten us?
  - grebc 4mo ago
    Comments below. There’s no actual problem here to be solved. If people feel they have better uses for a property they should put their money where their mouth is.
    - em-bee 4mo ago
      there is a problem to be solved. empty shops make shopping areas unattractive. walking through a half empty mall or shopping street is depressive. i see this all the time in china and in developing countries in general. they build huge malls, and then they can't fill them because there are not enough businesses who can pay the rent being asked. at least there is growth and the place will fill up eventually. but until that happens the place is less attractive. seeing the same in europe in malls or shopping streets is even worse because it feels like the economy is declining. you have to apply the broken window theory here. the more shops stay empty the less people will go there to visit the remaining shops. their revenue goes down, they can't afford the rent anymore and another shop is empty. if this becomes a trend then you risk that the shops will never come back. it is therefore in the interest of landlords and the city to keep the streets alive and fill them with businesses that attract people. ignoring this problem is just a sign of greed. instead of building a vibrant space they just want to extract as much money as possible. instead of being forced to foreclose the banks should be forced to extend the loan and eat the loss. foreclosing will cause them a loss too. so the banks are not better off either way. the article says the building is an income stream. no, it isn't. the building is part of a community. the needs of the community top your need to make a profit. yes, this means the community should probably contribute to make your work financially viable, and one way they can do that is by making policy that gives you more reasonable conditions to pay off your loan so that a foreclosure is not necessary.
WCSTombs 4mo ago
(2025). > The obvious thing cities could try is to put more pressure on building operators to fill their spaces, but the building operators are already under a ton of pressure — they’re losing a bunch of money! So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts. I agree that this is the obvious remedy. I don't know if it's exactly the right answer, but it's the natural place to start the conversation, and I think it's at least in the ballpark of the right solution. It's the city (and bigger) government's job to create policies that incentivize the right behaviors for the benefit of the community. There clearly has been an oversight here, if extremely valuable commercial properties are literally just sitting unused for no good reason. In my opinion we'd all be better off if the market did correct itself, at least getting us all on the same page about what these properties are actually worth, rather than the current situation. The city stepping in also helps put the fuckup back in the right place, in the hands of the property owners and lenders who seem to have made these bad bets, rather than externalized to the residents and business owners of the city, who haven't done anything wrong. The article suggests that this leads to "bad consequences" and even bank bailouts, but I'm pretty unconvinced that the problem is widespread enough that the federal government would literally need to start bailing out banks. From what I've seen, it's really bad in a few specific metro areas and not so much in others.
- em-bee 4mo ago
  another possible remedy would be to find ways to change the conditions of the loan so that building owners can continue to pay off their loan at better rates that match the income they can make from rent.
  - nemomarx 4mo ago
    If the banks would prefer to adjust their loans instead of defaulting on them I think they would just naturally do that? They may not want to take a longer loan though.
jojobas 4mo ago
There is also the practice of "deferred interest paid in kind", where vacancy is considered temporary, and the bank agrees that the interest for the term of vacancy will be paid at loan maturity. Not sure how/if it applies to multi-tenant buildings, but plenty of them aren't multi-tenant.
themafia 4mo ago
It could be 2 to 4 years to build the space. You can also structure the loan so the interest is amortized over a longer period than the loan which simply requires a balloon payment or refinancing of the interest balance at term which can offset some of the costs presented in this article. It also does look like San Francisco has a vacant storefront tax although the penalties are fairly light. https://abc7news.com/post/remember-vacant-storefront-tax-san-francisco-heres-how-going/16588700/ https://abc7news.com/post/remember-vacant-storefront-tax-san...
pif 4mo ago
Say what you want, but a law that lets you pretend that the value of a building is based on what you ask, rather than what you can actually obtain, is a stupid law.
- joshuahaglund 4mo ago
  It's not a law, it's a financial contract between a borrower and a lender. I agree it's stupid, but that's what you get when you let the invisible hand bind human hands
- bluGill 4mo ago
  What is a better option? Before your answer, remember it sometimes really is the case that the economy is down and in two years things will recover and everything will rent out again. Your answer needs to smooth that out.
  - jamilton 4mo ago
    Rolling average including vacant months as $0? And if that isn't smooth enough, add some smoothing factor, count vacant months as 10% of the last paid value, or maybe the first vacant month as 50% with further months decaying. Or some other fancy accounting that makes more sense than the current method.
    - joquarky 4mo ago
      Nothing will happen until wealthy people are negatively affected.
  - userulluipeste 4mo ago
    "remember it sometimes really is the case that the economy is down and in two years things will recover and everything will rent out again" Where do we draw the line between reality and fantasy then? If the terms of a deal are not reflecting the reality of the moment (i.e. the office rent market demand quotes) but some figure people come up with on their own, then let's call it what it is -- gambling (in which case it should be treated as such).
trukledeitz 4mo ago
Has anyone here considered the cost of capital reserves required by the bank for holding this loan? Commercial loans used to be a 100% capital holding requirement, while HVCRE (High Volatility Commercial Real Estate) Loans carry 150% capital holding. So if a bank loans a building owner 100% of a 20 million dollar facility and it meets HVCRE requirements, the bank has to keep 30 million of capital in reserve for the chance of default. Even if the loan receives enough buyer downpayment or for some other reason becomes normal Commercial loan the bank has to hold 20 million in reserve capital for the loan. So you have to net the incentive of the cost of the capital held in reserve against the interest payment on the bank's balance sheet as an economic forcing against continuing to float the loan forever...
- inigyou 4mo ago
  aren't we in a zero reserves era?
deleted 4mo ago
[deleted]
ChrisArchitect 4mo ago
Previously: https://news.ycombinator.com/item?id=46305123 https://news.ycombinator.com/item?id=46305123
alper 4mo ago
I'm in Berlin where there's a glut of offices which are all sitting empty. I'm living next to a top line historic renovation/office space and it took them 8-9 years to complete the renovation at probably an astronomical cost and now it's been sitting empty for a year or so. This financial model is also the main reason why it's so hard to convert these buildings to residential. Somebody has to eat the markdown.
- teddyh 4mo ago
  The ICC? <https://en.wikipedia.org/wiki/Internationales_Congress_Centrum_Berlin https://en.wikipedia.org/wiki/Internationales_Congress_Centr...>
  - inigyou 4mo ago
    I was thinking Am Tacheles but who knows
Animats 4mo ago
