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.
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.
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?
It's not a question of what the banks believe, but rather what they believe officially. As long as they keep pretending the loss doesn't need to get accounted for.
The policy is spelled out in the article? Banks have strict regulations that mean they have to have a certain amount of capital backing loans, and by revaluing a building you lower the capital that backs the loan, thus raising its risk, and thus leading you to break the regulation around capital requirements.
The whole goal is not to write off the value of the property which you have to do if you rent it for less money than initially planned. That's not that difficult to understand is it?
Nobody said commercial real estate was risk free free money in some abstract financial product, other than the doofus who wrote this long "note." The hard fact is these are real buildings in real places that aren't really fungible at all. So it seems kind of ridiculous that CRE investors should be insulated from every possible externality. Obviously the right thing to do is to tax vacant properties, and then we shall see how many stay vacant and how many foreclosures there are (hint: owners suddenly find capital and are able to pay the tax or rent things out and nothing ever gets foreclosed in every one of these scenarios where it actually happens).
I mean, it's highly unintuitive, which I would say makes it difficult to understand. The main weirdness is that lowering the rent would force a revaluation whereas letting the building sit vacant for an extended period of time apparently would not. If this is truly driven by regulatory capital requirements, then it seems like a gap in the regulations.
Also foreclosure generally isn't the only option: the borrower could, for example, agree to repay part of the loan early, or give extra collateral, both of which would increase the LTV (and this would be better for the bank).
I'm not saying the explanation is wrong, but I don't blame people for finding it difficult to understand. Other factors contributing to this are probably borrower relationships/negotiating strength and the high costs associated with foreclosing.
Commercial leases are often for say 5+5 years, so once you lock it in, you know for sure what the property revenue is going to be for the next so many years. Your uncertainty equation has collapsed.
I think the main insight here is that commercial real estate is an entirely different animal than the residences that you may be used to.
You can apply this same reasoning to the "back to the office" pushes done on behalf of the institutional investors who have exposure to large commercial properties in inner cities. That too is a financial house of cards built on assumptions and vibes.
Banks care that you pay their loan first and foremost, how you do that as the borrower is up to you.
They care about the regulatory requirements in so far as you either meet it, or you don’t at the time of writing a loan. And maybe you get a yearly review.
Also people are looking at this in a very isolated view. Just because a building is vacant doesn’t mean the owner has no other option than just lower the rent. Typically owners of commercial property own multiple properties and various other types of assets. Vacancy rates are also built into calculations.
But that just means the bank is creating deliberately delusional forecasts.
I can build a building that charges a billion dollars a month rent, and sits completely empty. A forecast suggestion I'll be making hundreds of billions with no renters is clearly silly.
> Keeping it vacant only impact current income, lowering rent impacts future forecasts.
Does it though? Suppose you can't find a tenant right now because the market is soft but is predicted to improve in a few years. If you leave the unit vacant, you lose money right now. If you rent it out with e.g. a 3-year lease, you make more for the next 3 years than you would with a vacancy, and if the market price has increased by then you can increase the rent on the unit and either get it from the current occupant or the one you get to replace them in the high demand market when the higher rent causes the low-paying tenant to not renew the lease.
So taking a tenant now only improves prospects (you fill a current vacancy) with no negative impact on future returns. The only thing it does is imply that current rents are lower than before and future rents might be too, but a vacancy implies that even more strongly.
it's because the expected future income is based on what current tenants are paying, extrapolated to the number of units in the building, ignoring vacancies. I get what you are saying, it should be based on total rental income from the building - full stop - but that isn't how it is done, and this is the result.
Simply stated, if you rent a new unit for 25% lower, then the value of the building just dropped 25%. If you don't rent to a new tenant, your value must be the same, that's what the existing tenants are paying (not that I agree with this, it's just how it works right now).
It's similar to how people holding low liquidity assets will claim they are "worth" whatever the last person who paid for this assert, even if the real value of it is dropped, the "book value" is still sky high.
If my wife and I are at the airport, and the gate agent offers me (and only me) an upgrade on the flight, your logic says I should take it since that's strictly better than both of us flying economy.
Business tenants know perfectly well that when it comes time to renew a commercial lease and local rents have increased, the renewal rent is going to approximate the current market price.
