I grew up in a town that had a booming downtown strip for as long as I can remember growing up.
Then around 2008 you started noticing stores closing up.
Word on the street was that rent was just too high to make a profit, and a lot of the retailers who had been in the same store downtown for decades closed up shop forever.
Fast forward to today, all of those stores and more are shuttered... the rent is still too damn high... and the absentee landlords that own these buildings are actually rewarded with property tax benefits for keeping them EMPTY!
How crazy is that?
Some rich guy owns almost every single building downtown, is asking $75/foot, and gets property tax breaks when his buildings sit vacant... slowly smothering the downtown vibe with an air of death.
The value of his building's keep increasing so he doesn't care. He doesn't live here.
IMHO retail properties should be taxed MORE if they sit vacant for too long, and that increased tax burden should go up exponentially every year that the building sits vacant.
A vacant retail building should be the landlord's problem, not the town's.
This is sort of the same myth as the "I shouldn't take more money because it will bump my tax bracket" (which makes no sense since tax brackets are marginal).
However, it is true that landlords will often have properties empty with rates at what seems to be higher than the market-clearing price.
The only explanation for this I've heard that makes sense is that rents/tenants are bimodal: the average is misleading.
There's one group of tenants (cafes, indie hardware stores, hobby shops, etc) can afford one rent, while Starbucks, Citibank, and Panera can afford a second, much higher rent.
Which tenant you get is a lottery, so as a landlord it may be short-term beneficial to set the rent at the higher mode and "wait out" a high quality tenant. And yes, long term this can be a collective detriment.
 Except for things like the EITC, and this was a strong criticism of it.
I think the issue is more with capital appreciation. Yes, month to month you're still losing nominal dollars for not having a tenant, even with lower taxes. However, that land/building are likely still seeing appreciation, even in markets that aren't "hot".
Some friends of mine recently bought a building to open a restaurant. I'm pretty sure it had been vacant for more than half its lifetime, yet trying to negotiate with the owner was a nightmare. They simply didn't want to budge and were apparently very content with saying 'No' to offers and letting it sit there for well over half a decade empty.
This makes people really want to rent out places, and you see a much higher occupancy than in other countries (you still have squatters, which is a big issue, pushing in the opposite direction so it's still not perfect).
The thing is that you pay a % of the rent, so you'd have to rent it out really cheap for it to make sense. I don't know if you can have an inspection or something happen if you rent it ridiculously cheap.
Example: you rent a place valued at 100k€ (mkt price: 160k€) for 1000€, or the "taxes for the virtual rent" is calculated at +0.9% of the value yearly, which is 75€/month in taxes. Let's say you pay 10% taxes on the rent, so it's either 100€ or 75€. That means the company would need to rent a 1000€ apartment for under 75€/month for it to make sense to you. The sane thing here would be to rent it out normally, you just need to put some effort to avoid squatters (no credit system in Spain).
This applies for normal residencies, I don't know about comercial real estate (though I would expect the same applies). In construction, allowing family to live there, land, etc do not have these taxes.
From the commercial landlords I have talked with SF, the lease term length is the main contributor to vacant retail spaces. When a retail shop moves in the lease term can be 5-7 years. Retail shops invest up to 50-100k fixing up the space - they need the guarantee they can rent the place for a lengthy time. Thus, the landlord needs to be sure the retail tenant has the capital and credit to last. So, landlords will hold out - rather than risk a bad tenant for 7 years. And quite frankly, there just aren't enough business models that work in retail spaces. If you have a brand new tenant with a 7 year long lease - this could also wreck your chances of a sale if the new owner wants the space cleared out.
Also! Commercial tenants have the protection of LLC (or c-corps, etc) - so if their "Grape vape LLC" doesn't work out - they can just walk - and as a landlord you can't go after them personally.
In the best case scenario the landlord gets a 7 years of steady rent. In the worst case, they get a few months and the store goes out of business (breaking the lease).
I see no reason why you couldn’t repeat that ad infinitum?
Everytime a lease is signed there are transaction costs and they are not immaterial.
Your one property (or a few properties) being empty isn't moving the needle enough in terms of the price of real estate to make up the difference from lack of rent.
Havent you seen the fed's balance sheet?
It was perceived as cheaper to have a few vacant units at $2000 a month instead of renting them for less and lowering the rate for anybody renewing their lease.
If you rent at a reasonable (for the area) rent (say, $15/sqft), then you get the money, true, but it may not beat the tax break.
Accounting is weird.
I learned this, back in the late 1980s. I was wandering around Ann Arbor, and marveled at all the "FOR RENT" signs. The person giving me the tour explained why they were there.
I am no expert, and don't know much about tax whatnots and real estate, but that was the story they told me, and they stuck by it.
This is especially true of buildings they were holding for sale to property developers.
And if you don't want to manage a property, property management companies exist for that exact reason.
I think the reason is that the repairs any tenant would demand would be costly, and he paid next to nothing for the buildings. So, in his calculation, he makes enough from appreciation (assuming an eventual sale) that he has no need to rent it.
Once you have enough capital, you no longer need to optimize at this level. He may be leaving money on the table, but he's wealthy enough that it doesn't matter. He can afford to be lazy and still turn a profit, while letting the community bear the negative consequences of his vacant eyesores until he inevitably sells them for dozens of times what he paid.
Speculation is the real value in real estate. If you don't need money from renters to make your loan payments, why even bother with them?
That sounds like a good summary of the whole problem.
I'd love to be able to take my peak monthly income, claim "missed income" off that peak of my current monthly income, and take a tax write off my personal taxes.
The tax rates still aren't 100% there but even something like 50% may seriously discourage people.
The reason is, the building is financed based on it's calculated property value, and commercial property value is simply a multiple of the listed rent. Whether or not you're collecting the rent is immaterial -- after all it's perfectly normal to buy a vacant lot and built a building on it, or to buy an old warehouse etc. and refurbish it, etc., such that the bank has to make the lending decision based on projected rent rather than actual rent. So this is what they do.
The problem is only when the projections are proven false, such as when you lower the rent to fill the space. If you do that, the bank must now lower the value of the building, which can easily make the building worth less than the loan.
Further complicating things, commercial properties are usually on short-term financing, for example a 5-year "revolving" loan where the developer pays interest only for 5-years and then is expected to pay off the loan all at once (unlikely) or refinance (99% of the time).
So, suppose the building has a $8M loan based on a theoretical $10M valuation. The developer is making the payments, whether from the partial rent, or his personal bank account, even though the building is vacant. The loan is now due to be refinanced.
If the developer says, "I'll get a tenant in here any day now," the banker can nod and say "I believe you," and refinance the building. The developer keeps paying the payments and doesn't have to go bankrupt. The banker doesn't have to foreclose and write off the loan as a loss.
