[entangledqubit]

From what I understand, commercial real estate is also going through some devaluing so maybe those rents should be going in the other direction? This seems like a last ditch attempt to keep things together long enough until rates come down (I'm not sure they'll come down enough in the near term.). I'm hoping businesses choose to move - or maybe go storefront free for a while - to speed up the correction. (I've noticed several businesses operating (purely?) out of a nearby storage place for a while now.)

[chatmasta]

Intuitively, it seems rare for any rent-seeking business (such as a landlord) to decrease prices, especially for an active tenancy. But even for a vacancy, they will only do that when they are absolutely forced to, and they will delay it for as long as possible (better to wait two months to fill a $1k/month vacancy than to reduce it to $800/month).

On the other hand, they will happily increase prices without being forced to, especially since they can do that while they have an active tenant.

Why would a landlord ever decrease the price of an active tenancy? It would only happen if the tenant threatened to end the tenancy. That’s more likely for commercial tenants than residential, but it still requires a higher “activation energy” than its corollary, where the landlord increases the price on a whim.

[lazide]

The answer is when the market turns - from going up or steady, to down.

If they can.

The big issue with rents right now IMO, is that commercial real estate typically has short length adjustable rate (or even ballon) financing, which causes catastrophic problems when you have a combination of:

+ rising vacancies and/or decreasing rents (aka reduced cash flow)

+ increasing finance costs.

Which is common when we enter a recession due to increasing borrowing costs.

The landlord either has to burn their free cash hoping for a recovery, or default. If it’s a short period of time, the first can happen. If it’s a fake out, then they’re left with no cash and still go bankrupt - so then need to liquidate, but it’s often when a bunch of other folks are doing the same, so prices go through the floor and it’s a bloodbath for existing investors.

And since the low interest rate environment was going on so long (with QE even!) almost everyone was leveraged to the gills on cheap credit, often to the point they had little to no free cash flow even at that point. It wasn’t just commercial of course - residential properties stopped having positive cash flow in some cases nearly a decade ago, but still kept going up. Residential financing offers more opportunities to insulate oneself from this kind of crazy though.

It happens normally of course due to the business cycle, but this has been an exceptionally long time without real monetary tightening (since well before ‘08), so the overhang is bigger.

It’s why all those dead malls are still sitting there.

So, in the fashion of wil-e-coyote off the cliff, no one wants to look down. Because it’s a long way down.

[marcosdumay]

That's basically the reason why many people claim a bit of inflation is good for an economy.

The same thing happens on lots of different contracts.

[EnigmaFlare]

Yep. Importantly, employment contracts. Employees are extremely resistant to wage decreases but they'll passively tolerate it in the form of inflation. Without inflation, they'd have to be fired and replaced with someone else just to get around that psychological obstacle.

[mnky9800n]

I suppose then you are simply arguing for strict regulation on when a landlord can increase rents.

[darth_avocado]

The simple answer is: “Because they can”

Moving for most small businesses comes with a heavy cost. If you’re in a high regulation area like California, even moving down the block would first of all require a ton of permitting and time. Second, foot traffic is not equal everywhere. Even if you move buildings in the same neighborhood, availability or lack of something as simple as parking, can affect your business significantly. Lastly, even if you figure everything out, moving comes with the costs of making the new place up to date to align with your business. For some businesses these costs can run into millions (big restaurants). In most cases, businesses will either pay the higher rent or simply shut down.

[downrightmike]

Yes, the delay and deflect mentality is in full swing in CRE and in the other bubbles as well. CRE has been a zombie since 2008.