Article is from 2025, and "extend and pretend" is coming unglued.[1] Extend and pretend was big around 2024.[2] The other side of this is that landlords hate to reduce rent to rent vacant spaces because their paying tenants will demand rent reductions or move. That can crash the rental market. A building half rented at rent X is more profitable than a building fully rented at rent 0.5 X. [1] https://propmodo.com/the-end-of-extend-and-pretend/ https://propmodo.com/the-end-of-extend-and-pretend/ [2] https://www.newyorkfed.org/research/staff_reports/sr1130 https://www.newyorkfed.org/research/staff_reports/sr1130
- goodpoint 4mo ago
  > That can crash the rental market ...as if it was a bad thing.
  - gonzalohm 4mo ago
    It's bad for one person only, the landlord, which happens to control the rent price
    - prepend 4mo ago
      It’s also a bad thing for future investment as building new units becomes riskier.
- dietr1ch 4mo ago
  This just says that they have too much power and society would be better off having a vacancy tax that aimed to reduce abuse by landlords while at the same time ensuring the city doesn't look like post crisis Detroit, which makes it worse for everyone.
  - ryanmcbride 4mo ago
    Yup. Unfortunately landlords have plenty of time to lobby against things like this while the rest of us are busy contributing to society.
  - 4mo ago
advisedwang 4mo ago
The key analysis is how does the system manage the risk that a building's equilibrium rent goes down or turns out to be lower than assumed when writing the loan. The system described in the article is basically that the risk is not explicitly planned for, and just washes out that it is managed by a vacancy and building owners eating the cost of the vacancy. Any solution needs to provide a new answer for how that risk is managed, preferably one that doesn't result in foreclosures. Some possibility: * The bank takes on the risk, by loans having a provision for writing down value if rents have to drop. This is tricky, because if the operator decides when rents need to be revised down, they have no incentive to protect the bank's position. If the bank decides, then they have no incentive to ever accept a rent drop, they'd rather force the operator to eat the vacancy. You'd need some trigger like duration of vacancies. * The operator takes on the risk but with a mechanism for lowering the rent. I can't really figure out a way this would work without requiring the operator to have capital on hand though. * The risk is insured. If rents need to drop then insurance pays the write-down in property value. I'm not sure any insurance company would be able to take this business though, as it is highly correlated between customers. A downturn would just wipe-out the insurer.
- BrenBarn 4mo ago
  My preferred solution is "whoever has the most money gets the risk".
quickthrowman 4mo ago
The value of a commercial building is based on the potential rent, not how much space is leased. Loans can be called by the lender if the value of the collateral (building) falls too low. Lowering rents lowers the building value. Not lowering rents and leaving spaces vacant ‘maintains’ the value of the building, as long as you can keeep making the loan payments everyone pretends the building is worth more money than it probably actually is. As long as the borrower keeps making payments to the lender, nobody really cares.
PaulHoule 4mo ago
I've seen a lot of this in Ithaca. They built a concrete parking garage with offices on the bottom level and for a long time it seemed like they'd only attract government offices. It took several years and they finally got a farm-to-table restaurant which is well regarded but possibly subsidized and in a category like government offices (e.g. no financial discipline about the rent) There is a lot of talk that "there are excessive vacancies on the Ithaca Commons" but doesn't seem that bad except for the bottom of the first floor of Harold's Square, a market rate apartment development that was recently developed.
brikym 4mo ago
Capitalism tips half the milk out and triples the price for the other half.
guelo 4mo ago
[dead]
gman2093 4mo ago
Property taxes are too low.
tomcam 4mo ago
I have been wondering this for 25 years. Now I understand why New York City has so damn many empty buildings.
adverbly 4mo ago
Land value tax would fix this
rossdavidh 4mo ago
Oh my goodness, thank you. My wife had to move her store in 2020 in the midst of lockdown; you'd think rents would have been low, but no. Since then, many of the places that wouldn't lower the rent then, have sat empty ever since. This is in Austin, TX, a town that has had a healthy economy during that entire time. Weirder still, many of them were on the market, theoretically for rent, but if you called them up it turned out they weren't actually available, and the landlord wasn't interested in renting them. I couldn't figure out why you would pretend something was for rent at $X, and let it sit empty for years, rather than actually rent it at something <$X. Now it makes sense.
- senordevnyc 4mo ago
  Wait, were they not available at $x, or not available for < $x? Because if it’s the former, then this article doesn’t really explain your experience, right?
  - evo 4mo ago
    Could be this (from the article): "Another scenario I can think of is that the financial model for the building requires spaces to be filled by “credit tenants,” meaning name-brand businesses of a certain caliber and creditworthiness." Might not be available unless your name ends in 'tarbucks'.
    - lokar 4mo ago
      Yep. The owner assigns much higher value to leasing to a large national chain. They often hold out for one, refusing to lease to more risky businesses.
  - Nemi 4mo ago
    Another thing that I read about on this topic was that once a land lord has gotten into a groove of extend and pretend they lower their costs and cut out the overhead of property management. This means that if they took on one tenant they would have to ramp up property management costs (and potentially refurb/improvement costs) and they are not willing to do that, so you end up with the situation where you can't rent a property even if you want to.
BLKNSLVR 4mo ago
One element of this that I find interesting is that from the outside it can look somewhat like a decentralised monopoly given that it affects all (or most?) commercial rental properties; it looks like collusion to keep rents high. Where it's actually systemic to how commercial buildings are created in the first place: they do not account for a downturn, or at least a downturn on the scale that Covid wrought. Store-fronts were already in decline due to 'internet shopping', but Covid probably brought a lot of physical close-down plans forward, such that any likelihood of recovery should be measured in decades or, more realistically, start being written off progressively to minimise a big hit down the track. The longer extend and pretend lasts, the bigger the hit will be when it that strategy breaks.
fyredge 4mo ago
If income stream is the metric, then I don't see why 'real' income stream can't be used to evaluate the value of the building instead of the last transaction. If the building sits at half occupancy, then the income stream is 500k, not a theoretical 1M.
prepend 4mo ago
Is this something there’s a federal lever for by forcing commercial loans to mark to market? So if I go to refi my $20M building and nothing is actually rented for 5 years, I can’t use list price and need to use market price for rent. Or could be a shareholder lawsuit for banks as they are putting out riskier loans than the rate reflects?
djbelieny 4mo ago
Seems to me that what is required to fix this is a complete overhaul of the valuation system and then tighter foreclosure protections, only foreclosing on defaults, more like residential real estate.
dzonga 4mo ago
people like to complain about strip malls or those little office parks. this is why those win - it's cheaper to build & maintain them & easier to turn a profit on them. the fancy big glass downtown skyscrapers are mostly for ego. usually the tallest one determines who has power in that economy/city. way back then churches used to be the tallest. now in most cities it's the banks. in SF - it's SalesForce Tower i.e tech is dominant

