Why do commercial spaces sit vacant? (2025)

https://www.freerange.city/p/why-do-commercial-spaces-sit-vacant

by Redoubts • 1 month ago

172 248 1 month ago

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.

grebc36• 1 month ago

I own a commercial property, I wouldn’t want to have day to day rentals.

I don’t enjoy dealing with property management or the fees they charge.

Schiendelman9• 1 month ago

Tell me more - is your commercial property vacant? I'm a landlord myself, and the calculus gets very different when you have a long term vacancy.

mstade• 1 month ago

So, wework? :o)

sam_lowry_• 1 month ago

Gosh... someone finally explained the WeWork business model that is more reasonable than "walk barefoot and expect money to rain from the sky".

Schiendelman9• 1 month ago

Ha, cute, but no, very different. Wework is a tenant, and does significant buildouts. This would be "you can use the space for a few days or weeks".

I've seen companies provide some moveable furniture in a space like this - some desks, some extension cords - but it has to be up to the temporary user to configure and put things away when they're done.

adityaathalye• 1 month ago

Came here to say the same thing... A "building-sized financial product that incentivises extend and pretend" is fertile ground for an organised player like wework to "lease and sublet, except on a subscription basis".

viz. wework could apply the "single-use low-priced shampoo sachet" model [0] to SaaS-style rent-seeking of long-lived infrastructure. Infra. that is guaranteed to be always under-utilised... even in boom markets, because nothing functions at 100% capacity.

Adobe, as another example of (software) infrastructure --- i.e. traditionally, lifetime licence and ownership desktop software --- figured out their own "shampoo sachet" pricing. viz. how to make and ship desktop software product but kill-switch them with metered SaaS subscriptions.

The monthly price is just high enough to make gobs of cash for Adobe, while causing the typically-feast-and-famine freelancer to take the capitalist shellacking because it's just convenient enough. They can align software spends with active projects, and avoid the anxiety of cracked software doing nefarious things to their computers and data.

But over a long enough time, they pay Adobe a (presumably) huge premium over up-front priced software. And they stay locked into a planned obsolescence cycle controlled by Adobe... "The new version of your beloved editing software will only work with the latest Windoze which means hardware upgrade and oh, you have to do it because well we are soon kill-switching the current version you are dependent on."

Wework like operators can do exactly similar shenanigans with access to commercial infrastructure. Crowd out competition by aggressive long-term leasing on their buy-side, and on their sell-side build daily-subscription-dependency (buying ease, google-ish facilities which feeds into cult-and-status-signalling games), and convert a percentage of that into routine-subscription-dependency. Meanwhile also run rent-seeking games inside the main rent-seeking game... now you have a captive wallets who will buy the add-ons and extras because it's easier than walking two blocks for some cheaper and better alternative (e.g. food, coffee, lovely meeting space etc.).

edit: add reference for "daily sachet pricing".

[0] Buying less, more often: An evaluation of sachet marketing strategy in an emerging market

https://www.researchgate.net/publication/233676293_Buying_le...

yellow_lead• 1 month ago

well, isn't the rent estimated as the daily rate * 30 then?

Schiendelman9• 1 month ago

By whom, for what purpose?

zipy1242• 1 month ago

I can't comment on that specific structure, but pop-up shops are one method that in the UK councils will often help vacant buildings with for exactly this reason, with the upside that they may convert into permanent tenants.

GJim3• 1 month ago

Yup....

And the downside is loads of reasonably successful decent small shops in the UK now have to close after 12-24 months when the rents get jacked-up from sensible to astronomical levels. None of them become permeant tenants unless they are a front for money laundering (hence the explosion of nail bars and barbers on the UK high street) or illegal goods (dodgy vape shops).

https://www.bbc.co.uk/news/articles/cqj1rkqqrgro

Your local press (if yours still exists) will also be full of such stories.

Schiendelman9• 1 month ago

Isn't that through council subsidy rather than avoiding a foreclosure-trigger tenant agreement?

weli3• 1 month ago

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...

