Someone mentioned that for accounting reasons property portfolios may be better sitting empty than offering tenants a discount because their yields look bad?
In: Economics
Plenty of poperty owners can afford mortgage payments just fine without tenants, or more likely, they bought the property outright with cash. Having assets like property is a good way to hold onto your wealth for a long period of time. Banks usually encourage wealthy clients to purchase commercial properties and make it very easy and quick for them to do so even if they have no real desire to use the buildings.
Having tenants and being a landlord is a massive headache. The people who own commercial properties aren’t trying to make money but just hold onto the wealth they already have. The rent that they would make would be like pocket money.
Commercial leases are typically *much* longer than residential. Most residential contracts are for a year at most. Commercial leases typically *start* at five years and can be as long as 20 or 30 year leases. Even short-term leases of less than one year are typically part of a contract where the tenant is expected to be renewing every year for the next 30 years.
Given how much effort goes into commercial leases and how money there is riding on the lease, it’s better to let the property sit empty and lose a little money than to get locked into an unfavorable contract for a decade or more.
I think the other comments are overstating the value of the real estate. Yes, commercial real estate is very valuable but it’s valuable *because you can charge rent*. Cities don’t appreciate it when companies let valuable commercial property sit empty, because it’s bad for the businesses around it – to say nothing of those businesses. If it’s something like a shopping center, one location sitting empty will drag down the value of the rest of the property and the rent that they can charge. While it’s true that they might be able to afford to sit on the property and let it accrue value simply by existing, nobody wants to let money go for no reason. If they can get a lease, they will.
They aren’t worried about tenants being a headache because that’s literally their business. Nor are they worried that giving one discount will suddenly cause everyone else to demand discounts. Again, commercial leases are *long*. The bay next to you getting a slightly lower rent per square foot than you negotiated might piss you off, but you can’t renegotiate for another five or ten years so what are you going to do about it? And then by the time the contract is up for renewal, the whole economy of the country may have dramatically shifted. So, although previous rent agreements will inform the negotiations, it’s not nearly as simple as “Well, you gave that guy $X/sqft, so give me that, too.”
There are also many more things to negotiate for commercial leases like common area maintenance fees, tenant improvement allowances, signing bonuses…The fees are rarely fixed and will increase every year to make up for expected inflation and increased property values; you need to negotiate that rate. Rarely, rent may even be tied to sales, so if you make more, you pay more. There is an entire industry built solely around auditing existing contracts to find money that everyone just kind of forgot about because 15 years ago you agreed that the tenant would pay for common area maintenance but then the tenant forgot to include that and the property management company didn’t notice because an extra $200/month in CAM is absolutely nothing compared to the several million dollars in rent coming in from the entire shopping center and hundreds of millions coming in from every property they’re managing.
For the record, the idea that swaths of real estate holders are just sitting on empty buildings to jack up pricing is false.
It’s not true now. [Occupancy rates](https://fred.stlouisfed.org/series/RRVRUSQ156N) are the [highest they’ve been](https://fred.stlouisfed.org/series/USHVAC) in 30+ years.
But it’s also *never* been true. It’s *extremely* rare that it would be worth it to a landlord to leave an apartment vacant. Maybe for a month or to to try and get a better deal, but that’s going to happen anyway and definitely not long-term. Every month it’s vacant is 100% lost income–and even a cost, for minimal utilities and taxes. It doesn’t take long for the increased rent to not make up for the months and months the apartment sat empty.
There may be some edge cases–there always are–but the stats show it’s not the norm.
(Commercial real estate might be a *little* different since they tend to have longer-term contracts and thus it might be worth it to wait for a higher price to “lock in”, but that’s different.)
If the property sits empty you can claim the rent you didn’t receive as a loss on your taxes, as well any maintenance costs related to the property.
Since there is no tenant or lease to abide by, what you set the “rent” at is arbitrary, as long as it’s not obnoxiously high.
If your real estate portfolio is deep enough you can potentially play the numbers in a way that your “income loss” from that property becomes a net gain. Or, at the very least, it’s less damaging than leasing the property at a discounted rate.
The other consideration is that once a property lowers the costs to lease, it brings down the average rental costs in that area. Simply letting it sit empty allows them to keep the rents higher on properties that aren’t currently vacant.
This is why nearly 1/3 of all commercial properties in NYC are vacant. The rents are so incredibly high that very few business could operate out of them and ever make a profit. But no one wants to lower their rents as that would allow their current tenants to potentially negotiate a lower rate when their leases expire.
This only applies to the U.K.
You only pay business rates on occupied commercial property. So if the property is empty then there is no rates to pay on it
Secondly the property is worth a multiple of the rental value. so if you reduce the rent, you reduce the book value of the property
One thing I’ve heard is that property valuation is at least partially based off the set rent price. So if they lower rents they end up re-valuing the property at a lower level which can cause other problems with their loans. So they’d rather take a hit on operating costs than a hit on asset valuation.
Prop 13 in CA means they pay the tax rate of decades ago. They can easily leave it empty until they get a favorable tenant.
Did I miss a memo some where? When did ELI5 become ElI50 with a degree from Harvard. Everybody’s response is like 4 paragraphs long lol
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