172 points by Redoubts 4mo ago

I actually think there's a business to be had here. As described, the landlord can't offer a traditional lease for the actual value of the space. However, the landlord could offer essentially day rentals without creating a lease. There are systems for this already, such as Peerspace and their ilk, which I've used for small events. I believe these don't trigger the foreclosure clauses. I think that a property management company managing deeply underwater buildings could play in this, reducing their cost structure by offering day rates. They've often already got a solid NFC entry system. Most of what you need is automated pricing, onboarding and offboarding, and figuring out how you avoid needing physical cleaning/setup/teardown overhead.

grebc 4mo ago
I own a commercial property, I wouldn’t want to have day to day rentals. I don’t enjoy dealing with property management or the fees they charge.
- Schiendelman 4mo ago
  Tell me more - is your commercial property vacant? I'm a landlord myself, and the calculus gets very different when you have a long term vacancy.
  - grebc 4mo ago
    Tenanted. I know regardless of the vacancy I would not consider day rates, I’d eat the loss and deal with the cashflow via other means. Consider what sort of fit out would be necessary for what’s lets be honest is being suggested - hot desking - compared to a standard office: lots of IT systems necessary, lots of additional security, lots more cleaning, and likely lots more repairs for wear & tear which probably isn’t recoverable easily.
    - Schiendelman 4mo ago
      I'm not suggesting hotdesking at all; you may have seen someone else's comments suggesting they thought that! My best example (provided in my original comment) was Peerspace, but there are many others like that. Zero infrastructural investment past giving someone a key (or setting up an HID reader and such).
      - grebc 4mo ago
        What sort of property do you own and do you utilise this service? I can’t fathom just putting some dinky reader on the front door and letting absolutely anyone in. The current tenants of mine started a lithium battery fire, almost burnt my property down.
        Schiendelman 4mo ago
        I own both commercial and residential property. I have used the company I mentioned, but I'm not trying to advertise for them, I just know other examples exist. I didn't install a reader, I provided a physical key copy. Readers make it slicker. I haven't had any problems, most of my rentals have been for small events. They brought their own supplies, minus a few tables I provided. Generally people renting space have no incentive to create a problem. They pay, I get paid, they want to take some pictures or get some people together.
    - deleted 4mo ago
      [deleted]
mstade 4mo ago
So, wework? :o)
- sam_lowry_ 4mo ago
  Gosh... someone finally explained the WeWork business model that is more reasonable than "walk barefoot and expect money to rain from the sky".
- Schiendelman 4mo ago
  Ha, cute, but no, very different. Wework is a tenant, and does significant buildouts. This would be "you can use the space for a few days or weeks". I've seen companies provide some moveable furniture in a space like this - some desks, some extension cords - but it has to be up to the temporary user to configure and put things away when they're done.
- adityaathalye 4mo ago
  Came here to say the same thing... A "building-sized financial product that incentivises extend and pretend" is fertile ground for an organised player like wework to "lease and sublet, except on a subscription basis". viz. wework could apply the "single-use low-priced shampoo sachet" model [0] to SaaS-style rent-seeking of long-lived infrastructure. Infra. that is guaranteed to be always under-utilised... even in boom markets, because nothing functions at 100% capacity. Adobe, as another example of (software) infrastructure --- i.e. traditionally, lifetime licence and ownership desktop software --- figured out their own "shampoo sachet" pricing. viz. how to make and ship desktop software product but kill-switch them with metered SaaS subscriptions. The monthly price is just high enough to make gobs of cash for Adobe, while causing the typically-feast-and-famine freelancer to take the capitalist shellacking because it's just convenient enough. They can align software spends with active projects, and avoid the anxiety of cracked software doing nefarious things to their computers and data. But over a long enough time, they pay Adobe a (presumably) huge premium over up-front priced software. And they stay locked into a planned obsolescence cycle controlled by Adobe... "The new version of your beloved editing software will only work with the latest Windoze which means hardware upgrade and oh, you have to do it because well we are soon kill-switching the current version you are dependent