[bombcar]

The thing I've noticed is that even dying downtowns want insane amounts of rent; I think you have to be able to buy the building to make it work.

However, that's not as unrealistic as it may seem, because the city itself often owns a decent amount of downtown, and can make a deal.

[QuantumNoodle]

High commercial rent affects not only diverse businesses (good ideas that take risks) but also the quality and accessibility of goods of necessary businesses. Near me, simple mens' haircuts have soared to $35+... Except those shops that have been around for ages and own their buildings. They still charge sub $20.

Another gripe is the amount of "luxury" apartments popping up. Inviting & modern interiors but all faux cheap materials. And, like, under a highway. Nothing says luxury like being surrounded by concrete and can't even go outside and walk. Commercial real estate is really out of touch :/

[SoftTalker]

A good haircut takes about 30 minutes. So if the barber is getting $20/cut that's $40/hr gross max assuming he's booked solid every day (most are not). From that they have to cover the rent (or property tax, insurance, and upkeep if they own the shop), utilities, scissors/clippers and other instruments, consumables, their own self-employment tax, health insurance, and retirement. That doesn't sound like it would leave much.

[lbreakjai]

30 minutes? There's a ton of men with a simple hairstyle just going for a quick trim, a competent barber should be able to handle three or four of those per hour easily.

[hdgvhicv]

And you need to run them back to back all day, every fay. Not just at lunch time or before after work, with no down time, no quiet days because it’s nice weather and people are out enjoying it.

[ofrzeta]

It's really baffling that even in the shittiest areas rents or property prices are insane. It seems the capital owners just don't care or don't lose enough money to care. They should be expropriated. Of course that won't happen.

[armenarmen]

AFAIK Commercial is priced at a multiple of rent. So when an owner still has a loan on a building that was based off of multiple of 3000/mo and decides to rent it out for 1500/mo it effectively cuts the value of that building in half.

Just an accounting issue for someone who owns it out right, but devastating for someone with a loan. I think this is why you’re seeing landlords offering multiple free months of rent nowadays. It allows them to adjust to actual market pricing annualized, while being able to call the “free” months an expense

[marcus_holmes]

We had this experience with a local town centre where the high street basically died. Retailers priced out by high rents, which was fine when the economy was good and people were spending, but as soon as it took a dip there was nowhere to go and they had to shut up shop.

And this mechanism was why; almost all the real estate was owned by funds and leveraged. Property values based on a multiplier of rent. They could weather a long spell of zero rental income because that effectively cost them nothing, but if the rent went down then the value went down and they had to come up with the difference.

[salynchnew]

That seems like a rather inefficient use of resources. How long will a fund typically keep that on the books before they have to offload the asset or declare bankruptcy? At a certain point, that smells like a scam with a real estate business attached to it.

[ThrustVectoring]

Commercial real estate lending typically has a clause that allows pausing of payments during a vacancy and letting the interest accrue into the balance of the loan - effectively, the banks are giving the property owners a free option to try and get the vacancy cleared without affecting long-term incomes and asset prices.

[BrenBarn]

That still sounds like a scam.

[gizajob]

I think that about nails it for most commercial real estate.

[mschuster91]

> That seems like a rather inefficient use of resources.

Inefficient for society? Yes. But for the capital providers aka investment (and let's be clear: retirement) funds and banks? Definitely not.

The fundamental problem at the root of all of it is how the US does pensions. In contrast to most European countries that operate in a redistribution system, aka the current workers pay the pensions of the current pensioners in exchange for "IOU tokens", the US has everyone responsible for themselves... which leads to a constant influx of cash into all kinds of asset markets, no matter the market conditions.

And that is bad, for multiple reasons.

- it ties general economic downturns to people's pensions. That in turn factually prevents politics from doing what is right (e.g. restrict climate gas emissions), because a lot of companies make a lot of money by abusing the environment and cracking down on that would lead to them losing value.

- it creates a lot of perverse incentives. When you got almost 50 trillion dollars in total retirement funds [1] with hundreds of billions of dollars in new savings each year... that money has to go somewhere where it is backed by a physical asset or a consumption in the end. A lot of that money ends up in government bonds, which "allows" the US to cut taxes for the ultra-rich without limitations and balloon the national debt without consequences because guess what, the US can "always" borrow money. It's just as bad as Japan, only less openly exposed. What does not end up in bonds ends up primarily on the real estate market, driving the nonsense we're discussing here, and what remains goes into crap like Yo [2].