Conversely, if the developer had cut the rent in half to get the building full, the banker now has to lower the building's value from $10M to $5M, and therefore the maximum loan is reduced to $4M. But the developer owes $8M to the bank, and doesn't have the money to pay it off. Not even the $4M to cover the difference and refinance the rest.
In this scenario, the developer goes bankrupt and the bank has to foreclose on the property.
Thus both parties choose "extend and pretend" as the rational action, even though it's not good for the developer and terrible for the surrounding community.
From my friends in the real estate business, my understanding is that a shocking percentage of commercial real estate is currently operating in this "extend and pretend mode," which ironically just reinforces the pattern, since all the players involved know that if the banks started forcing the issue they would likely kick off a chain reaction of bankruptcies, write-offs, and a destabilized real estate market that would lead to huge losses for most or all of them.
So instead, "this is fine."
Making everybody who wants to live in a stable home get involved in the real estate market is sort of like making everybody who wants a computer buy tech stocks. It's insane, and leads to a completely insane market. I own a house despite the fact I know nothing about houses and don't want to own a house, because the alternatives are far worse.
When you get a situation where the incentives are all set up to make people act in a way that's not only destructive, but also blatantly unsustainable for everybody involved, it means the government is sleeping at the wheel.
And there's a lot of factors making rent sticky: the financing structure you mentioned, maybe the bimodal distribution of tenants I'd hypothesized.
In residential there's also the "unintended consequence" of quite a few tenant's rights laws that makes rent extra sticky (why do you think NYC landlords require proof of 40x monthly rent as income?!)
But what doesn't seem to bek
the case is simply chalking it up to "tax breaks" which is a common boogyman.
I'm talking about the "move in special!" "one month free rent", etc. It would seem more rational to reduce the rent by 1/12th...
They're intended to protect existing tenants, but they also discourage landlords from reducing rent if they think rents will come back up in the future faster than they're aloud to raise them.
So instead you get a one-off discount.
the question is really who should take the risk of getting the projections wrong, and the answer is straightforwardly the bank, although the developer/owner has to act in good faith in both the financing and the operations. a new development is basically a finite business, and projecting the cash flows, and therefore the ultimate valuation, is risky. loan officers' principal job is to assess (and accept/reject) that risk.
all that said, we need to stop propping up banks and loans gone bad. without real downside consequences, we get misallocation, as we plainly see in many commercial real estate markets.
> if the developer had cut the rent in half to get the building full, the banker now has to lower the building's value from $10M to $5M, and therefore the maximum loan is reduced to $4M. But the developer owes $8M to the bank, and doesn't have the money to pay it off. Not even the $4M to cover the difference and refinance the rest.
Why do they still owe $8M if the loan was changed to $4M?
And why can't they pay it back since now they have a full building of paying tenants compared to a previously empty building not making any money?
The loan wasn't changed to $4M, the appraisal of the property was. They bank already paid the $8M to the previous owner (and their bank), but if it gets revalued, then the bank only has $4M of collateral against an $8M loan and starts looking for that lost money.
Not everyone can get the deep pocket tenant. The staggering number of empty store fronts reflects that.
I think the real answer to your question is “financialization” and zero interest rate policy.
Banks don’t hold loans, they make fees for issuing them and sell them off as securities. There’s so much money chasing so little return that it’s very easy to sell anything that looks “conventional” even if the market really ought to be more skeptical. Since almost everyone involved makes their money off the transaction, they have so many incentives to keep the party going, even though it sure seems like it’s unsustainable and must eventually crumble.
Good for you. My inlaws live near several. They suck.
They inherit the property. To them, it is too much effort to try and rent out versus write off the loss on their taxes.
(all personal experience of course and idk how much this affects anything at large)
I think this is a nice taxation strategy given that land can be considered a common good (and it's finite, and you didn't make it).
Of course the effect could be amplified by add-on adjustments, but one of the beauties of LVT is the simplicity.
This isn't really theoretical, I've been to cities where this type of taxing system was in place and it's completely different than what I find in, say, Toronto where giant big box stores take up a huge chunk of major downtown streets like Queen St.
"Land" in economics means natural resources. Land includes three-dimensional space; natural materials such as oil, water, and minerals; wildlife and genetic endowments, and the electro-magnetic spectrum. Nature and natural resources are prior to and apart from human action.
I would whole heartily support replacing taxes on Labor (aka income tax), with taxes on economic land, equality and natural moral law implies equal self ownership. Therefore they should fully own their own wages and products of their own labor. However self-ownership does not apply to what a person has not produced namely natural resources aka economic land.
I however can not support adding a land value tax in addition to our current tax system
By what metric? According to you, they're in an area where people don't want to be and there are no renters. If your description is even close to accurate, the value of the buildings is dropping.
Who wants a condo in the middle of nowhere? The replace-it-with-condos plan requires the area to be growing, not shrinking.
Amazon, e-commerce, and remote work mean towns can be growing at the same time as their central business districts are shrinking.
Imagine a liveliness scale, which is the amount of bars, restaurants, independent stores, coffee shops, music venues, theaters, arts/music expos, and other such things available in the neighborhood.
If the top neighborhood for liveliness in some city last year scored 84 on that scale, but this year it went down 10 points to 74, because of hiking rents and commercial buildings unwilling to lower their prices even if it prices out all such business from the area, preferring to even keep units vacant instead.
Now imagine all other neighborhoods similarly dropped 10 points on that scale. So the next one up last year might have been worth 80, but is now worth 70.
That makes it that the same neighborhood is still the most lively, and therefore still the #1 place where renters hope to live, but overall the entire city is getting less lively. And now imagine this is happening in all cities, making every city similarly impacted.
That would continue to keep prices distributed the same between neighborhoods, the most desirable neighborhood is still the most desirable one, yet the overall liveliness of everything is going down, while simultaneously having prices rise.
I think most people are observing this phenomenon, but the question is why the hell is it happening? Why are landlords choosing to price rentals above market, losing their existing tenants in the process and yet having it vacant as no other business can afford the rent either?
> And now imagine this is happening in all cities, making every city similarly impacted.
I can imagine it, but I also know that it cannot occur in reality. Some places go down; some places go up.
It doesn't though, that's why you see all those vacant commercial spaces, it's not because no business wants to move in, it's because they don't want to move in given the rent being asked.
The current businesses are forced to close, but not because they are being priced out by someone else, they close because the rent gets jacked, and then the space stays vacant for years after they closed, and yet the rent is never lowered back down.
This goes against common sense, that's why it's so strange and clearly something is broken. You'd expect that the rent would adjust to the market, if no business is willing to rent for the asking price, you'd expect the rent to lower, but it doesn't. You'd expect the value of the building to go down, but it doesn't.
I think you're insinuating that the neighborhood is dying down, because people are choosing to move out or something like that, but that's not the case.
> In your model of real estate, there is no such thing as a ghost town
That's right, because we are talking about major cities. The cities are not dying at all, it is only their liveliness which is. The cities still have all the jobs, and they still have all the infrastructure.