on." Wework like operators can do exactly similar shenanigans with access to commercial infrastructure. Crowd out competition by aggressive long-term leasing on their buy-side, and on their sell-side build daily-subscription-dependency (buying ease, google-ish facilities which feeds into cult-and-status-signalling games), and convert a percentage of that into routine-subscription-dependency. Meanwhile also run rent-seeking games inside the main rent-seeking game... now you have a captive wallets who will buy the add-ons and extras because it's easier than walking two blocks for some cheaper and better alternative (e.g. food, coffee, lovely meeting space etc.). edit: add reference for "daily sachet pricing". [0] Buying less, more often: An evaluation of sachet marketing strategy in an emerging market https://www.researchgate.net/publication/233676293_Buying_less_more_often_An_evaluation_of_sachet_marketing_strategy_in_an_emerging_market https://www.researchgate.net/publication/233676293_Buying_le...
yellow_lead 4mo ago
well, isn't the rent estimated as the daily rate * 30 then?
- Schiendelman 4mo ago
  By whom, for what purpose?
zipy124 4mo ago
I can't comment on that specific structure, but pop-up shops are one method that in the UK councils will often help vacant buildings with for exactly this reason, with the upside that they may convert into permanent tenants.
- GJim 4mo ago
  Yup.... And the downside is loads of reasonably successful decent small shops in the UK now have to close after 12-24 months when the rents get jacked-up from sensible to astronomical levels. None of them become permeant tenants unless they are a front for money laundering (hence the explosion of nail bars and barbers on the UK high street) or illegal goods (dodgy vape shops). https://www.bbc.co.uk/news/articles/cqj1rkqqrgro https://www.bbc.co.uk/news/articles/cqj1rkqqrgro Your local press (if yours still exists) will also be full of such stories.
  - Schiendelman 4mo ago
    Anything over 30 days is likely not to be a pop-up shop. There's no way to give a tenant 12+ months without triggering the foreclosure clauses, AFAIK.
    - GJim 4mo ago
      The UK is different old boy.
      - Schiendelman 4mo ago
        Of course it is! But I don't think it's different in this way. Did you have a specific data point about a 12-24 month rental getting kicked out in order to prevent foreclosure?
- Schiendelman 4mo ago
  Isn't that through council subsidy rather than avoiding a foreclosure-trigger tenant agreement?

weli 4mo ago

It all comes back to fractional reserve banking. It is the root of all evil in our financial system. If Rothbard could only see the current state of affairs...

VulgarExigency 4mo ago
Rothbard would probably lament that we have not yet turned children into "financial products" as well. https://mises.org/mises-daily/children-and-rights https://mises.org/mises-daily/children-and-rights
pjc50 4mo ago
This is a crank opinion that is somehow everywhere. The building is real, it's not fractional.
- weli 4mo ago
  The bank lended more money than it has in reserves allowing for speculation and extra inflation of perceived value of an asset
  - quickthrowman 4mo ago
    [dead]
Ekaros 4mo ago
You do not even need fractional banking for this. Same thing could happen without it. Someone lends money and is unable to pay it back. Both sides pretend that things will eventually go well. As at least on paper they have not lost anything until prices are realised.
- weli 4mo ago
  Without fractional banking the bank needs to be way more cautious when appraising an asset and be more conservative with the future gains estimation. Decreasing speculation and inflation of value.

spwa4 4mo ago

TLDR: lowering the rent would create a direct problem for banks to convince investors the building is worth more. And since they've already given the money of the investor away (usually to construct the building in the first place), effectively the bank would have to pay back the difference if they did this. So it's a choice between honesty and profit towards investors ... Oh and obviously the "solution" is waiting for inflation to change the price of the rent effectively. So the real fix is for government to take the initiative and start paying people (by now, a lot) more.

flotzam 4mo ago

How come this obvious workaround isn't used much more often: >> If the system allows you to pretend that the vacancy is temporary, why doesn’t it allow you to lower rents on the pretense that lower rents are also temporary? > This does happen sometimes: it’s packaged as “incentive offers,” like 50% off the first 12 or 24 months rent, or 6 months without rent, etc, that lower the average rent over the life of the lease without lowering the “list price.” That’s common in residential leases, and I know it happens sometimes in commercial leases, but I don’t know how prevalent it is.