The landlord doesn't want you to to leave but only to the extent that finding a new tenant costs more than the discount against the current market price they'd have to give you to stay.
> If my wife and I are at the airport, and the gate agent offers me (and only me) an upgrade on the flight, your logic says I should take it since that's strictly better than both of us flying economy.
This has happened many times to me - the answer is to take it and give the upgrade to your traveling companion if you are the one who flies a lot.
> Husbands, love your wives, just as Christ loved the church and gave himself up for her...In this same way, husbands ought to love their wives as their own bodies. He who loves his wife loves himself
Too many people ignore this part of that "submit yourselves to your husbands" quote.
For those of us who think of themselves as Christian, I think sitting in a less comfortable seat is probably small potatoes to what Christ did on the cross.
Just throwing out some biblical ideas here. I know there are a lot of other perspectives.
> Does it though? Suppose you can't find a tenant right now because the market is soft but is predicted to improve in a few years.
You'd need perfect information to make a contractual decision on that, and it still has lasting effects.
For instance imagine renting your floors to Pornhub for these 3 years on the cheap because the market it low. Assuming you made the right calculation and demand recovers 3 years later, you'll have to first kick out the company (= months spent restoring it), then try to convince the insurance company that eyes at your building that they should pay a hiked price to move into Pornhub's previous floors.
And that's assuming you haven't completely blown it where the market actually recovers within 6 months for reasons nobody anticipated.
"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.
> "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.
Suppose the building is supposed to be worth $20M, has an existing $10M mortgage and is actually only worth $10M. The landlord comes to you and wants to borrow another $5M against the building. Pretty important to the lender at this point that they're not overvaluing it, right? Or the same if they go to a different bank trying to refinance an existing mortgage they're already underwater on when using an accurate accounting.
“You” require a continuous analysis of cash flow to continuously determine value, and proper management. A simple, and common, requirement in commercial lending called the debt service coverage ratio.
Lower income for the building means lower numerator, which means being unable to meet the agreed upon DSCR, which means default. Whether or not the lender acts on this default is a separate matter, as they are usually loathe to get into the property management business, but renegotiation of terms and eventually foreclosure does happen.
The argument the article makes is that the bank doesn't want to admit the property is worth less than the mortgage because then they would "have to" foreclose.
The question is, why would they actually do that? The premise is that the landlord has to take out a new mortgage every few years and then the bank won't give them a new one if they're underwater. But that's only true if it's a different bank.
Let's take the same example. Building was expected to be worth $20M, landlord pays $4M down and takes a $16M interest-only mortgage. The only thing the bank ever expected from this was to collect interest on the $16M until it's paid back, which could be never and that's fine as long as they get to keep collecting interest.
Then we find out the building is maybe really only worth $14M. But the landlord is still making the interest payments on the $16M, and over time it will likely become worth more than $16M again due to inflation if nothing else, so why does the bank need to foreclose? The risk that they could "lose $2M" is by that point a sunk cost. It's the thing that happens if they do foreclose (or fail to renew the loan). They'd be calling in the note against an LLC that owns nothing but a building which is now estimated to be worth less than the loan principal. So the obvious thing would be to keep renewing it as long as the landlord continues to make the interest payments.
This feels like some kind of regulatory inefficiency or accounting scam where the bank is listing the mortgage lien as an asset and would have to take a write off if they valued it accurately and therefore transfer their perverse incentive to the landlord to prevent that from happening.
Notice however that doing that also hurts the bank. The landlord is collecting $500k/year at half occupancy, then paying the bank $640k and losing $140k/year to try to avoid the total loss of their $4M initial investment. Maybe they can do that for a year or three but the longer it continues the higher the probability that they run out of money. Whereas if they were collecting the $700k/year from renting out the entire building at lower rents then they could keep paying the bank its $640k/year forever, regardless of whether they're technically underwater. And if the landlord runs out of money then the bank has to take the $2M write off because they get a $14M building instead of collecting interest on a $16M loan. So the bank is really shooting itself in the foot.
At some point, you don't need to stand on the scales for it to be obvious you are a fat bastard. Ditto, it's obvious to all that commercial property has lost a huge amount of value.