If a neighborhood used to have some of the best coffee shops, and greatest restaurants and comedy club, and those close down. The people in that neighborhood are not going to choose to move out to a small remote town which never had any of that to begin with. They'll stay in the neighborhood, because they go to work at some office job downtown or because they go to the university nearby, or their kids go to the school. Also, the neighborhood might still be livelier than the suburbs which often score very low on my hypothetical liveliness scale, as suburbs generally simply have no such business at all to begin with, only offering residential housing, and even often lacking any walkability.
Edit: I realize maybe saying lively is a bit confusing. I'm not talking about population going up/down, I'm talking about businesses in a neighborhood that create things to do for the people living in the neighborhood. If a neighborhood is only residential, it's not lively, while the more it has of parks, coffee shops, restaurants, bars, libraries, bowling alleys, arcades, bakeries, cute shops, etc., and the more those things are well decorated and designed, and accessible to quickly go to or hop from one to another, the more lively it is.
And HN did its part to kill it too. Can't have music shops when you destroy physical music as a concept; can't have bookstores when no one wants to buy books. Movie sales and rentals? Internet. Electronics? Online category killers. Second hand stores? Ebay.
The rent jacking up is an issue too, but even if it were lower, you still wont get businesses. There's been a big change in retail overall due to the hyperefficiency of the internet; the kind of stores that existed pre-net can't compete.
Have we read the same article? That's not what it says. Where's your source that shows that?
You're focused on stores that I don't even include in what I'm talking. I'm specifically mentioning bars, restaurants, music venues, theaters, clubs, coffee shops, arcades and all such things. I'm not talking about retail stores.
Though I think small boutique stores can be a part of it, and the article specifically calls out an example of a local bookstore that the landlord was trying to push out by raising rent, not that it closed as part of waiding demand. And then it went to say this particular landlord is infamous for doing that and sitting on vacant units.
> the kind of stores that existed pre-net can't compete
That's true for a lot of retail stores, but also doesn't explain why commercial rentals are sitting vacant.
So the other route is we end up subsidizing small businesses to pay more for rent than they can afford (or to your point, should be charged). This means you the local resident are footing the bill either with local taxes or a federal subsidy.
I don’t have an answer here but these things get complicated quickly. Setting an exponential tax on a vacant property (or any property) sounds like an easy way to drive investors out of the market. Then your downtown is dead either way.
Curious other thoughts or maybe a solution to vacant holdings.
The incentives are nearly identical.
The only possible solution is to make housing a bad invenstment, but that's too unpopular.
I.e. Vancouver's Vacant Homes Tax (11674) http://bylaws.vancouver.ca/11674c.PDF
Honestly there's something broken with the way fundamental property laws work when we allow something like this.
> While vacancy rebates provided some businesses with a needed reprieve in fiscally difficult times, they were criticized for, in Bradford’s words, “incentivizing owners to keep stores empty while they waited for values to get high enough for redevelopment.” A review ordered by the Ministry of Finance showed that the policy had exacerbated the issue of “chronically vacant” street-level commercial real estate. A well-meaning initiative to help struggling property owners had been thoroughly negated through exploitation and speculation.
I'd imagine: having shops, instead of vacant properties. And extending to residential: having more housing supply.
So we want to (1) incentivize landlords to put their property to use, instead of letting it lay vacant & (2) avoid making property owning so risky that no one wants to do it.
It seems like a non-use tax + national economic hardship exception takes care of that nicely.
Taxes on your limited-supply property (e.g. city cores) increase at 30/60/90/180/360 days of vacancy. Where vacancy is defined on average across a timespan (to prevent resetting timers with faux leases). And then coupled to an external index (e.g. national occupancy rates for property type) that decreases the increased tax if there's a deteriorating economic period.
We want it to be financially painful to not have a tenant in your property. To the extent that landlords are incentivized to go to the trouble to offer their property to the public for use.
Nobody in their right mind would start a shop there, much less for extortionate prices.
However in many area's "downtown" is not a good place to be, there is limited parking, little public transit, high crime, high vagrancy, and the city does not spend much in keeping up their end of the bargin either.
I know more than a few places that left downtown not because of increasing rents, but because of decreasing customers and other issues with being downtown, they moved a little outside the city core where they can have their own parking lot, their own good signage with out tons of regulations, get deliveries with out issue, etc... and the business boomed.
Me personally, I live in the 2nd largest city in my state, I refuse to go to the down town area. There are plenty of businesses down there but there is no parking, higher prices, smaller shops, and it just is not enjoyable to me. I do not like high density...
"Wrong" is subjective. I am sure these is a ton of government spending believe is wrong or outside the role of government that you find to be a requirement of government
Some municipalities have a "vacancy tax" to address this. Buildings on good land shouldn't sit idle for years, that's not a good outcome for society.
But, frankly, even if I'm wrong about that, the point of my original comment is that the OPs claims make no sense, because, again, the implication that they can come out better under the current regulations by keeping the units empty is incorrect. It is arithmetically wrong.
They would make much more money if they leased the units.
So whatever explains these empty storefronts, it isn't this:
> Fast forward to today, all of those stores and more are shuttered... the rent is still too damn high... and the absentee landlords that own these buildings are actually rewarded with property tax benefits for keeping them EMPTY!
Unless what OP means by "[they're] rewarded with property tax benefits for keeping them EMPTY!" is that they lose money relative to their other options.
I don't know why this explanation appeals to so many people; it doesn't survive a second of scrutiny.
the problem happens when an absentee landlord owns a dozen buildings on main street. if a third of their properties are empty and they lower the rent to the point where people will occupy them, it drives down the rent for the other two thirds of their portfolio. if they keep some properties empty to hold the rents artifically high, and they don't have to pay property taxes and management fees on the vacant ones, they can just hold the properties for free while the land value appreciates.
Property tax abatement depends on local laws, correct?
On the other hand, I assume you can claim the usual boatload of expenses (e.g. mortgage interest, upkeep, etc.) against vacant properties, thus generating a paper loss to offset income generated by other properties or activities.
The real lynchpin appears to be: vacant properties are allowed to contribute tax losses to their owner(s).
Whereas in reality, what we probably want is something more akin to "If you have not fully utilized (i.e. leased for a percentage of the timespan) a property in the last X months, you can no longer claim any tax expenses for value-based (i.e. mortgage, financing, property taxes) components of the property. You can still claim expenses related to the improvement of the property (e.g. maintenance, etc.)".
Ergo, lower rent is not always worth more than no rent, even all else excluded.
Example: you rent your property to a tenant for $100 / month, who does $5,000 worth of damage to the property, and declares bankruptcy when you sue them for recovery, in addition to the time you spent installing them + evicting them + dealing with recovery.
Keeping properties off the market for years at a time in order to mitigate the risk of actually having tenants is not a very good plan.