roenxi 4mo ago
It is worth noting that the reason they are pretending is almost certainly because of regulatory demands - if it were just between the bank and the owner they'd agree to do what is in both of their best interests - rent the space out at market rates. If there is a market-based 3rd party involved they will figure out that the bank is playing games and start acting whether or not the bank officially recognises the losses. Surely only a regulator or other similar heavily law-bound body would tolerate this sort of sillyness. So as a blind guess, it probably depends on how legal incentive offers are. The axis being optimised here will be what the regulatory bodies can tolerate before they start handing out fines and punishments.
- flotzam 4mo ago
  Ah. That makes sense. Maybe the polite fiction would clash too obviously with accounting standards once the (de facto) lowered rent payments roll in: https://news.ycombinator.com/item?id=48567769 https://news.ycombinator.com/item?id=48567769 Could the situation be improved then if financial regulators started treating both versions ("temporary" vacancy / "temporarily" lowered rent) equally? Tolerate both or crack down on both.
  - grebc 4mo ago
    Banks maintain the capital/liquidity ratio’s they’re told they have too. People are actually advocating for looser lending requirements, which I’m perfectly fine with but the result might not be what they expect either.

bsder 4mo ago

The "problem" is that we let people claim the "rent" is X for certain people and "Y" for other people--both at the same time. Just stop that. The "solution" is that you should have to pay tax on what you claim the rent is after a small grace period (Less than 24 months certainly. Probably less than 12 or at least prorated starting before that.). If your financial agreement requires and claims that the rent is $5000, no problem! Then the tax authority should expect to receive the tax revenue they would expect if someone was actually paying $5,000 in rent to you. If you want to leave the space vacant even after paying the tax on the revenue--have a blast. That would short circuit all the financialization shenanigans.

Anon4Now 4mo ago
If the property is devalued, the property taxes lower accordingly. Portland, Oregon has been facing this problem recently. The devaluations caused the tax revenues for the city to drop, which in turn has caused budget issues. For example, "Big Pink" is an office tower in downtown Portland. It's last sale was for about $370 million. Out of desperation in a saturated market, the owners sold it last year for about $45 million. No one - the owners, the city, or the citizens - wants to have the vicious downturn of values, and there is no easy solution. Adding a vacancy tax just exacerbates the problem.
- nairboon 4mo ago
  Adding taxes in a downturn obviously adds additional friction. One might ask, what happened to the tax revenue of that $370M transaction, where is it now when the city needs it.
  - Anon4Now 4mo ago
    It's gone. So are many services that the city provided.
- Ekaros 4mo ago
  As citizen I might prefer downturn of values. At least in medium term. Yes there is lot less tax income. But on other hand lowering values would mean lower rents which would mean lower overheads and potentially cheaper prices or more business being viable.

jwarden 4mo ago

This explanation seems very implausible to me. By lowering the rent by X%, and therefore reducing annual revenue by X%, you admit the building is worth X% less. But by leaving the building X% vacant, also reducing the annual income stream by X%, you and the bank can somehow pretend the building is worth what it would be if full? I doubt owners and banks actually believe this. Is there some policy that forces this?

postepowanieadm 4mo ago
How do you asses the value? You use the x last transactions. No transactions, no data, the last value remains.
- arcza 4mo ago
  If a coffee shop is charging $25 for a latte and sells none, we don't say everything's fine because no sales data. The sales are $0 and it's not fine. There is no escaping the powers of supply and demand.
- AnthonyMouse 4mo ago
  "Last value" is pretty meaningless when it's stale though. Suppose there is a building that was built in 1970, last rented out in 1975 and then bought by a company that has used it as their own offices until now. The last transaction was in 1975, what's the value if they apply for a mortgage today? Surely they have some formula to use for this based on e.g. other buildings in the area. Moreover, "failure to find a tenant" is also a type of transaction. It's the landlord acting as the high bidder for the space, essentially the involuntary edition of imputed rent, and implies something negative about the financial prospects of the building when it continues for a significant period of time or large percentage of units. Ignoring that it is either incompetence or some kind of perverse incentive.
  - embedding-shape 4mo ago
    > "Last value" is pretty meaningless when it's stale though. For who and in what way though? Every entity involved wants to keep the price high, except the renter/new buyer, so with that in mind, "Last Value" seems optimal for achieving that. Maybe it's different in the US, but in Spain there is a ton of properties that sit completely empty and unused, even since earlier than 2008, just because the owners don't think the value is enough to sell yet, and they wouldn't earn enough renting it out, so everyone (except renters/new buyers) seems to prefer it just sits empty for decades.

BrenBarn 4mo ago

Here is the problem: > Half empty, the building is only generating $500k per year in net income instead of $1M. > Let’s imagine the owner lowers the rent by 30% to fill the building. > Now, reality has proven the operator can only make $700k per year. No. When the building sat half empty, reality had already proven that it could not generate what they thought it could. This is the insane fallacy driving this whole thing, and no amount of explanations about commercial mortgages will prove anything other than that a larger number of people than we thought are participating in the same delusion. If you cannot rent the space for what you thought it could rent for, your building is already worth less than you thought, and it is sheer folly to think that you can alter that fact by pretending you are waiting for higher rent later. > So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts. There is another problem. What we need is to dig deeper into that theory and push harder and harder for solutions where all the financial loss gets pushed onto the people at the top who have a lot of money. If the banks are making money off this kind of nonsense then they should fail. > I’ll give this some more thought, but if any actual commercial real estate professionals have ideas I’d love to hear from you in the comments! No! Commercial real estate professionals are mostly just more people buying into these same fallacies! What we need is more people outside that self-deluding system saying "this is nuts, I'm taking $100 million from you" and resetting the entire system.

