> The stores are rarely successful and I'm sure that the companies building all these things just factor in the cost of building these as a cost of doing business in that town.
One of the things you see people complaining about in cities like Seattle or SF is higher commercial rent prices pushing out all the "cool" but not particularly profitable businesses.
And how do you get lower business rents? There's a thing called supply-and-demand that might be helpful here.
The loans that they got to build the building were underwritten assuming X square feet of retail space would be rented at $Y per square foot.
If they were to rent the spaces at lower rates, the bank would need to reassess the building, taking the lower rental rate into consideration. Then the Loan-to-Value would be higher, making it harder and more expensive to refinance after the 5 to 10 year term of the loan. The bank doesn't want that either, as long as the payments are coming in on time.
Strangely, keeping the space vacant doesn't require the bank to reassess the space as though it's renting for $0.
So, the financial incentive for the borrower and bank is to keep the space vacant at $Y than rent it for less.
* Banks must re-evaluate the loan once a year based on the average real lease rate for that year OR the next year's contractually committed income. (Not the 'we would love to least it at X' fabrication.)
* In addition to Land Value Tax and any applicable income tax, all not-leased units and spaces would be taxed as if any asking price over comparable units within a reasonable distance, like a 12 city block or mile square centered on that unit, were booked income. Example: Studio apartments currently leased within 20% that units size within the 1 mile square average 1000 USD/mo, a vacant apartment which asks for 950/mo has a taxed rate of 0, while an apartment asking for 1200/mo would be taxed as if they had rented that space for 200 that month, even though there was 0 income. The goal is to apply a small downward pressure to rents and also directly reward renting beneath the mean average within the area. Maybe it should even be at a higher rate, like taxed as if 50% or even the full asking rate had been earned. Of course the highest possible rate (E.G. renting for one single smallest unit of time every time) would be utilized, including any one time fees for background checks, etc.
> Banks must re-evaluate the loan once a year based on the average real lease rate for that year OR the next year's contractually committed income. (Not the 'we would love to least it at X' fabrication.
yesfitz’ comment is not correct, and lenders do care about their collateral experiencing insufficient cash flow. They do not care about specific empty spaces, but if revenue is not as expected, then obviously risk of default is higher, and they will notice.
I think "not correct" is unfair.
The comment's audience was people who are unfamiliar with the effect of financing on market rents. To that end, I left out some nuance and caveats.
I appreciate your expansion on my statement though: "The bank doesn't want that either, as long as the payments are coming in on time."
But Debt Service Coverage Ratio (DSCR) looks at Net Operating Income, not just the collateral property's rents.
DSCR is recalculated at intervals based on the lender's policy.
That policy varies from bank to bank.
All banks' policies are examined by regulators, so it's not as though banks can totally ignore DSCR, but there are ways to mitigate policy exceptions that range from business as-usual to "Extend and Pretend"[1] that's been common since the Federal Reserve rapidly raised rates in 2022.
> And how do you get lower business rents? There's a thing called supply-and-demand that might be helpful here.
It's part of it for sure, but there are lots of commercial vacancies that sit empty for years because landlords often keep storefronts vacant on purpose. It's a confluence of reasons and it depends on the locale -- sometimes there's a tax break if it's vacant, sometimes there's a tax increase if rent hits a certain threshold and the landlord wants even more to make up for the new tax, sometimes the mortgage is guaranteed by the rent price in some way and lowering the rent would cause the holder to pay back the difference immediately, etc.
There are tons of empty storefronts in NYC at the moment, for example, so more supply isn't really the issue here, often it's a web of really bad policy.
And I'm sure this is the place where people start saying Land Value Tax.
Yeah, that all sounds like really horrible policy. Landowners in in-demand locations should be taxed heavily if the land isn't being used productively. They sure as hell shouldn't get a tax break for having a vacant lot or storefront.
Building cheaper commercial real estate will help with that issue, too, as it will cause the CRE landlord holdouts to realize the downward price pressure will only continue.
> And how do you get lower business rents? There's a thing called supply-and-demand that might be helpful here.
In theory there is. But the reality is that ground level lingers empty, or is occupied by some cool office space - and seemingly never needs to come down in price.
One of the things you see people complaining about in cities like Seattle or SF is higher commercial rent prices pushing out all the "cool" but not particularly profitable businesses.
And how do you get lower business rents? There's a thing called supply-and-demand that might be helpful here.