VulgarExigency• 1 month ago

Rothbard would probably lament that we have not yet turned children into "financial products" as well.

https://mises.org/mises-daily/children-and-rights

pjc50• 1 month ago

This is a crank opinion that is somehow everywhere. The building is real, it's not fractional.

weli3• 1 month ago

The bank lended more money than it has in reserves allowing for speculation and extra inflation of perceived value of an asset

Ekaros2• 1 month ago

You do not even need fractional banking for this. Same thing could happen without it. Someone lends money and is unable to pay it back. Both sides pretend that things will eventually go well. As at least on paper they have not lost anything until prices are realised.

weli3• 1 month ago

Without fractional banking the bank needs to be way more cautious when appraising an asset and be more conservative with the future gains estimation. Decreasing speculation and inflation of value.

inigyou8• 1 month ago

That almost describes fractional banking.

Sohcahtoa822• 1 month ago

How do you imagine people would get car loans and mortgages without fractional reserve banking? Where do banks get the money to loan out to people if they're not using the deposits from other members of the bank?

spwa4• 1 month ago

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.

flotzam2• 1 month ago

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.

roenxi• 1 month ago

It is worth noting that the reason they are pretending is almost certainly because of regulatory demands - if it were just between the bank and the owner they'd agree to do what is in both of their best interests - rent the space out at market rates. If there is a market-based 3rd party involved they will figure out that the bank is playing games and start acting whether or not the bank officially recognises the losses. Surely only a regulator or other similar heavily law-bound body would tolerate this sort of sillyness.

So as a blind guess, it probably depends on how legal incentive offers are. The axis being optimised here will be what the regulatory bodies can tolerate before they start handing out fines and punishments.

flotzam2• 1 month ago

Ah. That makes sense. Maybe the polite fiction would clash too obviously with accounting standards once the (de facto) lowered rent payments roll in: https://news.ycombinator.com/item?id=48567769

Could the situation be improved then if financial regulators started treating both versions ("temporary" vacancy / "temporarily" lowered rent) equally? Tolerate both or crack down on both.

bsder2• 1 month ago

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.

Anon4Now3• 1 month ago

If the property is devalued, the property taxes lower accordingly. Portland, Oregon has been facing this problem recently. The devaluations caused the tax revenues for the city to drop, which in turn has caused budget issues.

For example, "Big Pink" is an office tower in downtown Portland. It's last sale was for about $370 million. Out of desperation in a saturated market, the owners sold it last year for about $45 million. No one - the owners, the city, or the citizens - wants to have the vicious downturn of values, and there is no easy solution. Adding a vacancy tax just exacerbates the problem.

nairboon• 1 month ago

Adding taxes in a downturn obviously adds additional friction. One might ask, what happened to the tax revenue of that $370M transaction, where is it now when the city needs it.

Ekaros2• 1 month ago

As citizen I might prefer downturn of values. At least in medium term. Yes there is lot less tax income. But on other hand lowering values would mean lower rents which would mean lower overheads and potentially cheaper prices or more business being viable.

bsder2• 1 month ago

Adding a vacancy tax just exacerbates the problem.

The point of the vacancy tax is also to prevent the over speculation before it happens. If the operators know that they are looking at having to cough up more cash than they expect in the future, they might reign in the rampant real estate speculation. If the bank knows that they might have to start coughing up cash, they'll be more inclined to actually just drop the property into bankruptcy.

bandrami2• 1 month ago

Georgism FTW

advisedwang3• 1 month ago

The article touches on vacancy takes, and I think this has a similar effect. As the article says, the even if you apply a tax like this, lowering the rent would still lead to foreclosure, so won't happen. So piling a tax on top might make some revenue, and it might make some operators go bust but it won't actually directly* get the property to be occupied.

* maybe if the operator goes bust, the rents on the building can be lowered with a new property value for future loans. Then perhaps it can be occupied. But that's very uncertain, especially if this happens to a whole city at once.

jwarden• 1 month ago

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?

postepowanieadm• 1 month ago

How do you asses the value? You use the x last transactions. No transactions, no data, the last value remains.

arcza• 1 month ago

If a coffee shop is charging $25 for a latte and sells none, we don't say everything's fine because no sales data. The sales are $0 and it's not fine.