alper 4mo ago
> a larger number of people than we thought are participating in the same delusion Congratulations, you have just described high finance.
dj_axl 4mo ago
> Let’s imagine the owner lowers the rent by 30% to fill the building. Thought I'd comment with some concrete numbers. New buildings near me (West LA) are at $4100/month for a studio, where average rent in the area is $2300 for a studio, $2650 for a 1-bedroom. To fit in with "average" rent they'd need to lower 44% however 30% might be about right. Otherwise at 4% inflation wait 9 years? 1.04^9 = 1.42 ~ 100/(100 - 30).

joshka 4mo ago

Sounds like fraud with extra steps.

Scaled 4mo ago
Yes, but seems unlikely to be prosecuted... The government directly benefits from higher tax valuation.
advisedwang 4mo ago
Who is being defrauded? Who even is the fraudster? The operator of the building is losing money, so clearly they're not making a gain from anyone
- joshka 4mo ago
  Yeah, I probably don’t mean fraud in the narrow criminal sense. The thing that feels fraud-ish to me is that the loss doesn’t just disappear because nobody books it. A huge amount of capital and useful urban land is tied up preserving a fictional valuation and someone is paying for that somewhere. Maybe it’s not a clean “X stole from Y” thing here, but it still means real businesses are displaced, worse downtowns, and less of the city that could have existed otherwise. I haven't seen this sort of thing as much in Australian cities where I'm from, but have a lot in the US where I live. So maybe a better way phrasing "fraud on the public commons" is closer to what I mean. Everyone involved is probably acting rationally inside the system. The public still gets stuck living inside the dead space created by the fiction created by it and ends up eating that cost.
- dredmorbius 4mo ago
  Somewhere in this chain are parties who are able to claim assets or collateral with values far in excess of actual market worth. To me that smells like the creditors are defrauding their counterparties. The defrauded parties might include secondary lenders (to the property mortgage holders), regulators to whom financial instruments and solvency are being misrepresented, tenants who are paying higher-than-market rents, potential tenants who are denied market-rate rents on existing space, and arguably communities in which business and commercial opportunities are depressed due to the denial of access to real estate at market terms. The operator of the building isn't the key point to fraud, as their interest (reducing rent to attract tenants) is actively thwarted by their creditors. The element of fraud is misrepresentation of true market value / income potential by projecting partial tenancy at elevated rates as if it were full tenancy, rather than the actual income stream at full occupancy (allowing for a nominal vacancy rate) at actually-supportable lease rates.

grebc 4mo ago

It’s very clear there is no commercial property investors here, nor commercial borrowers.

dazc 4mo ago
Care to enlighten us?
- grebc 4mo ago
  Comments below. There’s no actual problem here to be solved. If people feel they have better uses for a property they should put their money where their mouth is.
  - em-bee 4mo ago
    there is a problem to be solved. empty shops make shopping areas unattractive. walking through a half empty mall or shopping street is depressive. i see this all the time in china and in developing countries in general. they build huge malls, and then they can't fill them because there are not enough businesses who can pay the rent being asked. at least there is growth and the place will fill up eventually. but until that happens the place is less attractive. seeing the same in europe in malls or shopping streets is even worse because it feels like the economy is declining. you have to apply the broken window theory here. the more shops stay empty the less people will go there to visit the remaining shops. their revenue goes down, they can't afford the rent anymore and another shop is empty. if this becomes a trend then you risk that the shops will never come back. it is therefore in the interest of landlords and the city to keep the streets alive and fill them with businesses that attract people. ignoring this problem is just a sign of greed. instead of building a vibrant space they just want to extract as much money as possible. instead of being forced to foreclose the banks should be forced to extend the loan and eat the loss. foreclosing will cause them a loss too. so the banks are not better off either way. the article says the building is an income stream. no, it isn't. the building is part of a community. the needs of the community top your need to make a profit. yes, this means the community should probably contribute to make your work financially viable, and one way they can do that is by making policy that gives you more reasonable conditions to pay off your loan so that a foreclosure is not necessary.

WCSTombs 4mo ago

(2025). > The obvious thing cities could try is to put more pressure on building operators to fill their spaces, but the building operators are already under a ton of pressure — they’re losing a bunch of money! So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts. I agree that this is the obvious remedy. I don't know if it's exactly the right answer, but it's the natural place to start the conversation, and I think it's at least in the ballpark of the right solution. It's the city (and bigger) government's job to create policies that incentivize the right behaviors for the benefit of the community. There clearly has been an oversight here, if extremely valuable commercial properties are literally just sitting unused for no good reason. In my opinion we'd all be better off if the market did correct itself, at least getting us all on the same page about what these properties are actually worth, rather than the current situation. The city stepping in also helps put the fuckup back in the right place, in the hands of the property owners and lenders who seem to have made these bad bets, rather than externalized to the residents and business owners of the city, who haven't done anything wrong. The article suggests that this leads to "bad consequences" and even bank bailouts, but I'm pretty unconvinced that the problem is widespread enough that the federal government would literally need to start bailing out banks. From what I've seen, it's really bad in a few specific metro areas and not so much in others.

