Comment by bombcar
3 days ago
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.
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 :/
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.
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.
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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.
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
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.
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>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.
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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.
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> 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.
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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?
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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.
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.
As I've said elsewhere, when the economy improves it will be rented again.
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I think for businesses that own multiple properties, they can claim losses on vacant buildings to offset their taxes in other profitable ones.
land value taxes would fix this. is too cheap to sit on derelict property
I don't think it's that simple. If the property is abandonded there's nobody to collect any taxes from.
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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.
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.
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.
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.
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.
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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.
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.
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.
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.
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.
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.”
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Force taxes on average use. Force empty stores to subsidize existing ones.
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".
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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.