There is no escaping the powers of supply and demand.

AnthonyMouse11• 1 month ago

"Last value" is pretty meaningless when it's stale though.

Suppose there is a building that was built in 1970, last rented out in 1975 and then bought by a company that has used it as their own offices until now. The last transaction was in 1975, what's the value if they apply for a mortgage today? Surely they have some formula to use for this based on e.g. other buildings in the area.

Moreover, "failure to find a tenant" is also a type of transaction. It's the landlord acting as the high bidder for the space, essentially the involuntary edition of imputed rent, and implies something negative about the financial prospects of the building when it continues for a significant period of time or large percentage of units. Ignoring that it is either incompetence or some kind of perverse incentive.

lotsofpulp• 1 month ago

“You” require a continuous analysis of cash flow to continuously determine value, and proper management. A simple, and common, requirement in commercial lending called the debt service coverage ratio.

https://www.investopedia.com/terms/d/dscr.asp

Lower income for the building means lower numerator, which means being unable to meet the agreed upon DSCR, which means default. Whether or not the lender acts on this default is a separate matter, as they are usually loathe to get into the property management business, but renegotiation of terms and eventually foreclosure does happen.

makeitdouble3• 1 month ago

Here the bank cares less about annual income than future income.

Keeping it vacant only impact current income, lowering rent impacts future forecasts.

AnthonyMouse11• 1 month ago

Keeping it vacant only impact current income, lowering rent impacts future forecasts.

Does it though? Suppose you can't find a tenant right now because the market is soft but is predicted to improve in a few years. If you leave the unit vacant, you lose money right now. If you rent it out with e.g. a 3-year lease, you make more for the next 3 years than you would with a vacancy, and if the market price has increased by then you can increase the rent on the unit and either get it from the current occupant or the one you get to replace them in the high demand market when the higher rent causes the low-paying tenant to not renew the lease.

So taking a tenant now only improves prospects (you fill a current vacancy) with no negative impact on future returns. The only thing it does is imply that current rents are lower than before and future rents might be too, but a vacancy implies that even more strongly.

nitwit0055• 1 month ago

But that just means the bank is creating deliberately delusional forecasts.

I can build a building that charges a billion dollars a month rent, and sits completely empty. A forecast suggestion I'll be making hundreds of billions with no renters is clearly silly.

senordevnyc4• 1 month ago

Agreed. From the article:

Actual commercial real estate professionals could give you many more reasons than I can

I am so tired of listening to people with little to no experience with commercial real estate try and explain the vacant storefront thing. Maybe this explanation in the article is correct, but it raises more questions than it answers, and it’s unclear why we should trust this person’s explanation.

em-bee13• 1 month ago

do you have a better explanation?

zipy1242• 1 month ago

The policy is spelled out in the article? Banks have strict regulations that mean they have to have a certain amount of capital backing loans, and by revaluing a building you lower the capital that backs the loan, thus raising its risk, and thus leading you to break the regulation around capital requirements.

alper4• 1 month ago

The whole goal is not to write off the value of the property which you have to do if you rent it for less money than initially planned. That's not that difficult to understand is it?

NoboruWataya• 1 month ago

I mean, it's highly unintuitive, which I would say makes it difficult to understand. The main weirdness is that lowering the rent would force a revaluation whereas letting the building sit vacant for an extended period of time apparently would not. If this is truly driven by regulatory capital requirements, then it seems like a gap in the regulations.

Also foreclosure generally isn't the only option: the borrower could, for example, agree to repay part of the loan early, or give extra collateral, both of which would increase the LTV (and this would be better for the bank).