- it disincentivizes the forces of the free market from holding bad actors accountable. Under "normal" conditions, the AI bubble or Tesla would simply have run out of cash years ago because no one would give them more money, but when the scam is so large it ends up in the S&P 500, cash will flow in automatically from all the dumb money that is going into ETFs and other pension investment vehicles. Once you are in, you stay in.

- To make it worse, people are increasingly going from "moderate" managed funds to the extremes: either purely tracking funds that have virtually no fees deducting profits (and, in exchange, do not exercise voting rights) or into high-yield "activist investor" funds that love to do exploitative shit like forcing companies to redistribute their liquidity reserves as dividends (robbing the company of resilience against economic downturns) or engage in LBOs, buy-and-break-apart schemes and the likes. These almost always offload the consequences of making money for investors onto society at large... like, for example, malls falling apart because anchor stores fell victim to the vultures. Toys'R'Us is one particularly nasty example.

> At a certain point, that smells like a scam with a real estate business attached to it.

The entire pension based economy in the US is the true scam - in the end, it's all IOUs just like our "pension points" in Europe. If there is no economy around due to demographic collapse or whatever, the IOUs become just as worthless.

Normally I wouldn't even care, but unfortunately, the US pension market is so large that a lot of dollars flow out elsewhere, including our healthcare system, and I'm sick and tired of American vultures buying up everything in Europe Just Because They Can.

[1] https://www.ici.org/statistical-report/ret_25_q4

[2] https://en.wikipedia.org/wiki/Yo_(app)

[CPLX]

This is broadly accurate, but it can be a little easier to point the finger at the actual culprits, which is Wall Street.

The problem is the financialization of everything, and the insistence on ensuring high rates of return above all other goals. Which is highly related to the dynamics that you mentioned here, so we're agreeing.

But other countries don't do this because the government stops them. In this country, the financial sector is more powerful and can override democracy through a couple of obvious means that we've all seen.

The result is effectively the plundering of a previously strong economy for the benefit of a couple of people.

Ask yourself why General Motors is taking the many billions of dollars in cash that they generate from their business operations and literally sending it directly to Wall Street bankers through the form of stock buybacks rather than investing in the next generation of electric cars. It's an obvious mistake, and eventually the bill will come, but maybe not in the lifetimes of the people who profit from it. Certainly not before they have a chance to buy another summer home.

China doesn't do this. They keep savings rates high and returns low, which means the money goes into building factories and infrastructure and lots of other things that ultimately make the country much, much wealthier.

[alextp]

The flip side is redistributive pensions require an ever growing population and most European pension systems will go bankrupt within a couple of decades given current birth and immigration rates.

[milesskorpen]

Americans save at a much lower rate than Europeans (5% US vs. 15% EU), which I think makes your whole thesis backwards. Maybe Americans SHOULD be saving more for retirement, but they aren't!

[triceratops]

> most European countries that operate in a redistribution system

The Netherlands does not. [1] It is also considered one of the best-run pension systems in the world.

> the current workers pay the pensions of the current pensioners in exchange for "IOU tokens", the US has everyone responsible for themselves

US Social Security works in the manner you described - current workers pay for current pensioners. This doesn't work great as we already know.

Making assets instead of workers pay for pensions isn't a bad idea per se. It makes no sense to load workers down with taxes to pay for seniors. The math only works as long as the population of workers grows or if you tax workers more and more.

Workers' labor produces ever-increasing surpluses every year. Use those surpluses aka higher productivity to support seniors.

1. https://ec.europa.eu/finance/docs/policy/191216-insurers-pen...

[Tanoc]

One could feasibly make their debate topic that the U.S. is not actually a functioning country but instead has morphed into an extensive financialization scheme, and they could win that debate.

[kevin_thibedeau]

There was a lot of anxiety in the US over Japanese buying everything up in the 80s. Just wait it out. The US will collapse its economy like Japan.

[NickC25]

> and I'm sick and tired of American vultures buying up everything in Europe Just Because They Can.

Here in America, we're also sick and tired of vultures buying up everything just because they can.

[mech998877]

The argument that letting people invest their own money leads to a distortion of asset markets is the most amusing thing I've read today.

[carlosjobim]

> In contrast to most European countries...

The entire industrialized world has the exact same problems with commercial real estate and rents for small businesses and people.

The common denominator across continents and political systems and economic factors and social factors: all the ownership is in the hand of the olds. Whether directly or indirectly through any kind of bank-and-funds-and-government schemes that can be dreamed up.

[coldtea]

>AFAIK Commercial is priced at a multiple of rent. So when an owner still has a loan on a building that was based off of multiple of 3000/mo and decides to rent it out for 1500/mo it effectively cuts the value of that building in half.