If lowering the rent by 10k a year lowers the value of the building by 100k, the building owner may have to add 25k that they don't have to keep the building from falling into default. If you have a completely empty building and you accept a lower rent in one of ten units, you could need to put down 250k it of you have many building under one loan they may want millions because of how it changes the loan valuations.
People don’t keep units empty for tax breaks. That’s absurd.
The value of the properties have probably increased 10 fold above the rate of inflation in that timeframe.
>Empty building with no maintenance tend to wear down and often get graffitied and broken into
That's exactly the reason why they should be incentivized to get a proper tenant in there ASAP.
I don't want to walk a downtown filled with barred windows and security guards behind every storefront.
Given that property is returning 8% in competitive districts, all the landlord really needs is for the property to make better than 3% return to make money from ownership.
Actually leasing the property or maintaining it simply adds costs to the arbitrage.
The idea is making it expensive to leave a building empty to force down rent prices and property values which is in the best interests of people who want to participate in the economy instead of collecting rent from it.
they don't have to. if there is no demand for the property in its current state, they can redevelop to a use for which their is demand, or they can sell the property to somebody who will redevelop it.
Most of the videos are long-form content which fits well into the background if anyone is interested: e.g. https://www.youtube.com/watch?v=Zjd1WNhGliY https://www.youtube.com/watch?v=Q53Wxx7aLrs https://www.youtube.com/watch?v=kuALRyGI3Ho
New York is in serious trouble and everyone is acting like things are somehow normal again.
I don't think we need the FUD; Manhattan (especially midtown) will be on a bit of a downswing as some companies get rid of their office space and people switch to semi-remote work, but it will survive and thrive just fine.
And people will leave.
Serious question, I haven't seen any articles about this so just guessing
Now that a lot of places are remote, the people who could afford a Manhattan apartment don't need it anymore and got tired of living in a shoebox.
You still get all the benefits of New York in the other boroughs, just in a 1 or 2 bedroom instead of a 5th floor studio walkup.
I don’t think it will happen in the USA, but I think a solution would be to tolerate squatting, if the squatters improve the neighborhood.
A significant number of our friends and family moved since the start of COVID but they went in different directions. We’re all mid-to-late 30s working in tech, mostly, so this is in no way representative of all the people making moves.
Some people moved out of the city entirely. All of these people have good jobs with high pay but decided that this was their opportunity to get the big house in a different area. In all but one case, these were renters who bought when they moved. That last case was a family that sold their place for more than asking price in 7 days and then bought a new place.
Others were renters who bought in the city. This includes me and my wife as well as two of her siblings. We have a handful of friends who either bought or are trying to buy. We and everyone I know doing this identify as “city people” who just don’t want to leave and are using this as an opportunity to upgrade space and take advantage of the benefits of home ownership. Many of our friends who rent took the opportunity to find a bigger place at a better rate or strong armed their landlords to get better deals.
So the tldr here: in our group of friends, the people who left were those who wanted to leave anyway and didn’t have the opportunity until now. The people who stayed are those who grew up here and/or just want to stay in the city long term.
That said, a handful of them have mentioned renting apartments in the city and already come down pretty frequently. I wouldn’t be surprised if their FOMO became overwhelming once things are fully reopened and wound up coming back permanently.
Insane pricing pushed us out initially.
Philadelphia is such a horrible place, pre-covid I was longing to go back.
COVID restrictions and now the fallout from that don't make it feel like a good idea.
Really thinking about Florida now.
If I was going to be a tax exile I’d be more inclined to look at parts of NH within the metro area of Boston and Texas (especially Austin). Maybe Nashville.
As stated elsewhere... Slowly boiling frogs.
It's a bleak future if you are poor and immobile.
With the rise of totalitarian/authoritarian capitalism, the upper-middle class won't be able to move freely. So many of us in America are used to free movement in the first world.
The future points to the first world being economically submissive to China in the future, and perhaps politically, and political movements within the first world show great appetite for authoritarians and distrust of the democratic norms, and it's not just Trump. How much of that is Russian and Chinese shadow propaganda remains to be seen.
Want to see first world countries turn super-not-first-world? Send a flood of refugees. The American Authoritarian Right is built fundamentally on paranoia of illegal immigration. Look at what the Syrian immigration did to Europe.
Those refugee events are peanuts compared to the displacements projected by Global Warming. Between rising sea levels, ecosystem changes/desertification, and raw temperature spikes, there will likely be billions with a big B displaced, and that will cause everyone to close their borders.
I would not count on free mobility when you need it.
After a year in Orlando, I moved to Miami, so have been here just under 2 years I think.
We are seeing so many people from California and other tech-heavy areas migrate here lately, it's insane.
It is a great city that is extremely walkable, has passable public transit, a tech giant (Comcast) and lots of hospitals and universities boosting the local economy. It saw a rebirth beginning with revamping its Center City district and Broad Street in the late 90s/early 00’s that has radiated outward to other areas.
The problem with Philadelphia is that it is a city that is unable to take the next step to maintain its pace of improvement. The mayor and city council are unwilling to perform city-wide street cleaning out of fear of blowback from South Philly lifers who would then have to move their 6 cars once every two weeks. They currently cannot even collect residential trash on time on a weekly basis due to an overworked and understaffed sanitation department. Their transit is underfunded, partially due to them being a blue city in a state where most of the legislature is from rural red counties that would rather build barely used highways than extending their subway or commuter rail. And last but certainly not least, the opioid crisis makes the area around Kensington and Allegheny look like something from a third world country. The city seems to have no solution other than evicting the addicts from their current encampment every year or so, which just results in them setting up shop a few blocks over.
The fact that quant spreadsheets extend to commercial is unsurprising.
The spreadsheets forget that you need people to make a city work.
It wasn't all bad. Some of my favourite artists and musicians lived in the city of that era. They were paying low rents or squatting while working on their craft.
Once the disinvestment had run its course developers swooped in and bought some of the most desirable property for cheap. New buildings went up. A generation of kids raised in the suburbs discovered cities were awesome. And those starving artists either became successful or were forced to move out.
The working poor and working class who built the city, maintained the city when everyone else walked away they were discarded. Sent to live in unfashionable suburbs hours away. Rising ever so briefly as "essential workers" while COVID wrecked the economy and ravaged the cities knowledge workers.
Drug use and HIV infection went hand in hand in those days and there was just so much death.
Most of midtown manhattan storefronts were just boarded up and covered in graffiti.
What happens is as the tax base leaves the city has less money to take care of itself leading to more people leaving, etc. The opposite happens as people move back in.
I’d never count NYC out but it was clearly in need of a correction. After the riots and the regime in charge supporting it, the increase in muggings and robbery, and the blandness to much of what Manhattan has become, I know a few people that left. Especially with remote work being more viable.
And I don't say this as a twisted conservative wanting to see liberal cities burn. I'm pretty fucking liberal and NYC is going pretty much off a cliff at the moment.