I'm not saying the explanation is wrong, but I don't blame people for finding it difficult to understand. Other factors contributing to this are probably borrower relationships/negotiating strength and the high costs associated with foreclosing.

doctorpangloss2• 1 month ago

Nobody said commercial real estate was risk free free money in some abstract financial product, other than the doofus who wrote this long "note." The hard fact is these are real buildings in real places that aren't really fungible at all. So it seems kind of ridiculous that CRE investors should be insulated from every possible externality. Obviously the right thing to do is to tax vacant properties, and then we shall see how many stay vacant and how many foreclosures there are (hint: owners suddenly find capital and are able to pay the tax or rent things out and nothing ever gets foreclosed in every one of these scenarios where it actually happens).

ReptileMan• 1 month ago

Think of it that way - until you haven't climbed on the scale, you haven't gained weight, even if your pants are bursting at the seams.

GJim3• 1 month ago

At some point, you don't need to stand on the scales for it to be obvious you are a fat bastard. Ditto, it's obvious to all that commercial property has lost a huge amount of value.

I suggest that like the dotcom/2008/AI bubbles, people will just keep dancing and making money until reality catches up and the music stops.

AnthonyMouse11• 1 month ago

The argument the article makes is that the bank doesn't want to admit the property is worth less than the mortgage because then they would "have to" foreclose.

The question is, why would they actually do that? The premise is that the landlord has to take out a new mortgage every few years and then the bank won't give them a new one if they're underwater. But that's only true if it's a different bank.

Let's take the same example. Building was expected to be worth $20M, landlord pays $4M down and takes a $16M interest-only mortgage. The only thing the bank ever expected from this was to collect interest on the $16M until it's paid back, which could be never and that's fine as long as they get to keep collecting interest.

Then we find out the building is maybe really only worth $14M. But the landlord is still making the interest payments on the $16M, and over time it will likely become worth more than $16M again due to inflation if nothing else, so why does the bank need to foreclose? The risk that they could "lose $2M" is by that point a sunk cost. It's the thing that happens if they do foreclose (or fail to renew the loan). They'd be calling in the note against an LLC that owns nothing but a building which is now estimated to be worth less than the loan principal. So the obvious thing would be to keep renewing it as long as the landlord continues to make the interest payments.

This feels like some kind of regulatory inefficiency or accounting scam where the bank is listing the mortgage lien as an asset and would have to take a write off if they valued it accurately and therefore transfer their perverse incentive to the landlord to prevent that from happening.

Notice however that doing that also hurts the bank. The landlord is collecting $500k/year at half occupancy, then paying the bank $640k and losing $140k/year to try to avoid the total loss of their $4M initial investment. Maybe they can do that for a year or three but the longer it continues the higher the probability that they run out of money. Whereas if they were collecting the $700k/year from renting out the entire building at lower rents then they could keep paying the bank its $640k/year forever, regardless of whether they're technically underwater. And if the landlord runs out of money then the bank has to take the $2M write off because they get a $14M building instead of collecting interest on a $16M loan. So the bank is really shooting itself in the foot.

shaftway• 1 month ago

Not if the economy actually does recover, or at least "looks" like it recovered on paper. Inflation helps with that.

The average inflation over the last 10 years has been just north of 3%. If you have tenants today that are paying $500k/year, in 10 years they should be paying almost $700k/year with 50% occupancy. If you can string the bank along for another loan then your valuation is $28M instead of $20M. As the owner you can effectively take money out in this scenario.

If the bank won't refinance at that rate, then you could lower your rents by a bit in the last year. If you lowered your rates back down to $500k/year then you invite a bunch of new tenants, and now you can show high occupancy again.

laughing_man• 1 month ago

It's not a question of what the banks believe, but rather what they believe officially. As long as they keep pretending the loss doesn't need to get accounted for.

pweaver• 1 month ago

What is being missed is that most commercial leases are much longer term than residential leases. Businesses will want to renovate the space and sign a 10 or 20 year lease. So if you lower the rent by 30% you will really be reducing the income of the building over the long term and face those consequences when refinancing. Landlords will frequently try to rent out unused space to temporary tenants like popups or non profits that they can move in without renovation and kick our on shorter notice to generate some cash-flow and keep the storefront occupied.

Sohcahtoa822• 1 month ago

Landlords will frequently try to rent out unused space to temporary tenants like popups

and Spirit Halloween.

nmfisher• 1 month ago

I doubt owners and banks actually believe this.