Well, if the town is dying, the "value of that building" is effectively cut in half, or worse, anyway. Asking a lot for rent is not gonna magically make the building worth more - it will just keep it unrented.

[tardedmeme]

It's not just accounting, it means enough things that they're incentivized to manipulate it upwards. It impacts the loans they can get and the interest they pay, enough that it may be worth it to forego some actual income to keep the fake numbers up.

[SoftTalker]

But at some point it has to collapse, it seems to me. You can't forever fake a high value on a property that is bringing in no rent. Unless the real value is just being a outwardly legitimate-looking place to park money.

[bombcar]

And they’re often owned by funds that are measured in the billions. A parking lot in New York covers for a bunch of empty middle America storefronts, as long as the valuation works out on paper.

[zoomablemind]

It seems that approach is a way to generate losses without actually losing the titles. These losses are needed to offset incomes elsewhere thus not paying taxes on profits.

Investment fund's commodity is value - the rest are just tools to optimize the value.

[nothercastle]

Accounting rules allow you to extend and pretend which is common in commercial. Because loans are sucuritized by other assets there can be a lot of different assets that could all suddenly become distressed just by pricing down rent in one building

[BrenBarn]

I hear people say this a lot but it doesn't make any sense. Why would the value be based on some imaginary rent rather than the actual amount of money taken in? It seems stupid for anyone to say that asking, say, $2500 rent with three free months (giving $27k for the year) is better than just asking $2000 with no free months (giving $24k for the year). If this is really what is going in then the system deserves to crash.

[bombcar]

It’s just how commercial real estate is valued. It’s very formulaic based on the local multiplier of rents. It even applies down to single-family homes but those have competing buyers (families) - but in pure commercial you are the multiple of rents and basically nothing else (save in the strange case of someone wanting that particular property).

The key is home loans for normal families can’t be called - commercial loans can.

[bluGill]

Even in the best of times you will have empty places so they have to ignore unrented places since there is no formula that can tell the state of the economy from just current rent. Real estate is always local so even in the worst economies there is always some place booming

[IAmBroom]

Your suggested alternative generates a need for massive accounting by the banks, tracking each loan's aggregate monthly rental income.

A simpler rule that mostly covers today's problems, and adds very little overhead after the loan is signed, is often considered good enough.

[nothercastle]

It’s probably a bad rule in retrospect but to reprice now would be devastating

[pif]

> devastating for someone with a loan

Sorry, I can't understand why. Could you please expand a bit?

I don't get how decreasing the value of the building makes the loan more difficult to repay.

[sjducb]

Loan to Value (LTV) is a percentage that tells you how safe a loan is. You divide the amount of the loan by the value of the building. So if I buy a building for 10 million with a 6 million loan and 4 million of my own money then I have an LTV of 60%.

This means if I go bankrupt then the bank can sell the building and get its money back.

If the value of the building halves because the rent halved then I have a 6 million loan on a 5 million building. My LTV is 120%. The bank cannot get its money back by selling the building.

No bank is going to give me a loan on a property with an LTV of 120% so I’m stuck with my current bank. My current bank then increases my interest rate because I am now a very high risk customer who can’t leave. This is very expensive for me.

One way out of this situation is to get my LTV back to 60% which means I need to reduce the loan to 3 million by finding 3 million to pay off part of the loan.

Another way out is to sell the building for 5 million then pay the bank one million, exiting the deal with a loss of 1 million.

None of these are good for me. I’ll do anything to keep the value of the building high by charging high rents even if no one can actually pay the rents and the building sits empty.

Long term I might be able to exit by getting permission to convert it to flats.

[bluGill]

Don't forget that long term the current downturn is likely to end and so I will again be able to get the rent in a few years if I can just hold on for these bad years.

[petsfed]

... which sort of assumes that the global downturn and the local downturn are completely unrelated.

Like, if a rent hike pushes out the tenant who has been there the longest, who has the most consistent revenue stream, in other words is the surest bet, then that, all by its lonesome, should be a pretty clear risk indicator to the bank.

[com2kid]

Sounds like a solution would be to average rent prices over some period of time to account for rental market fluctuations.

[sjducb]

Solution for who? Everyone with power in this situation wants to keep the building valuations artificially inflated.

If local people want shops on their high street then the only real solution is incredibly agressive fines for vacant commercial spaces.

[nothercastle]

The commercial market is functionally frozen and illiquid. Owners can’t come down without declaring bankruptcy, bankruptcy is bad for lenders because they can’t move the property for the loan amount so you essentially have a mass delusion because accepting reality would bankrupt much of the existing players and start a crisis

[sgarman]

So how long can you collect $0 of rent on your $5000 building before the bank realizes?