I suggest that like the dotcom/2008/AI bubbles, people will just keep dancing and making money until reality catches up and the music stops.
Actual commercial real estate professionals could give you many more reasons than I can
I am so tired of listening to people with little to no experience with commercial real estate try and explain the vacant storefront thing. Maybe this explanation in the article is correct, but it raises more questions than it answers, and it’s unclear why we should trust this person’s explanation.
they already gave their explanation. if you disagree then it is on you to provide a counter argument otherwise anyone could just shoot down any argument by claiming that it has no merit.
at best you could say that you do not find the argument convincing, but even then you should explain why. you are not even claiming that the argument in question is wrong, you are only questioning the credentials of the author. that's appeal to authority, and therefore not a valid argument. https://youtu.be/N5k4yUSPHI8
I don't know much about microbiology, but that shouldn't stop me from asking someone who "did their own research" to shut up and let the experts talk.
yes it should, unless you can provide a convincing argument that the person is wrong, expert or not.
on the internet anyone can claim to be an expert and nobody can prove it.
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.
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.
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
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.
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.
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.
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).
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?
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.
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).
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.
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.
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.
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.
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...
> 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.
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.
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.
the question is, why don't they prefer that? what is influencing that decision. for the building owners, if they don't want a longer loan then that's their choice. but we want the building filled, so if forcing them to lower the rents will cause them to go bankrupt because they refuse to accept a longer loan with lower monthly payments, then that's also their choice. and if the banks don't want to offer such a loan, the question is also "why?". if there are legitimate reasons then we need to fix those. if there aren't then it's probably just greed.
How, specifically? If they refuse to acknowledge the building is worth less than they expected, they aren't going to sell it to you at a price where you can make money either.
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.
real estate must be the worst thing to use as an argument for "it's a free market" - because its one of the types of things which every stock is it's own, truly unique monopoly. I can't "freely" produce the same commercial property, unless I already own that property.
no, i can't. the rent is to high. which means the rent is not market-rate. the free market was supposed to correct that, but it doesn't, so maybe this is not a free market after all.
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.
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.
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.
The article touches on vacancy takes, and I think this has a similar effect. As the article says, the even if you apply a tax like this, lowering the rent would still lead to foreclosure, so won't happen. So piling a tax on top might make some revenue, and it might make some operators go bust but it won't actually directly* get the property to be occupied.
* maybe if the operator goes bust, the rents on the building can be lowered with a new property value for future loans. Then perhaps it can be occupied. But that's very uncertain, especially if this happens to a whole city at once.
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.
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.
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.
> 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.
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.
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...
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.
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.
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/
[2] https://www.newyorkfed.org/research/staff_reports/sr1130
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.
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?
It's not a question of what the banks believe, but rather what they believe officially. As long as they keep pretending the loss doesn't need to get accounted for.
The policy is spelled out in the article? Banks have strict regulations that mean they have to have a certain amount of capital backing loans, and by revaluing a building you lower the capital that backs the loan, thus raising its risk, and thus leading you to break the regulation around capital requirements.
The whole goal is not to write off the value of the property which you have to do if you rent it for less money than initially planned. That's not that difficult to understand is it?
Nobody said commercial real estate was risk free free money in some abstract financial product, other than the doofus who wrote this long "note." The hard fact is these are real buildings in real places that aren't really fungible at all. So it seems kind of ridiculous that CRE investors should be insulated from every possible externality. Obviously the right thing to do is to tax vacant properties, and then we shall see how many stay vacant and how many foreclosures there are (hint: owners suddenly find capital and are able to pay the tax or rent things out and nothing ever gets foreclosed in every one of these scenarios where it actually happens).
I mean, it's highly unintuitive, which I would say makes it difficult to understand. The main weirdness is that lowering the rent would force a revaluation whereas letting the building sit vacant for an extended period of time apparently would not. If this is truly driven by regulatory capital requirements, then it seems like a gap in the regulations.
Also foreclosure generally isn't the only option: the borrower could, for example, agree to repay part of the loan early, or give extra collateral, both of which would increase the LTV (and this would be better for the bank).
I'm not saying the explanation is wrong, but I don't blame people for finding it difficult to understand. Other factors contributing to this are probably borrower relationships/negotiating strength and the high costs associated with foreclosing.