I worked for a commercial property company before, and yes this is exactly how it works, and yes it's just as stupid as it sounds.

Margin Call nailed it perfectly:

"It's just money. It's made up. Pieces of papers with pictures on it so we don't have to kill each other just to get something to eat".

BrenBarn9• 1 month ago

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.

alper4• 1 month ago

a larger number of people than we thought are participating in the same delusion

Congratulations, you have just described high finance.

dj_axl• 1 month ago

Let’s imagine the owner lowers the rent by 30% to fill the building.

Thought I'd comment with some concrete numbers. New buildings near me (West LA) are at $4100/month for a studio, where average rent in the area is $2300 for a studio, $2650 for a 1-bedroom. To fit in with "average" rent they'd need to lower 44% however 30% might be about right. Otherwise at 4% inflation wait 9 years? 1.04^9 = 1.42 ~ 100/(100 - 30).

joshka2• 1 month ago

Sounds like fraud with extra steps.

Scaled• 1 month ago

Yes, but seems unlikely to be prosecuted... The government directly benefits from higher tax valuation.

advisedwang3• 1 month ago

Who is being defrauded?

Who even is the fraudster? The operator of the building is losing money, so clearly they're not making a gain from anyone

joshka2• 1 month ago

Yeah, I probably don’t mean fraud in the narrow criminal sense.

The thing that feels fraud-ish to me is that the loss doesn’t just disappear because nobody books it. A huge amount of capital and useful urban land is tied up preserving a fictional valuation and someone is paying for that somewhere.

Maybe it’s not a clean “X stole from Y” thing here, but it still means real businesses are displaced, worse downtowns, and less of the city that could have existed otherwise. I haven't seen this sort of thing as much in Australian cities where I'm from, but have a lot in the US where I live.

So maybe a better way phrasing "fraud on the public commons" is closer to what I mean. Everyone involved is probably acting rationally inside the system. The public still gets stuck living inside the dead space created by the fiction created by it and ends up eating that cost.

dredmorbius3• 1 month ago

Somewhere in this chain are parties who are able to claim assets or collateral with values far in excess of actual market worth. To me that smells like the creditors are defrauding their counterparties.

The defrauded parties might include secondary lenders (to the property mortgage holders), regulators to whom financial instruments and solvency are being misrepresented, tenants who are paying higher-than-market rents, potential tenants who are denied market-rate rents on existing space, and arguably communities in which business and commercial opportunities are depressed due to the denial of access to real estate at market terms.

The operator of the building isn't the key point to fraud, as their interest (reducing rent to attract tenants) is actively thwarted by their creditors. The element of fraud is misrepresentation of true market value / income potential by projecting partial tenancy at elevated rates as if it were full tenancy, rather than the actual income stream at full occupancy (allowing for a nominal vacancy rate) at actually-supportable lease rates.

grebc36• 1 month ago

It’s very clear there is no commercial property investors here, nor commercial borrowers.

dazc• 1 month ago

Care to enlighten us?

grebc36• 1 month ago

Comments below.

There’s no actual problem here to be solved. If people feel they have better uses for a property they should put their money where their mouth is.

WCSTombs• 1 month ago

(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.

em-bee13• 1 month ago

another possible remedy would be to find ways to change the conditions of the loan so that building owners can continue to pay off their loan at better rates that match the income they can make from rent.

nemomarx• 1 month ago

If the banks would prefer to adjust their loans instead of defaulting on them I think they would just naturally do that? They may not want to take a longer loan though.

userulluipeste4• 1 month ago

Then you'll most likely get moral hazard. That is, rather of people acting in their own limits, as responsible business parties, they would instead be encouraged this way to make deals which they know won't be able to carry through, then after getting this metaphorical foot in the door, they'll expect "to change the conditions of the loan", i.e. beneficial intervention on their behalf (and a kind of bait-and-switch).

jojobas• 1 month ago

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.

themafia• 1 month ago

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...

pif• 1 month ago

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.

joshuahaglund• 1 month ago

It's not a law, it's a financial contract between a borrower and a lender.