[sokka_h2otribe]

The backing of the loan is in part based on the value of the asset, so you need to add collateral to accommodate a reduction in the asset value.

Basically you have to pay a lot more if the building value goes down

[LPisGood]

I’m not sure if the explanation in the second part holds water. Wouldn’t the reduction in property value be the same as the ammortized free rent?

[Arainach]

No, because the mortgage companies' valuation is based on rent and does not consider any incentives.

[BrenBarn]

Right. . . but isn't that just obviously stupid? If I say the rent is $3k a month but you get all 12 months free, why would anyone be fooled by that? Why would you base it on some hypothetical rent rather than the amount of actual money that the property takes in?

[bluGill]

The bank knows but they maintain the fiction that they don't because their books collapse too if they count those. Banks make money from loans.

Don't forget this is typically a short term things. When the economy improves the building will be rented again. So they need the books to look good today to get through.

[toast0]

It is stupid, but every party involved benefits from playing by the stupid rules, so they keep doing it.

If the lender insists the property be valued based on actual collections rather than hypothetical collections based on the rate once discounts expire or the asking rate if vacant, then they will have a loan where the borrower is underwater and that's going to end up as a loss on the bank's books.

If the borrower values it factually, they will be underwater and likely have to sell for a loss or be forclosed on.

There's also portfolio effects. If rent drops are acknowledged in one space, nearby spaces may also acknowledge lowered rents and most banks have lots of loans and many borrowers manage several buildings.

[netcan]

No. Not if the valuations and downstream effects of valuations are formulaic, which they often are.

[diogenescynic]

It's because commercial property is bought and bundled up into REITs and they would rather have a property go unleaded than to lower rates.

[wvbdmp]

I see this also, but I don’t get it. An empty building still costs a bunch of taxes and upkeep and still rapidly deteriorates without tenants looking after it. Aren’t these people hemorrhaging money? What do they have to show for it? My city actually handled a majority of the rent so a business could revitalize a large-ish property that had been empty for years. Of course it failed as soon as that deal ran out.

[bluGill]

As I've said elsewhere, when the economy improves it will be rented again.

[TheOtherHobbes]

If.

And for how much?

The system is a formalised version of "Don't tell the Tsar bad news."

Everyone has to pretend Better Days Will Come™ while the economy saws through the branch it's sitting on.

It works until suddenly it doesn't, and the banks demand a bailout.

[bluGill]

The economy has always had ups and down. While that is no guarantee, it is a strong sign. Inflation means that rent will get cheaper in real terms just staying the same. Things will be bad - again - for a few years, not that is nothing unusual.

Of course real estate is very local. There is a big difference between property in a growing city and land in a rural small town.

[g3f32r]

> and the banks demand a bailout.

Which will certainly be granted and thus Better Days *WILL* Come, at least in the localized "I'm taking practically no risk" sense.

[IAmBroom]

So what is your solution that is impervious to a permanent or lengthy and gigantic downturn in the economy?

[com2kid]

Except we have the entire commerical business districts of small and mid sized cities destroyed from these practices and there is often no bouncing back from that. Oops.

[gosub100]

I think for businesses that own multiple properties, they can claim losses on vacant buildings to offset their taxes in other profitable ones.

[anthonypasq]

land value taxes would fix this. is too cheap to sit on derelict property

[SoftTalker]

I don't think it's that simple. If the property is abandonded there's nobody to collect any taxes from.

[hdgvhicv]

On which case it’s owned by the state and the state can do whatever it wants. Like rent it out for $10 a year to the local knitting club.

[dh2022]

How would the state become the owner of the property if there are no taxes of the property? The owner would probably be the bank or someone that bought the property in foreclosure. But not the state.

[hdgvhicv]

Then you collect the tax from the bank.

Can’t avoid a land value tax as the land is forfeit if the tax isn’t paid. Doesn’t matter who owns it.

[notatoad]

i don't know if it's the same everywhere, but in my town there's essentially no taxes on vacant commercial buildings. the tax rate is based on the use

and so landlords who own a whole bunch of properties would much rather a unit sit empty for a year than lower the rent to fill it, becauase it costs them basically nothing and lowering the rent on one unit might have a cascading effect that lowers the rents on all their other properties.

[izacus]

When the capital owner has thousands of properties, why spend energy on optimizing a few to make cities more liveable?

Consolidation, as always, is eating the society like cancer.

[vasco]

If the only way to be successful is to start by buying multiple downtown locations outright I think we know why the downtown is empty. Nobody is going to do that to open a shop. Not even the mega chains are usually buying anything.

