I was speaking to the owner of the building I work in (335 Madison) about this, he said because so much is owned by families and paid off, (his included) they can afford to leave them empty vs lower the rent, therefore lowering the property values that are leveraged.
I follow along in /r/realestate and it seems that part of the motivation for this behavior is that the owners are usually leveraged - they don't own the property outright, or if they do, they have taken a loan against the property. If they lower rents, it impacts the valuation more than staying vacant and waiting for a new tenant, which in turn has implications on the loan & ability to obtain loans in the future.
Additionally, I believe you can also get a margin call on your financing if you lower the rent, so there are perverse incentives to keep spaces empty which can push against a correction in prices.
You seems to be understanding this better than I do.
I understand that if a commercial property gets rented out at 80% of its previous rent that causes a reduction in the valuation of the property. What I don't understand, shouldn't not-renting it out cause an even bigger dip?
An 80% reduced property brings in 20% less income to the owner, but if the property is empty that means the owner has to pay for maintenance out of their pocket. (maintaining the roof, keeping the squatters away etc. However cheap these expenses are, it is clearly not zero dollar.) The property becomes from an asset to a liability. (in the colloquial sense at least, as you can hear I'm not well versed in economics.) How does that not decimate the valuation like crazy?
i think one of the problem is the value of commercial properties is directly linked to their rent. hence why so many would rather keep their property empty than negotiate down the rent as it would instantly devalue their property. they'd rather stay in their inflated bubble.
Same with retail space, they wont lower the rent so units remain empty for years...
To make it fair for the small mom/pop owned units, maybe if they have to lower the rent, they should be able to lower the property value (and thus property tax), since its based off rent.
I've seen older units being sold as condos, because the owner just wanted out of the situation.
Some of this may be due to incentives in the way property management and owners value commercial property and calculate cash flows and fees.
In many cases, it can make more sense (to some folks) having a vacant property at a nominally high rent (look, we could make this much from this property, hence it’s worth x multiple!) then admitting that is not likely for the foreseeable future (oh shit, this property is now only capable of producing 80% of x, write downs and angry investors incoming).
It sounds weird, but the wil-e-coyote analogy is remarkably apt - in the cartoons, as long as he doesn’t look down, he keeps going just fine!
I don’t know what it is, but it seems commercial landlords would rather have an empty property than accept market rent in a down market. I saw a lot of that in the last recession.
I suspect that the managers of REITs and partnerships that own most commercial property worry that accepting lower rent would make it harder for them to delude their investors into thinking their property values haven’t tanked. “We appraise this property based on a rental income of $5k/mo, it’s just between tenants right now”
They'll lower rents in order to maximize profit. Number of units goes up, demand stays constant, the price will need to come down or they're stuck with empty units that generate negative profit.
> Is it really worth the property owners keeping them empty?
Yes. It's a tax dodge. [1] [2]
The owners "...hold out for higher rents to increase the worth of their properties because value is based on future income stream...They can afford to forego current rental income, waiting for higher-paying tenants because they claim big business losses. Landlords get a tax loss from negative rental income when no rent comes in, which cushions their lack of cash flow."
There are also perverse incentives structured by the debt instruments securing these properties. [3]
There's some more miscellaneous reasons, like not wanting to hassle with renegotiations from existing tenants who hear about a lower psf/psm rent of a new tenant, not wanting to attract the "wrong" class of tenant, etc., but by and large, the money reasons talk loudest.
High real estate costs preventing affordable, energy-dense and hyper-efficient living and working for most of the world's population are imposing quite significant externalities around the world. Not really discussed much though, as it gores too many oxen. Saliently changing this status quo would require fundamental changes in how real estate and credit interact, and that's not going to happen without some real not metaphorical blood spilling.
its because they are likely tied up in CMBSs with terms that state that the value of the building is based on the value its renting units out at, and if they lower the rent they have to recollateralize the loan (pay an additional down payment, to cover the lost 'value' of the property), but they can just apply missed rent from empty units to the end of the mortgage and take a tax write off.
The financial motivation is in keeping rents high. The units are empty because no more people want to pay as much as they are charging. Then it becomes a balancing act. An empty unit might cost you X, but to find a tenant for it might require you to lower rent by Y. If X * # of empty units is less than Y * # of occupied units, then it makes more sense to leave them empty.
I was talking with a real estate agent in SF and he said it’s not unusual for landlords looking to sell their rent controlled building to just let units sit empty.
Why? Because it can increase the value of the building by hundreds of thousands of dollars. Losing out on $24k worth of rent each year is easy if you know it comes with an extra $300k in your pocket when you sell.
Another is this: a building nearly full rented has an easily calculable valuable based on its income. A building with a higher price but not trying to rent can, incredibly, claim to have a higher value. Especially if there are several building nearby claiming the same value.
If there is a debt associated with the building, it is especially in the owner's interest to keeping the supposed value of the building high even if they are loosing revenue at the moment.
If a few organizations own a large number of units they can strongly influence a market both of rental rates and building values by doing this. Undoubtedly to a net profit or they wouldn't be doing it.
Aren’t commercial real estate owners famous for not lowering prices? They don’t want to accept a lower rent amount as it lowers the valuation of their portfolio?
and thats the problem. if you watch any of Louis Rossmans videos on NYC real estate he explains the Issue.
Buisness dump invested money into expensive building. If no one rents then it stays vacant.
Why vacant, isnt the landlord going to lose money? well yes but if he rents a lower amount then his valuation goes down and he is suddenly upside down on his loan. So he is compelled to not rent versus renting it.
Add to this governments make more tax yearly if its valued hire and now there is no incentive to fix this.
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