I agree it's stupid, but that's what you get when you let the invisible hand bind human hands

bluGill3• 1 month ago

What is a better option? Before your answer, remember it sometimes really is the case that the economy is down and in two years things will recover and everything will rent out again. Your answer needs to smooth that out.

jamilton2• 1 month ago

Rolling average including vacant months as $0? And if that isn't smooth enough, add some smoothing factor, count vacant months as 10% of the last paid value, or maybe the first vacant month as 50% with further months decaying. Or some other fancy accounting that makes more sense than the current method.

userulluipeste4• 1 month ago

"remember it sometimes really is the case that the economy is down and in two years things will recover and everything will rent out again"

Where do we draw the line between reality and fantasy then? If the terms of a deal are not reflecting the reality of the moment (i.e. the office rent market demand quotes) but some figure people come up with on their own, then let's call it what it is -- gambling (in which case it should be treated as such).

BrenBarn9• 1 month ago

Smooth it out for who? If the answer is "the person who owns a $20 million building" then my answer is "I don't care".

trukledeitz• 1 month ago

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...

inigyou8• 1 month ago

aren't we in a zero reserves era?

ChrisArchitect• 1 month ago

Previously: https://news.ycombinator.com/item?id=46305123

alper4• 1 month ago

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.

teddyh• 1 month ago

The ICC? <https://en.wikipedia.org/wiki/Internationales_Congress_Centr...>

inigyou8• 1 month ago

I was thinking Am Tacheles but who knows

Animats• 1 month ago

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

dietr1ch4• 1 month ago

This just says that they have too much power and society would be better off having a vacancy tax that aimed to reduce abuse by landlords while at the same time ensuring the city doesn't look like post crisis Detroit, which makes it worse for everyone.

ryanmcbride2• 1 month ago

Yup. Unfortunately landlords have plenty of time to lobby against things like this while the rest of us are busy contributing to society.

limagnolia2• 1 month ago

Most of the US does, its called property tax. Or in some cases, land value taxes.

jujube3• 1 month ago

The city doesn't want commercial real estate values to collapse either, since buildings are taxed based on their value. If extend and pretend is ending, tax revenues are about to take a nosedive.

bluGill3• 1 month ago

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 too is a "it depends". For a failing mall, getting anyone into the empty spaces starts to become important to the other tenants because anything that draws people into the mall is a potential customer. Customers will even no shop you just because they know there is nothing else in the mall. Thus some malls near me have museums and the like inside - anything to get traffic.

AnthonyMouse11• 1 month ago

A building half rented at rent X is more profitable than a building fully rented at rent 0.5 X.

That's assuming rents would decrease by half, and also that it's still half occupied. A building half rented at X isn't more profitable than a building fully rented at 0.7 X. A building 25% rented at X isn't more profitable than a building fully rented at 0.5 X.

NoMoreNicksLeft• 1 month ago

If the space is commercial, it's more valuable for the tenants. More traffic, more random sales opportunities. If half-occupied, it looks like a ghetto, and they only get deliberate traffic.

LoganDark2• 1 month ago

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.

Since when have tenants known each other's rents?

solomonb• 1 month ago

The current tenants will see the listing for the vacant unit.

amanaplanacanal• 1 month ago

Is this one of those secrets, like you aren't supposed to ask your coworkers how much they are getting paid?

BrenBarn9• 1 month ago

That can crash the rental market.

At this point I think that's exactly what we need in a lot of places.

throwburn2026052• 1 month ago

I was told capitalism made for efficient use of resources.(inb4 oh you sweet summer child)

If the land isnt being used efficiently the owning entity should fail and a new productive use made.

Whether thats tearing it down for the public to get better use of the land; rerouting roads, community swimming pool, park etc. Replacing with a more economic building; factory, stadium, appartments (zoning not withstanding). Or a more productive entity getting use of it.