In exchange no one would complain that city government, the state authorities, and trades would be fantastically overpaid and overstaffed.
This was also good for people that worked in industries that cater to the rich (waiters, doormen, weed delivery services, etc, etc).
Things were hardly perfect but aside from the very poor and people being squeezed out of neighborhoods due to gentrification most groups were doing well enough to be satisfied.
The problem is that the whole thing depends on a few thousand very wealthy people sticking around. If they no longer care enough about the restaurants, museums, clubs, private schools, house parties, whatever to want to be in NYC pay taxes and spend lavishly then the whole thing falls apart. The worst part is that there’s no way to gracefully dial back—-wages and benefits are sticky.
I'm sure there are details I don't know, but naively it seems like enforcing those same valuation consequences for empty units too would incentivize filling units.
On a 30 year model, small fluctuations have big consequences, and they cascade even further if there are multiple units.
Not filling at all should too though.
If you discount it to 80% today and then rent it at that rate for 10 years, you'll lose 10% compared to if you leave it empty for a year and rent it for 9 years at 100% of asking price. Obviously financial calculations have a lot more complexity than that, but it illustrates why someone would prefer a vacant property. It's based on expectations of future income.
The fundamental problem is everyone wants in on the big money. No one really wants to serve the lower end. And the lower end would be upper middle class in some cases in a lot of other cities. Definitely all of it will concert to make parts of NYC the exclusive domain of the wealthy soon. (Actually, parts already are, I guess I mean more parts.)
If I understand it correctly, basically what happens is:
1. The owner of the building takes a loan over a period of, let's say 10 years.
2. They fix the rent as such that it will be the thing that pays back this loan plus interest.
3. The bank that granted the loan creates a "Commercially Backed Mortgage" based on that loan, which is a sort of guaranteed-profit thing. Dozens to hundreds of people get in on that.
The interest on the loan being the "guaranteed profit". Considering the amount of people buying in, it's gonna be pretty high.
But because of this, based on the size of the loan and probably some other factors, rent has to be pretty high. Even unrealistic. And the kicker is: you can't lower the rent, because it's all based on that idea of "You need to produce X in Y years, no matter what".
Lowering the rent means getting 100% approval of all the people who bought into that specific mortgage, to say "your guaranteed profit is going to be lower than what you were told when you bought into this".
Which isn't going to happen.
And if you fail to get the needed amount of money, I guess the bank still pays the people who invested in the mortgage and takes the property as compensation? Perhaps fines too?
That's how I understood the explanation at least.
But, I've never seen anyone discuss second order effects from hedge funds, or rich developers.
Can someone explain why second order effects are only relevant and as powerful when it is a government entity. Hedge funds and large corporations often seem like they have more power and often much more agility than governments. And, they have impacts far greater as well at times.
Is this a relevant question? What am I missing?
I think we do. We discuss startup culture, unicorns, huge companies with no revenue, the effects of quarterly reporting on long term thinking and many similar topics. These are all in my opinion second order effects of how business is financed nowadays. If you can think of other second order effects which are not widely discussed please do write about it. They are usually all super interesting and more insightful analysis is always welcome.
> Can someone explain why second order effects are only relevant and as powerful when it is a government entity
I don't think that they are only relevant when it is about government. See my previous point, but it is easier to talk about governments in this sense. Our governments in the "free and democratic" world are very transparent. We have freedom of information laws, the laws and policies of our countries are published, and politicians leak info like a sieve. Of course there are secrets, and backroom deals, and honest to goodness conspiracies too. But when you compare how transparent our governments are to how transparent hedge funds are it is day and night. It is much easier to talk about what you can observe, therefore there is more discourse around the second-order effects of transparent government action than the intentionally more opaque hedge funds.
Likewise people discuss more what they can influence. At least in theory we all can influence our governments. I'm not voting on hedge fund managers. They don't really care what I think. They care enough to not anger so many people that they grab pitchforks, but the opaqueness and lack of information helps them there. Curiously the easiest way the average Joe and Jill can affect a hedge fund is by convincing the government to enact and enforce some law. This is another reason why people might be talking about the second-order effects of government action more.
So this preposterous fact those that all manner of incentives have gone wrong.
For example, we now know rent control isn't bad, just like minimium wage: https://jwmason.org/slackwire/considerations-on-rent-control.... To flip this around, that these neoclassical-economics-defying conclusions are true means the housing market and labor market are terrible markets.
We do need to abolish bad zoning and things, but we also need more public housing. The simple fact is we need to build enough dense housing to "devalue" the existing events in terms of their rent revenue, and the private sector will be loath to do that.
Another thing is public transportation. Public transit is extremely valuable, but the private sector is unable to provide because a) it's a natural monopoly we can't trust the private sector with (except for Japan, where a bunch of things relating to land use are really different). It works best when cars are beaten back (investments in one hampers the utility of the other), see https://pedestrianobservations.com/2019/09/18/cars-and-train.... The private sector is too impatient without the prospect of terrible rent seeking to wait out a transition from cars, and is also powerless to eradicate lanes and do other things that might driving rightfully harder (https://www.youtube.com/watch?v=ORzNZUeUHAM).
So people saying every government intervention has unwanted side effects are just shills for the continued retrenchment for the state. The fact is the market cannot coordinate on a scale needed to "turn the ship". At the same time, the emaciation of the administrative state decades across across the US means we have a weak and incompetent pubic sector that's currently incapable of administrating the necessarily infrastructure we need.
Hard problems all around, but the former is a hard fact, while the latter is fixable.
I have spent some time in the San Francisco bay area and a lot of time in New York City.
Looking at BART and Caltrain schedules - the last Caltrain train leaving San Francisco is three minutes after midnight. The last BART train leaving San Francisco leaves at 1041PM! The BART website says they will add slightly later trains next month, but still - it was like this before Covid too.
In New York City, PATH and subway trains run all night. Metro-North, LIRR and New Jersey transit trains run fairly late as well. It's a larger city, but many people commute 40 miles or more every day, and it's no big thing - get on a train in Bay Shore, Suffolk, New York in the morning, and in a little less than an hour you walk out of Penn Station, over 40 miles away. If you want a faster commute, then live 35, or 30, or 25 miles away - still plenty of room for one family homes and lawns if that is your thing.
I have taken the BART from SFO into the city during the day, and that worked well enough when I did it, but expanding BART, Caltrain etc. could solve a lot of the Bay's problems of insane rent for a small place in a neighborhood that is not that great.
The A train is < 40 miles, and Manhanttan is roughly in the middle, so subways commutes are less long.
There is nothing wrong with long regional rail commutes per-se, but the the problem is US "commuter rail" is set up so the richest surburbanites in the biggest homes drive for the rest of their lives (and are the worse green house gas emitters in the country), and just take transit to get to their 9-5 midtown office jobs.