em-bee 4mo ago
another possible remedy would be to find ways to change the conditions of the loan so that building owners can continue to pay off their loan at better rates that match the income they can make from rent.
- nemomarx 4mo ago
  If the banks would prefer to adjust their loans instead of defaulting on them I think they would just naturally do that? They may not want to take a longer loan though.

jojobas 4mo ago

There is also the practice of "deferred interest paid in kind", where vacancy is considered temporary, and the bank agrees that the interest for the term of vacancy will be paid at loan maturity. Not sure how/if it applies to multi-tenant buildings, but plenty of them aren't multi-tenant.

themafia 4mo ago

It could be 2 to 4 years to build the space. You can also structure the loan so the interest is amortized over a longer period than the loan which simply requires a balloon payment or refinancing of the interest balance at term which can offset some of the costs presented in this article. It also does look like San Francisco has a vacant storefront tax although the penalties are fairly light. https://abc7news.com/post/remember-vacant-storefront-tax-san-francisco-heres-how-going/16588700/ https://abc7news.com/post/remember-vacant-storefront-tax-san...

pif 4mo ago

Say what you want, but a law that lets you pretend that the value of a building is based on what you ask, rather than what you can actually obtain, is a stupid law.

joshuahaglund 4mo ago
It's not a law, it's a financial contract between a borrower and a lender. I agree it's stupid, but that's what you get when you let the invisible hand bind human hands
bluGill 4mo ago
What is a better option? Before your answer, remember it sometimes really is the case that the economy is down and in two years things will recover and everything will rent out again. Your answer needs to smooth that out.
- jamilton 4mo ago
  Rolling average including vacant months as $0? And if that isn't smooth enough, add some smoothing factor, count vacant months as 10% of the last paid value, or maybe the first vacant month as 50% with further months decaying. Or some other fancy accounting that makes more sense than the current method.
  - joquarky 4mo ago
    Nothing will happen until wealthy people are negatively affected.
- userulluipeste 4mo ago
  "remember it sometimes really is the case that the economy is down and in two years things will recover and everything will rent out again" Where do we draw the line between reality and fantasy then? If the terms of a deal are not reflecting the reality of the moment (i.e. the office rent market demand quotes) but some figure people come up with on their own, then let's call it what it is -- gambling (in which case it should be treated as such).

trukledeitz 4mo ago

Has anyone here considered the cost of capital reserves required by the bank for holding this loan? Commercial loans used to be a 100% capital holding requirement, while HVCRE (High Volatility Commercial Real Estate) Loans carry 150% capital holding. So if a bank loans a building owner 100% of a 20 million dollar facility and it meets HVCRE requirements, the bank has to keep 30 million of capital in reserve for the chance of default. Even if the loan receives enough buyer downpayment or for some other reason becomes normal Commercial loan the bank has to hold 20 million in reserve capital for the loan. So you have to net the incentive of the cost of the capital held in reserve against the interest payment on the bank's balance sheet as an economic forcing against continuing to float the loan forever...

inigyou 4mo ago
aren't we in a zero reserves era?

deleted 4mo ago

[deleted]

ChrisArchitect 4mo ago

Previously: https://news.ycombinator.com/item?id=46305123 https://news.ycombinator.com/item?id=46305123

alper 4mo ago

I'm in Berlin where there's a glut of offices which are all sitting empty. I'm living next to a top line historic renovation/office space and it took them 8-9 years to complete the renovation at probably an astronomical cost and now it's been sitting empty for a year or so. This financial model is also the main reason why it's so hard to convert these buildings to residential. Somebody has to eat the markdown.

teddyh 4mo ago
The ICC? <https://en.wikipedia.org/wiki/Internationales_Congress_Centrum_Berlin https://en.wikipedia.org/wiki/Internationales_Congress_Centr...>
- inigyou 4mo ago
  I was thinking Am Tacheles but who knows

Animats 4mo ago

Article is from 2025, and "extend and pretend" is coming unglued.[1] Extend and pretend was big around 2024.[2] The other side of this is that landlords hate to reduce rent to rent vacant spaces because their paying tenants will demand rent reductions or move. That can crash the rental market. A building half rented at rent X is more profitable than a building fully rented at rent 0.5 X. [1] https://propmodo.com/the-end-of-extend-and-pretend/ https://propmodo.com/the-end-of-extend-and-pretend/ [2] https://www.newyorkfed.org/research/staff_reports/sr1130 https://www.newyorkfed.org/research/staff_reports/sr1130

goodpoint 4mo ago
> That can crash the rental market ...as if it was a bad thing.
- gonzalohm 4mo ago
  It's bad for one person only, the landlord, which happens to control the rent price
  - prepend 4mo ago
    It’s also a bad thing for future investment as building new units becomes riskier.
dietr1ch 4mo ago
This just says that they have too much power and society would be better off having a vacancy tax that aimed to reduce abuse by landlords while at the same time ensuring the city doesn't look like post crisis Detroit, which makes it worse for everyone.
- ryanmcbride 4mo ago
  Yup. Unfortunately landlords have plenty of time to lobby against things like this while the rest of us are busy contributing to society.
- 4mo ago