> lowering the rent would force a revaluation
Commercial leases are often for say 5+5 years, so once you lock it in, you know for sure what the property revenue is going to be for the next so many years. Your uncertainty equation has collapsed.
I think the main insight here is that commercial real estate is an entirely different animal than the residences that you may be used to.
You can apply this same reasoning to the "back to the office" pushes done on behalf of the institutional investors who have exposure to large commercial properties in inner cities. That too is a financial house of cards built on assumptions and vibes.
Banks care that you pay their loan first and foremost, how you do that as the borrower is up to you.
They care about the regulatory requirements in so far as you either meet it, or you don’t at the time of writing a loan. And maybe you get a yearly review.
Also people are looking at this in a very isolated view. Just because a building is vacant doesn’t mean the owner has no other option than just lower the rent. Typically owners of commercial property own multiple properties and various other types of assets. Vacancy rates are also built into calculations.
That's the missing link on these - the owner is making payments either way - the bank is getting their money.
They don't want to disrupt the flow or trigger contract clauses, so they cover the missing cashflow from elsewhere.
Here the bank cares less about annual income than future income.
Keeping it vacant only impact current income, lowering rent impacts future forecasts.
But that just means the bank is creating deliberately delusional forecasts.
I can build a building that charges a billion dollars a month rent, and sits completely empty. A forecast suggestion I'll be making hundreds of billions with no renters is clearly silly.
> Keeping it vacant only impact current income, lowering rent impacts future forecasts.
Does it though? Suppose you can't find a tenant right now because the market is soft but is predicted to improve in a few years. If you leave the unit vacant, you lose money right now. If you rent it out with e.g. a 3-year lease, you make more for the next 3 years than you would with a vacancy, and if the market price has increased by then you can increase the rent on the unit and either get it from the current occupant or the one you get to replace them in the high demand market when the higher rent causes the low-paying tenant to not renew the lease.
So taking a tenant now only improves prospects (you fill a current vacancy) with no negative impact on future returns. The only thing it does is imply that current rents are lower than before and future rents might be too, but a vacancy implies that even more strongly.
it's because the expected future income is based on what current tenants are paying, extrapolated to the number of units in the building, ignoring vacancies. I get what you are saying, it should be based on total rental income from the building - full stop - but that isn't how it is done, and this is the result.
Simply stated, if you rent a new unit for 25% lower, then the value of the building just dropped 25%. If you don't rent to a new tenant, your value must be the same, that's what the existing tenants are paying (not that I agree with this, it's just how it works right now).
It's similar to how people holding low liquidity assets will claim they are "worth" whatever the last person who paid for this assert, even if the real value of it is dropped, the "book value" is still sky high.
If you let a family member move in for free that doesn't make the value of the building go to $0. That valuation strategy is too simplistic.
Humans are not Pareto efficient.
If my wife and I are at the airport, and the gate agent offers me (and only me) an upgrade on the flight, your logic says I should take it since that's strictly better than both of us flying economy.
This happened on the flight to my honeymoon, and my wife took the upgrade.
Business tenants know perfectly well that when it comes time to renew a commercial lease and local rents have increased, the renewal rent is going to approximate the current market price.
The landlord doesn't want you to to leave but only to the extent that finding a new tenant costs more than the discount against the current market price they'd have to give you to stay.
> If my wife and I are at the airport, and the gate agent offers me (and only me) an upgrade on the flight, your logic says I should take it since that's strictly better than both of us flying economy.
This has happened many times to me - the answer is to take it and give the upgrade to your traveling companion if you are the one who flies a lot.
You should take it and then switch seats with your wife. Happy wife, happy life.
> Happy wife, happy life.
Why wouldn't that happy cycle work with the husband ?
From a Christian perspective:
> Husbands, love your wives, just as Christ loved the church and gave himself up for her...In this same way, husbands ought to love their wives as their own bodies. He who loves his wife loves himself
Too many people ignore this part of that "submit yourselves to your husbands" quote.
For those of us who think of themselves as Christian, I think sitting in a less comfortable seat is probably small potatoes to what Christ did on the cross.