This is bad for the environment, and regressive. Transit should serve all classes, and be paired with dense development around stations (think more flushings) so people living far out might have more room for kids, but need not rely on cars to any greater extent.
See https://pedestrianobservations.com/2021/03/09/the-hempstead-... and linked posts for plans about this sort of thing.
If people in the city earn more on average than people elsewhere, then everything will cost more, just supply and demand. Not sure what you can do about that besides put price controls on literally everything.
That and the extra taxes and other business costs. When the hot dog vendor has to pay a million dollars a year for their spot at central park then they're going to have to charge more.
It also use to be true! The main thing that changed is government policies increasingly restricting supply.
Big cities obviously have economies of scale, so, say, the chicken lo mein is fresher and hotter due to higher volume. Or, the first time I had a cup of plain coffee at a random cafe in NYC, it was stunningly good. Any reasonably successful business has much higher volume than in a less populated area and is pressured by competition more too. They can and must do better.
But people make more money on average in a big city, and that means they spend more. If the exact grade of hamburger available everywhere is 20% cheaper, that doesn't in any way prevent your meals from being much more expensive. The whole point of being in a city is so you can get stuff you can't otherwise.
If you are living and working in NYC, are you going to just have the same fast food you could get in Albany, that's incrementally better?
Don't mix up "city dwellers use less resources for a unit of a given thing" with "city dwellers use less resources period".
True rural and true urban (with public transit predominating) is good. But the suburbs where most people live are absolute trash.
I'm inclined to think that carbon emissions (or consumption in general) are primarily a product of wealth.
It would be possible in principle to normalize that map for household income, and I wonder if it would show the same pattern.
We don't need to go to extremes (a Parisian studio can go as low as 100 square feet!) but house size in the US has mostly crept up as a function of minimum lot sizes in US zoning.
People in the US have a choice between the two, and they’re largely chosen to put up with a commute from the suburbs in exchange for more space. Those lot sizes aren’t just wasted space. Lower density also translates to more green space, lower noise, fewer shared spaces, etc.
This is why it's incredibly important that we fix this stuff. Rich environmentalists' "sacrifices" achieve nothing. It is also why I am incredibly sad the current infrastructure bill is slated to fund so much stupid suburbanization.
If we want revitalized cities where people want to live, we don’t just need low cost housing, we need high value housing. The middle class didn’t leave cities on cost alone and they’re not going to move back to cities on cost alone.
> There are plenty of apartments available in cities at rents lower than the average suburban mortgage payment.
But what is the floor area? Saying people don't need McMansions is not the same as saying additional bedrooms for kids isn't nice.
> If we want revitalized cities where people want to live, we don’t just need low cost housing, we need high value housing.
It's very easy to tear down walls making bigger units. Focusing on the cost of housing is the key part. Value comes after.
Also remember that suburbs and driving is massively subsidize, even separately from the externalizes. It's not fair to expect cities to compete completely on costs without that being fixed.
Go read https://www.strongtowns.org/ for urbanism for small-scale romantics if big cities still sound "just bad".
I think if you focus on cost alone, you’re going to build poor neighborhoods and jump start a cycle of poverty.
I think the key is to build diverse neighborhoods. You want poor, rich, and middle income housing all in the same place. The segregation of incomes is how we got into this mess to begin with.
Other than physical dividers like highways, I don't really think segregation is built?
One big exception is we certainly want the public housing to not be congregated in ghettos. That was another terrible NYCHA (and others) practice.
Zoning is a very recent phenomenon. Cities were economically vibrant long before that. Even if there is zoning it doesn't need to be as exceedingly specific as American zoning tends to be.
It is as if we used to have clumps of matter bound together by gravity, enforced by magic that new matter must be spread out (zoning) but also charged the matter (cars). Merely stopping the magic doesn't meant gravity will overpower electromagnetism.
Zoning and car culture achieved dominance in tandem, and so I am quit skeptical of any certainty that fixing one alone is sufficient to roll back the clock.
There could be other sorts of hystersis too that make this challenging. Really we should be very careful and vigilant and not rely on one tactic to eradicate the scourge of suburbanization.
This is on top how much zoning craziness distorts the market.
I live within city limits, in a multifamily building. But the edge of the city outside of which is presumably "suburban" is literally a few dozen feet away. Also, my neighborhood has a layout and look that I think a lot of people would consider suburban. No businesses, mostly no sidewalks, mostly a cookie cutter development. On the other hand, it's super quick to go from where I live (by car that is) into the middle of the city where I work, which is kind of against the stereotype of suburbs. It's also much cheaper than the "actual" suburbs, probably because it's part of the city school district.
There, did it.
Sounds like your place has some nice benefits, but since you drive everywhere (you mentioned work, and stores not being in the neighborhood, so that's a safe assumption, right?), It's suburban.
I could also technically walk to a convenience store or perhaps a supermarket. It doesn't take that long to walk a mile or two.
Point is though, it's clearly not rural, and it's within a recognized city, so any time people are talking about "urban" it includes this sort of setting. It doesn't matter if you think it should be classified as urban, the fact that it is, means that's where the statistics show up indirectly.
There is a distinct separation in property value between my neighborhood and surrounding suburbs with single-family housing at double or quadruple the price.
Furthermore, as a matter of geometry, any city that is more or less a roundish blob, is going to have more space near the edges than the center. So it seems plausible to me that it's more representative of a city lifestyle. The very center in several cities I've been in is almost completely commercial.
This is the US? I'll happily grant you that the bus system is terrible.
> I could also technically walk to a convenience store or perhaps a supermarket. It doesn't take that long to walk a mile or two.
That's way too far. Don't beat yourself for not walking.
> The fact that it is, means that's where the statistics show up indirectly.
Sure. That's a bummer. Hopefully we can fix that someday.
> Furthermore, as a matter of geometry, any city that is more or less a roundish blob, is going to have more space near the edges than the center. So it seems plausible to me that it's more representative of a city lifestyle. The very center in several cities I've been in is almost completely commercial.
This pattern: (big towers?) commerical monoculture in the center, gradual peetering off, is very (North) American. A lot of other places have stricter transitions at the city boundary, and less division within the city.
That's quite a wide unsubstantiated generalization.
Tons of people have no interest in living in a tiny apartment in a tall building and will happily pay extra to move to the suburbs to avoid that.
The price per square foot is reflective of what the market will pay, first and foremost. The large cost premium in hot cities suggest that the unmet supply of apartment is much larger in percentage terms than the unmet supply of single family housing. In my area rents are already recovered from their COVID slump and still rising.
False. Yes, taller buildings are more expensive per floor. But the benefits they bring in far exceed those costs.
You have to account for the whole system, or track your externalities if it's not closed. And if our current economic systems don't do that, they need to be fixed.
With stores, they’re squeezed on both ends: Pressure from online retailers and then exorbitant rents.
It’s not unusual to have monthly rents that go into mid-five figures for a small store at ground level.
