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Comments (151)

• rossdavidh
  Oh my goodness, thank you. My wife had to move her store in 2020 in the midst of lockdown; you'd think rents would have been low, but no. Since then, many of the places that wouldn't lower the rent then, have sat empty ever since. This is in Austin, TX, a town that has had a healthy economy during that entire time.Weirder still, many of them were on the market, theoretically for rent, but if you called them up it turned out they weren't actually available, and the landlord wasn't interested in renting them. I couldn't figure out why you would pretend something was for rent at $X, and let it sit empty for years, rather than actually rent it at something <$X. Now it makes sense.
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  Animats
  Article is from 2025, and "extend and pretend" is coming unglued.[1] Extend and pretend was big around 2024.[2]The other side of this is that landlords hate to reduce rent to rent vacant spaces because their paying tenants will demand rent reductions or move. That can crash the rental market. A building half rented at rent X is more profitable than a building fully rented at rent 0.5 X.[1] https://propmodo.com/the-end-of-extend-and-pretend/[2] https://www.newyorkfed.org/research/staff_reports/sr1130
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  advisedwang
  The key analysis is how does the system manage the risk that a building's equilibrium rent goes down or turns out to be lower than assumed when writing the loan.The system described in the article is basically that the risk is not explicitly planned for, and just washes out that it is managed by a vacancy and building owners eating the cost of the vacancy.Any solution needs to provide a new answer for how that risk is managed, preferably one that doesn't result in foreclosures. Some possibility:* The bank takes on the risk, by loans having a provision for writing down value if rents have to drop. This is tricky, because if the operator decides when rents need to be revised down, they have no incentive to protect the bank's position. If the bank decides, then they have no incentive to ever accept a rent drop, they'd rather force the operator to eat the vacancy. You'd need some trigger like duration of vacancies.* The operator takes on the risk but with a mechanism for lowering the rent. I can't really figure out a way this would work without requiring the operator to have capital on hand though.* The risk is insured. If rents need to drop then insurance pays the write-down in property value. I'm not sure any insurance company would be able to take this business though, as it is highly correlated between customers. A downturn would just wipe-out the insurer.
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  jwarden
  This explanation seems very implausible to me. By lowering the rent by X%, and therefore reducing annual revenue by X%, you admit the building is worth X% less. But by leaving the building X% vacant, also reducing the annual income stream by X%, you and the bank can somehow pretend the building is worth what it would be if full? I doubt owners and banks actually believe this. Is there some policy that forces this?
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  flotzam
  How come this obvious workaround isn't used much more often:>> If the system allows you to pretend that the vacancy is temporary, why doesn’t it allow you to lower rents on the pretense that lower rents are also temporary?> This does happen sometimes: it’s packaged as “incentive offers,” like 50% off the first 12 or 24 months rent, or 6 months without rent, etc, that lower the average rent over the life of the lease without lowering the “list price.” That’s common in residential leases, and I know it happens sometimes in commercial leases, but I don’t know how prevalent it is.
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  pif
  Say what you want, but a law that lets you pretend that the value of a building is based on what you ask, rather than what you can actually obtain, is a stupid law.
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  Schiendelman
  I actually think there's a business to be had here.As described, the landlord can't offer a traditional lease for the actual value of the space.However, the landlord could offer essentially day rentals without creating a lease. There are systems for this already, such as Peerspace and their ilk, which I've used for small events. I believe these don't trigger the foreclosure clauses.I think that a property management company managing deeply underwater buildings could play in this, reducing their cost structure by offering day rates. They've often already got a solid NFC entry system. Most of what you need is automated pricing, onboarding and offboarding, and figuring out how you avoid needing physical cleaning/setup/teardown overhead.
• PaulHoule
  I've seen a lot of this in Ithaca. They built a concrete parking garage with offices on the bottom level and for a long time it seemed like they'd only attract government offices. It took several years and they finally got a farm-to-table restaurant which is well regarded but possibly subsidized and in a category like government offices (e.g. no financial discipline about the rent)There is a lot of talk that "there are excessive vacancies on the Ithaca Commons" but doesn't seem that bad except for the bottom of the first floor of Harold's Square, a market rate apartment development that was recently developed.
• tomcam
  I have been wondering this for 25 years. Now I understand why New York City has so damn many empty buildings.
• adverbly
  Land value tax would fix this
• trukledeitz
  Has anyone here considered the cost of capital reserves required by the bank for holding this loan? Commercial loans used to be a 100% capital holding requirement, while HVCRE (High Volatility Commercial Real Estate) Loans carry 150% capital holding. So if a bank loans a building owner 100% of a 20 million dollar facility and it meets HVCRE requirements, the bank has to keep 30 million of capital in reserve for the chance of default. Even if the loan receives enough buyer downpayment or for some other reason becomes normal Commercial loan the bank has to hold 20 million in reserve capital for the loan. So you have to net the incentive of the cost of the capital held in reserve against the interest payment on the bank's balance sheet as an economic forcing against continuing to float the loan forever...
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  joshka
  Sounds like fraud with extra steps.
