njudah
Over and over we hear these stories of businesses being pushed out by excessive rent increases, only to then have the space vacant bc it's too expensive.
Can someone explain the logic of this? Are there 1000s of Other Businesses just eager AF to pay high rent and just haven't arrived from Geidi Prime or wherever?
mark
@Jackiemauro @mekkaokereke @njudah @sanae real estate in this situation offers interesting leverage. If you lose out on a bit of rent, but can now report the value of the building as higher (because the strategy in valuing commercial is based on potential by sq ft). Now your suddenly increased value is collateral for a bigger loan. There is probably losses that can be recorded for the Un used space as well
mekka okereke :verified:
If I bought the building long enough ago, I might have payments on it that are so low that I don't care if it sits fallow for a few years, just as long as when it comes back it comes at a much higher rate.
The apartment on top might cover my entire loan payment.🤷🏿♂️
JackieM
@mekkaokereke @njudah @sanae but strictly speaking this doesn’t make economic sense right? If right now I’m charging $10/mo and in a year I can charge $150, it’s true that my $100 will cover the lost money, but I would be better off charging $10 until the market picks up and then raising my rent.
Maybe I just assume it will take a certain amount of time to find a renter willing to pay a higher amount and it’s worth holding out for that? But it’s weird to charge more than the market supports.
JackieM
How does this work if it’s a building that’s just one shop and maybe some apartments on top? I still see so many of these shopfronts sitting empty.
njudah
@sanae I think a lot of commercial landlords in SF got used to the 90s boom and just assume it’s going to be that way forever regardless of the economy, societal changes, etc but that’s a guess not a fact
mekka okereke :verified:
Say I'm a commercial landlord and I own a 10 unit building in SF. Each unit rents for $10K a month. Each unit is occupied. I make $100K a month.
SF has a Gross Rent Multiplier of ~14. So my building is worth: ($100K * 12 months * 14). $16.8 million.
I raise rent on all tenants to $15K. Everyone pays the new rent, except for one beloved neighbourhood restaurant, that moves to a new location. That unit is now empty. I now make $135K a month. Building value is now $22.7 million.🤡
sanae :vbike: :vbus: (SF)
@njudah I think a lot of commercial (and other) landlords are just bad at business.
They assume they should be able to get ever increasing rents, evict the business, and refuse to rent to anyone who won't pay the rent they think they deserve. And because commercial taxes are low and they mostly have a lot of money, they can be stubborn in the face of reality for years without ever being forced to change anything
brad m
@mekkaokereke @Jackiemauro @njudah @sanae Banks are involved too: won’t allow landlords to lower rents or shorten lease duration
“the banks, in many cases, won't let property owners lower their rents enough to fill their properties”
“landlords are sitting on space they can't rent, financed by deals they can't alter”
“If you have a credit tenant (major brand) with a 10-year lease, arguably the building is worth more”https://www.businessinsider.com/bank-financing-urban-planning-pandemic-retail-apocalypse-vacant-storefront-2023-10?op=1
mekka okereke :verified:
Missing out on that rent doesn't change the landlord's lives in any way in many cases. They're willing to just sit on the vacant.
Some cities handle this by charging landlords a fee for having vacant storefronts. Some people think this is mean to landlords! But really, it's just changing the landlords' calculus. 🤷🏿♂️
Those cities want fewer vacant storefronts, so they make it more profitable to have a lower paying tenant than a vacant.
mekka okereke :verified:
Part of the problem is that there is no pain for landlords that have empty storefronts.
If I told you to take $5 out of your pocket and put it in a drawer, and wait an undetermined amount of time, (maybe 1 month, maybe 3 months, maybe 6 months, maybe a year, but eventually, that $5 turns into 1 million dollars), you might do it! You won't miss that $5. But you want the million.
Alternatively, you could put that $5 in your checking account and earn 2% a year on it.
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