Cutting rent means that the property is worth less. That means investors are demanding to know why the property is worth less, and the city collects less property taxes which might lead to politicians asking questions.
While all that may be necessary, it won't happen until it's the only thing that can happen.
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.
Owners are not able to cut rent as most commercial financing have covenants which require a minimum lease rate/sq foot. If they cut rent, they could be in technical default and lose the building.
Commercial financing has onerous terms which should be stricken by the government/courts.
No one wants to buy it because it's missing a tenant.
At some price someone will decide that the building is a worth while risk. You might not like that price, but there will be a price you like more than getting hit with high taxes for owning an empty building. The point here though is not to keep you, the landlord, rich; it's to make a city full of shops with happy customers, taxable sales, etc. If you can't make your building work for you then your business has failed and you need to move aside to let someone else use that real estate asset. That's how capitalism works.
Keeping it empty would remove it from the housing pool, driving rents up.
I think the comment is saying that investors are using cheap loans to buy up properties and rent them out. This increase the supply of rentals and drives rent prices down.
The value of commercial property is a function of the cap rate. Cutting the rent thus cuts the principal value, which can often leave the property underwater.
I know it eventually happens, but it seems like a lot of commercial landlords would rather have excessive vacancies than lower the rent to attract new tenants or keep existing tenants. Is there some kind of tax reason for it?
There's some weird legal implications that I know that I don't understand.
I see this all the time where a large ownership company will leave apartments or commercial real estate totally unoccupied rather than allow a cheaper rent.
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.
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.
Isn't the underlying issue often one of accounting? As I understand it, prices cannot drop because the appraisal is tied to the rent, and the financing is tied to the appraisal, and the overall business is dependant on the financing.
As strange as it is, this makes it "cheaper" overall for some properties to remain empty rather than trying to get any, albeit reduced, rent.
It's a common fallacy that rents fall when demand drops. In fact, they often don't, particularly for commercial space; the owners choose instead to let the spaces go unused. I've seen this happen up close with several buildings my city, in several neighborhoods. There was an article a while ago about how Greenwich Village suffered a similar fate.
While I agree value has been destroyed, rents should fall as a result of lower property values, and tenant companies will have more money to deploy to their businesses as a result.
A net negative to the economy to be sure, but (literal) rent-seekers aren't the only ones in the equation.
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?
While all that may be necessary, it won't happen until it's the only thing that can happen.
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