Few small businesses can sustain that in the long term.
Legalizing a healthy housing supply would improve this country more than anything I can think of.
What in Dodd-Frank stops housing construction?
Actually it makes private financing difficult for all builders, but then it created easier programs through hud to finance section 8 multi family apartments. Which is why you see crappy apartments being built at a faster rate than cookie cutter homes were being built in 2007.
Zoning is part of it as well, but zoning on its own does nothing if people can't get financing to build. And a large majority of the population will only buy what's already built, and won't finance new construction on their own.
I wish this were true!
In 2017, Federal Reserve Chairwoman Janet Yellen stated that "the balance of research suggests that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth." Some critics have argued that the law had a negative impact on economic growth and small banks, or failed to provide adequate regulation to the financial industry. Many Republicans have called for the partial or total repeal of the law.
We don’t need more houses unless we want to continue wrecking the environment. Better to block renting and use what we have.
More broadly, the problem isn't rent, but landlords. Rent is fine, it's when rent feeds into rentiers that the bad extraction happens. The solution is to make it "rent all the way up".
For example, do a maximal land value tax where the "tax" is so high it eats up the value of the land...and thus becomes rent. The rent goes to the state, and much of it is distributed as a dividend back to the people. That completes the loop, rent all the way around. All flows, no stocks.
Affordability is the ratio of income to prices. Nobody is saying city prices should never be higher in absolute terms, they simply shouldn't keep up with the higher incomes.
Huge ask that we all accept that conclusion from the speech you linked.
But we fail miserably on both those counts, and denying the next best thing does not strike me as useful accelerationism.
This is from an actual economist, not some political hack, and links have been added to the underlying studies. Disparaging this for being originally a speech is intellectually lazy.
Personally, I don't understand how rent couldn't hurt housing supply. I do understand that there is empirical evidence suggesting it doesn't but I'll remain skeptical until there's some theory explaining how that could be that I can understand.
Unless you are one of those that thinks that economics isn't subject to the scientific method, reality trumps theory. And it's false that we have no theory of why rent control is effective, we absolutely do.
I agree with this comment: https://jwmason.org/slackwire/considerations-on-rent-control...
I think that if rent control doesn't hurt housing supply, it's because of various regulations that are distorting the market. Enacting rent control instead of reforming those regulations seems silly to me.
I'm being serious here, if you think that a vague, purely theoretical argument, from theories that we already know are very far from complete, is a match for empirical evidence, then you are not treating economics as a science.
I think we would be better off reforming regulations that are preventing people from building than enacting rent control. That seems like a very reasonable opinion with plenty of support from economists. I find your posts in this thread overly dismissive and aggressive.
Simply pointing to "supply and demand" and operating by maximalist principle is a vague argument. You have to actually engage with the fact that housing can never be an ideal markets and that inelasticities are indeed great.
Again, if you think that these regulations are both more effective and exclusive to rent control, you can find empirical evidence.
I'm not being a pure empiricist. A basic theory made an empirical prediction - that rent control would decrease supply - and the theory is wrong. You can't then use the same theory that made an already incorrect prediction to make a second prediction that is this time almost impossible to evaluate empirically. Find another theory and make an original prediction, without ex-post-facto retconning, and we can judge that theory on the merits.
As it is, we already know that simple neoclassical market theory does not apply to markets with significant price in-elasticity and friction, and the housing market is and will always be like that.
It's theory that is often wrong, that is wrong here again, you can't rely on it over the empirical evidence by retconning your predictions after the fact. That's just bad science. In another field that would get you laughed out of the room.
I never made a maximalist argument of any kind. I never said there can be an ideal market. I merely think that we should move towards an ideal market (which we will never reach) rather than on rent control (which is at best a band-aid).
> I'm not being a pure empiricist. A basic theory made an empirical prediction - that rent control would decrease supply - and the theory is wrong. You can't then use the same theory that made an already incorrect prediction to make a second prediction that is this time almost impossible to evaluate empirically. Find another theory and make an original prediction, without ex-post-facto retconning, and we can judge that theory on the merits.
The idea that some studies have falsified supply and demand is bizarre. You're assuming "inelasticities" and regulations are fixed for some reason.
Ease zoning restrictons and watch supply increase. Then enact rent control and watch supply decrease.
That rent control makes renting less profitable and that landlords sell some properties is absolutely expected. The question is whether that actually increases rents, which the article does not establish, it instead makes the leap that less rental units means higher rents even if the total supply of housing stays the same, while assuming that rent control doesn't actually lower prices.
All in all, the article doesn't actually make the claim or even suggestion that rent control decreased the supply of housing. The article doesn't provide evidence that rents would have increased faster without rent control, as it doesn't quantify the rent depressing effect of rent control at all.
By the way, I don't actually like the SF implementation of rent control and I believe that the actual implementation details of rent control are critical. I wouldn't be surprised if SF's rent control wasn't effective at all. It's just that the article you linked doesn't actually makes such a claim.
But right there if you even read to the end of the abstract:
"Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law."
Probably now you're going split hairs on rental supply vs. supply. Ok.
But at least we can firmly state that the original claim "we now know rent control isn't bad" was bunk.
If the article had made an actual claim that market rents increased in the long run, it wouldn't have passed peer review.
That's because there is no empirical evidence that market rents increased in the long run, and no actual analysis, that would have to take into account factors like displacement of ethnic minorities and it's impact on rents, the change in homeownership rates, the tendency for rents to compound over time thus giving an outsized effect to the initial suppression of rents, etc..., which wouldn't come to a solid conclusion without additional data.
As a result, we cannot say that it's incorrect that rent control isn't bad. The evidence you've provided falls way short of the argument.
We can't keep giving benefits to certain populations of people. You need to work out the negative externalities and tax it. You need to work out the positive externalities and subsidize it. Anything else leads to perverse incentives. If you happen to have a surplus as a result of taxing negative externalities, you should take the tax money and give it back to your residents as a dividend.
If you want to have parking minimums, if you want to have certain setbacks and limited building height, if you want to disallow building train-tracks through your backyard, that's fine. But those are externalities on the community and they should ultimately show in the Land Value and that needs to be taxed. When it is not taxed it is incentivized, and those perverse incentives only lead to more bad policies. A Land Value Tax would instantly turn most NIMBY voters into YIMBY voters. Fixing all of these follow-on symptoms would go from an up-hill battle to a downhill breeze. Focus on the disease, tax negative externalities.
Beyond that, lowering rents benefits even future residents and homeowners-to-be as they lower property values and dampen speculation.
Economically trap them in their home/apartment forever, thus achieving segregation with extra steps? I agree.
I find this sentence to be crucial. So 3/4 of the way into his speech it seems like he mentions perhaps the most important assumption he is making: he is assuming a situation where the supply and demand of housing is already largely fixed regardless of whether there is or there is no rent control.