[colechristensen]

The path to the return of main street is bullying your city council to attach ridiculous property tax penalties for any vacancies for whatever the central business district commercial zone is and not allow land zoned in that fashion to change.

Force the rents and property values down until a competitive market rate is arrived at naturally. Punish the greed that attempts to store or preserve value by leaving things vacant for years.

[gizajob]

You’re right but it seems like the exact opposite scenario is usually in effect.

Particularly in the UK, landlords seem stuck in some kind of bizarre logic of “oh, nobody can rent my building, it just has to sit here being worth nothing” and “oh, you want my worthless building, then naturally I’ll need ALL your profit and more.”

[colechristensen]

There are accounting practices in place where a property value is set based on rents and that value isn't reset when a unit is vacant, but it IS reset when a new lower rent is in place through various mechanisms of valuations.

[nothercastle]

Force taxes on average use. Force empty stores to subsidize existing ones.

[gosub100]

You don't think that corporate weasels have a way to avoid the tax?

In Nevada, if you have a gaming license you must "use it or lose it", and for this reason, sometimes 24-hour "casinos" pop up in vacant buildings, just to operate the minimum number of hours to keep the license. Like one day a year.

If you tried to implement a vacant property tax they would set up the most pathetic minimum-compliant "business" you could imagine. "Golfball cleaning, $3.00 per ball, open 1-4pm tues-friday".

[colechristensen]

Eh, just model the law on what shopping malls have in their leases, a "Continuous Operations Clause".

Put into the zoning ordinance business hours where doors have to be open, business has to be staffed and stocked. Property tax penalties apply for daily violations when you don't operate more than the minimum of, say, 250 days per year. Cities could also take inspiration from France in which zoning details and approves the EXACT kind of business, and you could have rules accordingly.

LLM generated lease clause just as an example of the shape of things:

>"Tenant shall continuously conduct its permitted business in the Leased Premises on all regular business days, opening for business no later than 9:00 AM and remaining open until at least 9:00 PM, or during such other hours as are customary for similar businesses in the Shopping Center. Tenant shall continuously maintain a full stock of merchandise and adequate staff to properly serve the public. Should Tenant cease operations without the Landlord's prior written consent, Landlord shall have the right to declare Tenant in default, seek injunctive relief to compel reopening, and recover damages or impose an alternative 'go-dark' rent penalty."

[andrepd]

A Georgist LVT would fix that is short order. Start making owners pay compensation for keeping a valuable space empty and crumbling, and you'll see them step to it pretty quickly or sell it to someone who does.

[ghaff]

If it's empty and crumbling, I doubt it's all that valuable to be repurposed for housing or anything else. I did note the other day in the very small downtown of a nearby minor city that the the ancient travel agent is now a party supply store. But, really, there's not a lot in that downtown.

[ishouldstayaway]

The point of LVT is right there in the name: it is the land that has value. "Location, location, location" is an old cliche for a reason.

If you let your property go empty and crumble, the Land Value Tax is there to provide the incentive for you to either fix up the property and actually use it, or sell it to someone who will.

[SoftTalker]

What if nobody wants to buy it and you can't pay the tax?

[datadrivenangel]

The state takes it, and then can either sell it off or use it. This makes it easier to do things than trying to find who owns a probably abandoned property.

[ghaff]

Or it just decays without a real owner.

[ishouldstayaway]

The same thing you do now when you can't sell a piece of land: you lower the price.

In addition to what others said, in this case the land is obviously not worth very much, and thus the taxes are also minuscule.

[hdgvhicv]

Then it’s worthless and the state will take abandoned land for $0.00.

If the land is worth less than nothing (contaminated etc) then there should have been a bond involved to ensure the clean up fee was collected.

[IAmBroom]

This is essentially saying "There's no hope; no one will ever return to downtown, no matter what!"... in a thread trying to find ways to prove that wrong.

[avidiax]

Though I am pro-LVT, I don't think this will help in the current situation.

The owner, the bank, and the city all wish to maintain the illusion that a $10M building from 2010 is still worth at least $10M today, even vacant. No party wishes to realize the loss in value. Occasionally, the city may try to punish vacancy with a tax, which is still about additional revenue and not about realizing diminished value.

[hdgvhicv]

Let’s assume that 10m is the land and it’s a 5% tax. That means the bank is paying 500k a year to keep an empty property. That’s real cash flow problems.

[expedition32]

For the companies that own all that real estate it's better to let them sit empty for years than lower the rent.

But eventually the hammer always falls.