[inglor_cz]

I am not even sure what sense does it make to sit on an empty property for five years.

Lower rent income is still better than constant 0. At least it covers necessary repairs.

One would expect that after some months of making nothing, the landlord would start to have second thoughts.

[MereInterest]

> Lower rent income is still better than constant 0.

Depends on the terms of the lease and the expected changes in the future. Suppose you're negotiating a 5-year lease. There aren't too many new businesses at the moment, and so the market price is 25% below typical rates. If you take it and rent right away, then you get 3.75 normal years worth of rent over the next 5 years. On the other hand, if you expect that things will get back to normal in 6 months, then you might want to wait and rent in 6 months instead. Over the next 5 years, you then get 4.5 normal years worth of rent.

The numbers vary based on location, and what the crystal ball tells you about if/when the prices will change, but there can be a financial incentive to keep things empty until to avoid locking yourself into a low rate. I'd agree with other posters that there should be a tax on vacant commercial properties, so that it tips the equations in favor of renting now vs waiting indefinitely.

[inglor_cz]

Yeah, a 5-year lease is a big commitment, for both the landlord and the renting business.

I would imagine that a string of 2-year leases would work better in that case. More flexibility.

"if you expect that things will get back to normal" - sure, but after several years of vacancy you are deep in red numbers, so it would make sense to reevaluate that position. That is a reason why I would not expect to see long-term vacant properties in places that do have reasonable demand.

[CydeWeys]

Unfortunately, unlike with residential, there's a substantial amount of upfront build-out time and costs that go into retail. For most retail renters it simply doesn't make sense to sign a short lease.

[MereInterest]

The expectation can be significantly different from reality, because that's how humans work. We form an expectation of what something is intrinsically worth, and then get surprised when market conditions change. People still see that pinned price as the "true" price, and any differences as temporary fluctuations soon to be corrected once people change their minds.

I agree that it is illogical to expect a significant change in market price after several years of low demand. However, I don't think people behave perfectly logically, and so it is important to also determine what people are likely to do.

[rdtwo]

It’s a financing thing. You can pretend a building is worth more if the asking rent is high but the unit is empty vs if the unit is full for a lower rate

[inglor_cz]

Can you explain that to me in more detail? This is interesting, and I am not experienced in that black sorcery.

If you need a loan or so, won't the bank actually investigate if the units are vacant?

[CydeWeys]

The key thing to understand is that commercial real estate is valued as some multiplier on rent (exactly the same as evaluating a bond by the interest rate it pays out). If the rent you're charging goes down then so too does the valuation, which can out you underwater on your loan and then you're just screwed.

Some kind of regulation that imposed an equation that increasingly devalues property from its last rented price the longer it remains vacant would do wonders here at correcting the market distortions. Another way to implement that would be to value vacant properties using the total rents charged over the past 5 years -- so the more vacancy there is in that, the more your total rent suffers.

Lenders can (and should) make this change too. It doesn't even need to be imposed top-down by the government.

[bombcar]

Commercial loans can also often be called - unlike home loans - so if you go underwater the lender can say “cash. Now.”

[rdtwo]

Right and being underwater and recognized as underwater can topple an entire chain of loans that were used to secure other loans. One bad loan can topple an entire chain like dominos but this usally applies to small/med real estate groups. Large conglomerates have ways to segregate risk and leave investors holding the bad w

[bombcar]

You can use this to your advantage when negotiating if you can figure out a way for your official rent payment to be what they want but receive rebates or other cost cutting measures so the net payment is what you want.

[shiftpgdn]

Because they don’t care. The loan is collateralized and sold as a financial instrument and the bank is no longer involved. The loan holders should care but the loans are owned by hundreds or thousands of organizations and individuals who don’t have the mechanism to see what the underlying assets in their financial instruments are doing.

The movie “The Big Short” actually does a great job of showing this but for the 08 financial crisis.

[dwater]

The bank makes a loan based on what they think is likely to happen in the future, and you the borrow can influence that. You can say, I'm going to buy this commercial building in the highly desirable neighborhood, which has seen continuous growth for the past 10 years, and it will continue to grow for the next 10 years, so I can charge a rent of $X, which will support a loan payment of $Y, so you can safely give me $Y.

The problem arises when predictions about the future don't come true. Like a pandemic lowers the value of living in a city, so the amount of rent you can charge goes down. Do you admit that to the bank and let them change the terms of the loan (or have them foreclose), or do you pretend everything is fine, keep your asking rent high, and hope things turn around before the bank calls you?

[eigen]

it seems that somehow $0 is not less than say 5% discount on rent. perhaps unrented is counted a NULL for these calculations.

[landlordy90810]

Actually making 0 means you have a rather fixed assets depreciation and some base appreciation that follows the market.

We don't rent a place because there is a cost in managing the renter too, and a single bad renter would probably wipe all the gains.