| I worked in commercial property for some time, which allowed me to understand why certain things happen that seem irrational from the outside. Everything in real estate is driven by the valuation. This dictates lending terms, tenant acquisition, sales & marketing strategy, everything. But valuations, fundamentally, are just numbers that an independent advisor plucks out of thin air. It's a difficult job that ends up being a mishmash of guesswork of what things could be rented for, and how much they will appreciate over the coming years, and tangible numbers around what other "comparable" properties are selling/renting for right now. This isn't as nonsensical as it sounds. After all, an untenanted building clearly isn't "worthless". Now owners have every incentive to push this valuation up. Actual yield (i.e. how much rent you are actually receiving at any given point in time) limits your flexibility to do so. It's difficult to convince the valuer that your space could be rented for $1000 psqm when it's already being rented out at $800 psqm. Absurdly, it's much easier to convince a valuer that untenanted space could be rented at $1000 psqm. There's no direct evidence to the contrary, so the smoke and mirrors story is much more convincing. This is why commercial landlords will almost always lose a tenant before dropping rents. The latter will crystallise a reduction in yield which immediately affects the property's valuation (and thus their sale prospects or leverage ratio). It was incredibly eye-opening to see how much unreality goes on in real estate. |