Just throwing out some biblical ideas here. I know there are a lot of other perspectives.
haha
> Does it though? Suppose you can't find a tenant right now because the market is soft but is predicted to improve in a few years.
You'd need perfect information to make a contractual decision on that, and it still has lasting effects.
For instance imagine renting your floors to Pornhub for these 3 years on the cheap because the market it low. Assuming you made the right calculation and demand recovers 3 years later, you'll have to first kick out the company (= months spent restoring it), then try to convince the insurance company that eyes at your building that they should pay a hiked price to move into Pornhub's previous floors.
And that's assuming you haven't completely blown it where the market actually recovers within 6 months for reasons nobody anticipated.
How you think about it is different to how the multiple different players think about it.
If you’re levered up to the eyeballs you don’t want your bank reviewing your file.
How do you asses the value? You use the x last transactions. No transactions, no data, the last value remains.
"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.
> "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.
> For who and in what way though?
For anyone who wants an accurate accounting.
Suppose the building is supposed to be worth $20M, has an existing $10M mortgage and is actually only worth $10M. The landlord comes to you and wants to borrow another $5M against the building. Pretty important to the lender at this point that they're not overvaluing it, right? Or the same if they go to a different bank trying to refinance an existing mortgage they're already underwater on when using an accurate accounting.
Commercial borrowers have to pay for a valuation report by a bank approved valuer.
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.
“You” require a continuous analysis of cash flow to continuously determine value, and proper management. A simple, and common, requirement in commercial lending called the debt service coverage ratio.
https://www.investopedia.com/terms/d/dscr.asp
Lower income for the building means lower numerator, which means being unable to meet the agreed upon DSCR, which means default. Whether or not the lender acts on this default is a separate matter, as they are usually loathe to get into the property management business, but renegotiation of terms and eventually foreclosure does happen.
The argument the article makes is that the bank doesn't want to admit the property is worth less than the mortgage because then they would "have to" foreclose.
The question is, why would they actually do that? The premise is that the landlord has to take out a new mortgage every few years and then the bank won't give them a new one if they're underwater. But that's only true if it's a different bank.
Let's take the same example. Building was expected to be worth $20M, landlord pays $4M down and takes a $16M interest-only mortgage. The only thing the bank ever expected from this was to collect interest on the $16M until it's paid back, which could be never and that's fine as long as they get to keep collecting interest.
Then we find out the building is maybe really only worth $14M. But the landlord is still making the interest payments on the $16M, and over time it will likely become worth more than $16M again due to inflation if nothing else, so why does the bank need to foreclose? The risk that they could "lose $2M" is by that point a sunk cost. It's the thing that happens if they do foreclose (or fail to renew the loan). They'd be calling in the note against an LLC that owns nothing but a building which is now estimated to be worth less than the loan principal. So the obvious thing would be to keep renewing it as long as the landlord continues to make the interest payments.
This feels like some kind of regulatory inefficiency or accounting scam where the bank is listing the mortgage lien as an asset and would have to take a write off if they valued it accurately and therefore transfer their perverse incentive to the landlord to prevent that from happening.
Notice however that doing that also hurts the bank. The landlord is collecting $500k/year at half occupancy, then paying the bank $640k and losing $140k/year to try to avoid the total loss of their $4M initial investment. Maybe they can do that for a year or three but the longer it continues the higher the probability that they run out of money. Whereas if they were collecting the $700k/year from renting out the entire building at lower rents then they could keep paying the bank its $640k/year forever, regardless of whether they're technically underwater. And if the landlord runs out of money then the bank has to take the $2M write off because they get a $14M building instead of collecting interest on a $16M loan. So the bank is really shooting itself in the foot.
Think of it that way - until you haven't climbed on the scale, you haven't gained weight, even if your pants are bursting at the seams.
At some point, you don't need to stand on the scales for it to be obvious you are a fat bastard. Ditto, it's obvious to all that commercial property has lost a huge amount of value.
I suggest that like the dotcom/2008/AI bubbles, people will just keep dancing and making money until reality catches up and the music stops.
Agreed. From the article:
Actual commercial real estate professionals could give you many more reasons than I can
I am so tired of listening to people with little to no experience with commercial real estate try and explain the vacant storefront thing. Maybe this explanation in the article is correct, but it raises more questions than it answers, and it’s unclear why we should trust this person’s explanation.
do you have a better explanation?