Bagholders being entrenched and protected are becoming a weight around the neck

goodpoint• 1 month ago

That can crash the rental market

...as if it was a bad thing.

gonzalohm• 1 month ago

It's bad for one person only, the landlord, which happens to control the rent price

advisedwang3• 1 month ago

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.

BrenBarn9• 1 month ago

My preferred solution is "whoever has the most money gets the risk".

quickthrowman• 1 month ago

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.

PaulHoule3• 1 month ago

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.

brikym• 1 month ago

Capitalism tips half the milk out and triples the price for the other half.

gman2093• 1 month ago

Property taxes are too low.

tomcam• 1 month ago

I have been wondering this for 25 years. Now I understand why New York City has so damn many empty buildings.

adverbly• 1 month ago

Land value tax would fix this

rossdavidh2• 1 month ago

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.

senordevnyc4• 1 month ago

Wait, were they not available at $x, or not available for < $x? Because if it’s the former, then this article doesn’t really explain your experience, right?

evo• 1 month ago

Could be this (from the article): "Another scenario I can think of is that the financial model for the building requires spaces to be filled by “credit tenants,” meaning name-brand businesses of a certain caliber and creditworthiness."

Might not be available unless your name ends in 'tarbucks'.

Nemi3• 1 month ago

Another thing that I read about on this topic was that once a land lord has gotten into a groove of extend and pretend they lower their costs and cut out the overhead of property management. This means that if they took on one tenant they would have to ramp up property management costs (and potentially refurb/improvement costs) and they are not willing to do that, so you end up with the situation where you can't rent a property even if you want to.

rossdavidh2• 1 month ago

Several instances of both. In at least one case they told us that they wanted to rent to a big-name tenant at a larger space in the same complex, before they started renting any of the smaller places. What seemed odd to me is that they would nonetheless put the property "on the market", i.e. online listing, even though if you called up they would say it's not for rent. I figured it had to be to claim that it was "available for rent" in some technical sense, but I didn't know why.

In others they would just have too high a price, and it is still empty six years later so they are clearly not unaware that they have it priced too high. Simple math showed they would be better off renting at a lower price than going years without anything, but it was quite common so it didn't seem like it could be simple stupidity.

The test, I guess, of this explanation is whether or not the flow of money out of private credit causes the end of "extend and pretend", and the market finally clears.

BLKNSLVR• 1 month ago

One element of this that I find interesting is that from the outside it can look somewhat like a decentralised monopoly given that it affects all (or most?) commercial rental properties; it looks like collusion to keep rents high. Where it's actually systemic to how commercial buildings are created in the first place: they do not account for a downturn, or at least a downturn on the scale that Covid wrought.

Store-fronts were already in decline due to 'internet shopping', but Covid probably brought a lot of physical close-down plans forward, such that any likelihood of recovery should be measured in decades or, more realistically, start being written off progressively to minimise a big hit down the track.

The longer extend and pretend lasts, the bigger the hit will be when it that strategy breaks.

fyredge• 1 month ago

If income stream is the metric, then I don't see why 'real' income stream can't be used to evaluate the value of the building instead of the last transaction. If the building sits at half occupancy, then the income stream is 500k, not a theoretical 1M.

prepend4• 1 month ago

Is this something there’s a federal lever for by forcing commercial loans to mark to market? So if I go to refi my $20M building and nothing is actually rented for 5 years, I can’t use list price and need to use market price for rent.

Or could be a shareholder lawsuit for banks as they are putting out riskier loans than the rate reflects?

djbelieny• 1 month ago

Seems to me that what is required to fix this is a complete overhaul of the valuation system and then tighter foreclosure protections, only foreclosing on defaults, more like residential real estate.

dzonga• 1 month ago

people like to complain about strip malls or those little office parks.

this is why those win - it's cheaper to build & maintain them & easier to turn a profit on them.

the fancy big glass downtown skyscrapers are mostly for ego.

usually the tallest one determines who has power in that economy/city.

way back then churches used to be the tallest.

now in most cities it's the banks.

in SF - it's SalesForce Tower i.e tech is dominant

Why do commercial spaces sit vacant? (2025)

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