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  alper
  I'm in Berlin where there's a glut of offices which are all sitting empty. I'm living next to a top line historic renovation/office space and it took them 8-9 years to complete the renovation at probably an astronomical cost and now it's been sitting empty for a year or so.This financial model is also the main reason why it's so hard to convert these buildings to residential. Somebody has to eat the markdown.
• gman2093
  Property taxes are too low.
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  WCSTombs
  (2025).> The obvious thing cities could try is to put more pressure on building operators to fill their spaces, but the building operators are already under a ton of pressure — they’re losing a bunch of money! So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts.I agree that this is the obvious remedy. I don't know if it's exactly the right answer, but it's the natural place to start the conversation, and I think it's at least in the ballpark of the right solution. It's the city (and bigger) government's job to create policies that incentivize the right behaviors for the benefit of the community. There clearly has been an oversight here, if extremely valuable commercial properties are literally just sitting unused for no good reason. In my opinion we'd all be better off if the market did correct itself, at least getting us all on the same page about what these properties are actually worth, rather than the current situation.The city stepping in also helps put the fuckup back in the right place, in the hands of the property owners and lenders who seem to have made these bad bets, rather than externalized to the residents and business owners of the city, who haven't done anything wrong. The article suggests that this leads to "bad consequences" and even bank bailouts, but I'm pretty unconvinced that the problem is widespread enough that the federal government would literally need to start bailing out banks. From what I've seen, it's really bad in a few specific metro areas and not so much in others.
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  grebc
  It’s very clear there is no commercial property investors here, nor commercial borrowers.
• quickthrowman
  The value of a commercial building is based on the potential rent, not how much space is leased.Loans can be called by the lender if the value of the collateral (building) falls too low.Lowering rents lowers the building value. Not lowering rents and leaving spaces vacant ‘maintains’ the value of the building, as long as you can keeep making the loan payments everyone pretends the building is worth more money than it probably actually is. As long as the borrower keeps making payments to the lender, nobody really cares.
• brikym
  Capitalism tips half the milk out and triples the price for the other half.
• ChrisArchitect
  Previously: https://news.ycombinator.com/item?id=46305123
• themafia
  It could be 2 to 4 years to build the space. You can also structure the loan so the interest is amortized over a longer period than the loan which simply requires a balloon payment or refinancing of the interest balance at term which can offset some of the costs presented in this article.It also does look like San Francisco has a vacant storefront tax although the penalties are fairly light.https://abc7news.com/post/remember-vacant-storefront-tax-san...
• jojobas
  There is also the practice of "deferred interest paid in kind", where vacancy is considered temporary, and the bank agrees that the interest for the term of vacancy will be paid at loan maturity. Not sure how/if it applies to multi-tenant buildings, but plenty of them aren't multi-tenant.
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  bsder
  The "problem" is that we let people claim the "rent" is X for certain people and "Y" for other people--both at the same time. Just stop that.The "solution" is that you should have to pay tax on what you claim the rent is after a small grace period (Less than 24 months certainly. Probably less than 12 or at least prorated starting before that.).If your financial agreement requires and claims that the rent is $5000, no problem! Then the tax authority should expect to receive the tax revenue they would expect if someone was actually paying $5,000 in rent to you. If you want to leave the space vacant even after paying the tax on the revenue--have a blast.That would short circuit all the financialization shenanigans.
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  BrenBarn
  Here is the problem:> Half empty, the building is only generating $500k per year in net income instead of $1M.> Let’s imagine the owner lowers the rent by 30% to fill the building.> Now, reality has proven the operator can only make $700k per year.No. When the building sat half empty, reality had already proven that it could not generate what they thought it could.This is the insane fallacy driving this whole thing, and no amount of explanations about commercial mortgages will prove anything other than that a larger number of people than we thought are participating in the same delusion. If you cannot rent the space for what you thought it could rent for, your building is already worth less than you thought, and it is sheer folly to think that you can alter that fact by pretending you are waiting for higher rent later.> So, cities could do something like put a vacant storefront tax and… make them lose even more money? If that “worked,” the mechanism would be to force a lot of commercial property to default, which could put a lot of new space on the market at lower prices, which should lower the commercial rent. But it would also hurt the banks a lot, which has a history of leading to bad consequences and subsequent bailouts.There is another problem. What we need is to dig deeper into that theory and push harder and harder for solutions where all the financial loss gets pushed onto the people at the top who have a lot of money. If the banks are making money off this kind of nonsense then they should fail.> I’ll give this some more thought, but if any actual commercial real estate professionals have ideas I’d love to hear from you in the comments!No! Commercial real estate professionals are mostly just more people buying into these same fallacies! What we need is more people outside that self-deluding system saying "this is nuts, I'm taking $100 million from you" and resetting the entire system.
• spwa4
  TLDR: lowering the rent would create a direct problem for banks to convince investors the building is worth more. And since they've already given the money of the investor away (usually to construct the building in the first place), effectively the bank would have to pay back the difference if they did this.So it's a choice between honesty and profit towards investors ...Oh and obviously the "solution" is waiting for inflation to change the price of the rent effectively. So the real fix is for government to take the initiative and start paying people (by now, a lot) more.
• anon
  undefined
• guelo
  [dead]
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  weli
  It all comes back to fractional reserve banking. It is the root of all evil in our financial system. If Rothbard could only see the current state of affairs...