It's on the person who willingly took the public stage to prove that their ideas have merit.
I don't know much about microbiology, but that shouldn't stop me from asking someone who "did their own research" to shut up and let the experts talk.
they already gave their explanation. if you disagree then it is on you to provide a counter argument otherwise anyone could just shoot down any argument by claiming that it has no merit.
at best you could say that you do not find the argument convincing, but even then you should explain why. you are not even claiming that the argument in question is wrong, you are only questioning the credentials of the author. that's appeal to authority, and therefore not a valid argument. https://youtu.be/N5k4yUSPHI8
I don't know much about microbiology, but that shouldn't stop me from asking someone who "did their own research" to shut up and let the experts talk.
yes it should, unless you can provide a convincing argument that the person is wrong, expert or not.
on the internet anyone can claim to be an expert and nobody can prove it.
I’m agreeing with the person I first responded to about why I don’t find this explanation credible. I don’t feel the need to reiterate what they said.
AND I’m also saying I’m tired of non-experts giving their theories on this particular phenomenon, since they never make much sense.
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.
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.
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
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.
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.
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.
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
Your local press (if yours still exists) will also be full of such stories.
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.
The UK is different old boy.
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?
Isn't that through council subsidy rather than avoiding a foreclosure-trigger tenant agreement?
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.
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.
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.
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).
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.
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.
So, wework? :o)
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.
Gosh... someone finally explained the WeWork business model that is more reasonable than "walk barefoot and expect money to rain from the sky".
well, isn't the rent estimated as the daily rate * 30 then?
By whom, for what purpose?
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.
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.
The ICC? <https://en.wikipedia.org/wiki/Internationales_Congress_Centr...>
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...
Sounds like fraud with extra steps.
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
Yes, but seems unlikely to be prosecuted... The government directly benefits from higher tax valuation.
(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.
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.
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.
the question is, why don't they prefer that? what is influencing that decision. for the building owners, if they don't want a longer loan then that's their choice. but we want the building filled, so if forcing them to lower the rents will cause them to go bankrupt because they refuse to accept a longer loan with lower monthly payments, then that's also their choice. and if the banks don't want to offer such a loan, the question is also "why?". if there are legitimate reasons then we need to fix those. if there aren't then it's probably just greed.
It’s very clear there is no commercial property investors here, nor commercial borrowers.
Care to enlighten us?
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.
How, specifically? If they refuse to acknowledge the building is worth less than they expected, they aren't going to sell it to you at a price where you can make money either.
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.
If you think there’s a better use it’s a free market. It’s even up for lease, you don’t even need to buy it ;)
real estate must be the worst thing to use as an argument for "it's a free market" - because its one of the types of things which every stock is it's own, truly unique monopoly. I can't "freely" produce the same commercial property, unless I already own that property.
no, i can't. the rent is to high. which means the rent is not market-rate. the free market was supposed to correct that, but it doesn't, so maybe this is not a free market after all.
Previously: https://news.ycombinator.com/item?id=46305123
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...
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.
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.
The article touches on vacancy takes, and I think this has a similar effect. As the article says, the even if you apply a tax like this, lowering the rent would still lead to foreclosure, so won't happen. So piling a tax on top might make some revenue, and it might make some operators go bust but it won't actually directly* get the property to be occupied.
* maybe if the operator goes bust, the rents on the building can be lowered with a new property value for future loans. Then perhaps it can be occupied. But that's very uncertain, especially if this happens to a whole city at once.
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.
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.
I'm with you there, but as far as I can tell, it hasn't impacted residential prices.
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.
It's gone. So are many services that the city provided.
Georgism FTW
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.
> a larger number of people than we thought are participating in the same delusion
Congratulations, you have just described high finance.
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.
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...
Rothbard would probably lament that we have not yet turned children into "financial products" as well.
https://mises.org/mises-daily/children-and-rights
This is a crank opinion that is somehow everywhere. The building is real, it's not fractional.
The bank lended more money than it has in reserves allowing for speculation and extra inflation of perceived value of an asset
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.
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.