advisedwang 4mo ago

The key analysis is how does the system manage the risk that a building's equilibrium rent goes down or turns out to be lower than assumed when writing the loan. The system described in the article is basically that the risk is not explicitly planned for, and just washes out that it is managed by a vacancy and building owners eating the cost of the vacancy. Any solution needs to provide a new answer for how that risk is managed, preferably one that doesn't result in foreclosures. Some possibility: * The bank takes on the risk, by loans having a provision for writing down value if rents have to drop. This is tricky, because if the operator decides when rents need to be revised down, they have no incentive to protect the bank's position. If the bank decides, then they have no incentive to ever accept a rent drop, they'd rather force the operator to eat the vacancy. You'd need some trigger like duration of vacancies. * The operator takes on the risk but with a mechanism for lowering the rent. I can't really figure out a way this would work without requiring the operator to have capital on hand though. * The risk is insured. If rents need to drop then insurance pays the write-down in property value. I'm not sure any insurance company would be able to take this business though, as it is highly correlated between customers. A downturn would just wipe-out the insurer.

BrenBarn 4mo ago
My preferred solution is "whoever has the most money gets the risk".

quickthrowman 4mo ago

The value of a commercial building is based on the potential rent, not how much space is leased. Loans can be called by the lender if the value of the collateral (building) falls too low. Lowering rents lowers the building value. Not lowering rents and leaving spaces vacant ‘maintains’ the value of the building, as long as you can keeep making the loan payments everyone pretends the building is worth more money than it probably actually is. As long as the borrower keeps making payments to the lender, nobody really cares.

PaulHoule 4mo ago

I've seen a lot of this in Ithaca. They built a concrete parking garage with offices on the bottom level and for a long time it seemed like they'd only attract government offices. It took several years and they finally got a farm-to-table restaurant which is well regarded but possibly subsidized and in a category like government offices (e.g. no financial discipline about the rent) There is a lot of talk that "there are excessive vacancies on the Ithaca Commons" but doesn't seem that bad except for the bottom of the first floor of Harold's Square, a market rate apartment development that was recently developed.

brikym 4mo ago

Capitalism tips half the milk out and triples the price for the other half.

guelo 4mo ago

[dead]

gman2093 4mo ago

Property taxes are too low.

tomcam 4mo ago

I have been wondering this for 25 years. Now I understand why New York City has so damn many empty buildings.

adverbly 4mo ago

Land value tax would fix this

rossdavidh 4mo ago

Oh my goodness, thank you. My wife had to move her store in 2020 in the midst of lockdown; you'd think rents would have been low, but no. Since then, many of the places that wouldn't lower the rent then, have sat empty ever since. This is in Austin, TX, a town that has had a healthy economy during that entire time. Weirder still, many of them were on the market, theoretically for rent, but if you called them up it turned out they weren't actually available, and the landlord wasn't interested in renting them. I couldn't figure out why you would pretend something was for rent at $X, and let it sit empty for years, rather than actually rent it at something <$X. Now it makes sense.

senordevnyc 4mo ago
Wait, were they not available at $x, or not available for < $x? Because if it’s the former, then this article doesn’t really explain your experience, right?
- evo 4mo ago
  Could be this (from the article): "Another scenario I can think of is that the financial model for the building requires spaces to be filled by “credit tenants,” meaning name-brand businesses of a certain caliber and creditworthiness." Might not be available unless your name ends in 'tarbucks'.
  - lokar 4mo ago
    Yep. The owner assigns much higher value to leasing to a large national chain. They often hold out for one, refusing to lease to more risky businesses.
- Nemi 4mo ago
  Another thing that I read about on this topic was that once a land lord has gotten into a groove of extend and pretend they lower their costs and cut out the overhead of property management. This means that if they took on one tenant they would have to ramp up property management costs (and potentially refurb/improvement costs) and they are not willing to do that, so you end up with the situation where you can't rent a property even if you want to.

BLKNSLVR 4mo ago

One element of this that I find interesting is that from the outside it can look somewhat like a decentralised monopoly given that it affects all (or most?) commercial rental properties; it looks like collusion to keep rents high. Where it's actually systemic to how commercial buildings are created in the first place: they do not account for a downturn, or at least a downturn on the scale that Covid wrought. Store-fronts were already in decline due to 'internet shopping', but Covid probably brought a lot of physical close-down plans forward, such that any likelihood of recovery should be measured in decades or, more realistically, start being written off progressively to minimise a big hit down the track. The longer extend and pretend lasts, the bigger the hit will be when it that strategy breaks.

fyredge 4mo ago

If income stream is the metric, then I don't see why 'real' income stream can't be used to evaluate the value of the building instead of the last transaction. If the building sits at half occupancy, then the income stream is 500k, not a theoretical 1M.

prepend 4mo ago

Is this something there’s a federal lever for by forcing commercial loans to mark to market? So if I go to refi my $20M building and nothing is actually rented for 5 years, I can’t use list price and need to use market price for rent. Or could be a shareholder lawsuit for banks as they are putting out riskier loans than the rate reflects?

djbelieny 4mo ago

Seems to me that what is required to fix this is a complete overhaul of the valuation system and then tighter foreclosure protections, only foreclosing on defaults, more like residential real estate.

dzonga 4mo ago

people like to complain about strip malls or those little office parks. this is why those win - it's cheaper to build & maintain them & easier to turn a profit on them. the fancy big glass downtown skyscrapers are mostly for ego. usually the tallest one determines who has power in that economy/city. way back then churches used to be the tallest. now in most cities it's the banks. in SF - it's SalesForce Tower i.e tech is dominant