That's a bit funny, if that the case then it's almost by definition, the rent control is not going to have much effect in this case...
Even if he is right about what he is pitching for under these assumptions, the discussion seems incomplete unless he also treats the situation where the supply of housing is flexible enough.
What happens then? Does rent control has effect on supply in this case?
Maybe the problem is actually too much regulation to begin with. Which then leads to very reduced flexibility in the market response. So he is not arguing about policies to reach global optimum, just policies to adjust for a local optimum under heavily regulated market assumption.
> I’m not entirely unsympathatic to your point of view. If we could do more to boost the supply of affordable housing, there would be less need for rent control, that is true.
> But, first, less need is not no need. I don’t think it’s even physically possible to get a perfectly elastic housing supply at the local level, so when local demand rises some people are still going to face displacement from rising rents. And I think they deserve protection from that. Second, and more important, I am not at all sympathetic to the idea that we should remove protections that people very much need today, because they would need them less in a quite different world that we may reach someday.
I'd say what you are talked about is exactly addressed. Sure, it would have been good to include in the article this audience, but that wasn't the audience of the original speech.
50% of the world lives in cities yet they consume 70% of the worlds energy.
The figure you quote, aggregated at the global level, entirely results from a comparison of city lifestyle with pre-industrial countryside lifestyles in developing countries. By contrast, living in the countryside or in suburbia in rich nations is much more environmentally damaging than in dense urban areas, which is what gp was referring to.
Literally pre-industrial . Last numbers I saw from the UN estimated 2 billion subsistence farmers as of 2015, all living without the benefit of modern agriculture except the occasional bag of fertilizer or engineered seeds. The future is very unevenly distributed.
If "developed cultured" is fixed by pricing the externalities, it would be absolutely better to pack people in cities, replace subsistence farming with sustainable industrial agriculture (no tilling, no aquifer depletion, etc.) and decrease the portion of land devoted to agriculture.
We're not comparing to the third world here, we're comparing across models of living in the developed world.
Why this reminds me of treating workers as caged hen? Dense in the sense of building complexes of decent size family homes? That I could support, but building blocks of shoebox flats, should really be eliminated.
The supply of residential housing should be at a level, where buying or renting from a private sector could be considered an option, not a necessity. Local governments should be allowed to rent houses from private investors, but pricing should be strictly regulated, so that residential property is not viewed as an investment, but rather as a way of getting maintenance money for idle properties.
Residential property investment should be treated as carts and horses of economy and become the past.
> The supply of residential housing should be at a level, where buying or renting from a private sector could be considered an option, not a necessity.
That's actually good.
> Local governments should be allowed to rent houses from private investors
Nah, there's no value for the private sector to add, and huge risk of regulatory capture here.
We avoid NYCHA failures be saying public housing != low income housing. Allow the average rent to meet costs so public housing is self sufficient. Having average rent not meet costs is moronic politics, basically committing seppuku for the right.
> So that residential property is not viewed as an investment, but rather as a way of getting maintenance money for idle properties.
> Why this reminds me of treating workers as caged hen? Dense in the sense of building complexes of decent size family homes? That I could support, but building blocks of shoebox flats, should really be eliminated.
Saying density means less space for people is dead wrong! Less land space too, but taller buildings can mean bigger units.
Back yards don't scale. Ensure people city and natural park access (which the Bay Area has lots of), and then build the buildings as big as possible to give people humane floor space.
Ultimately it's single family homes that make people caged hens....in tents.
Whereas land use regulations and the like are a public commons, and everyone is entitled to a say and should have their needs meet. So all the ramifications of any public policy like this are of great significance and the affected feel they have a right to be heard.
Private actors with very strong claims on things like their labor and capital can just do what they will, and the second order effects aren't discussed because they are not relevant to the stakeholders. Everyone is a stakeholder of public policies like this.
They don’t. Hedge funds and corporations don’t have powers like eminent domain and men with guns authorized to use violence to enforce them.
The vacancy rates actually are a second order effect of the banking industry. You’d think landlords would reduce rents because some income is better than none. However commercial property is valued as a function of the rent, so reducing rents 20% could reduce the value of the property 20% too, potentially leaving the commercial mortgage underwater. But leaving it empty with a rent the market can’t bear keeps that from happening.
Therefore the correct solution is changing banking regulations to eliminate that perverse incentive, not to try an ad hoc fix at the city level which probably won’t work as intended.
The banking angle is to ensure that loans on property aren't durably underwater, such that the bank has a high likelihood of ending up owning underwater property. (The bank is in the money business; anytime they get into the real estate business with a REO, someone screwed up.)
Preventing banks from doing this is likely to lead to a lot more bank-owned properties (REOs), which is generally a bad sign for a real estate market.
I understand that if a commercial property gets rented out at 80% of its previous rent that causes a reduction in the valuation of the property. What I don't understand, shouldn't not-renting it out cause an even bigger dip?
An 80% reduced property brings in 20% less income to the owner, but if the property is empty that means the owner has to pay for maintenance out of their pocket. (maintaining the roof, keeping the squatters away etc. However cheap these expenses are, it is clearly not zero dollar.) The property becomes from an asset to a liability. (in the colloquial sense at least, as you can hear I'm not well versed in economics.) How does that not decimate the valuation like crazy?
The valuation is based* on looking forward multiple decades. If you think COVID (or recession or other short-term event) is a blip in the future prospects, you aren't overly concerned if a property sits vacant for a year or two, when you're looking at the overall income over the next 30 years.
On the other hand, if you drop the rents 20% because you're feeling an urgent need to fill the property now, your fixed costs don't change (property tax may eventually go down slightly), you have 20% less income to cover them and leave a profit, and your next 10 years' of rental income outlook is now nerfed by about 20% (and profit by perhaps 30% or more).
It's the reason that rent rebates are a thing. You don't drop the monthly rental rate; you instead credit free months of rent over the initial period of the lease, give larger allowances for landlord-paid improvements, or other "one time" credits.
* - every market participant does something slightly different, of course, but they're all more or less looking over a multi-decade period to judge what the property is worth now.
If the bank has a loan on the books that’s being paid-as-agreed and is in compliance with the agreed ratios, it's not at all clear to me that there's been an underwriting mistake and consequently I don't think that giving them the power to foreclose is in the public or borrower’s interests. (Giving them the option is technically always in the bank’s interests, but if the loan’s being paid, they’re not likely to exercise the option anyway.)
This view is implicitly premised on the notion that banks exist purely to make a profit. I take the view that banking licenses are issued by the government representing the public and that licensees should act in a way that benefits the community in which they are licensed to operate. Using a dishonest valuation scheme that blights urban commercial districts violates that public purpose. I have no strong opinion on how the lender and borrower ought to work out the costs of accepting reality, and I acknowledge that it probably needs to be handled with finer granularity than some blanket policy.
If commercial property commonly has 2 year vacancies (as a matter of the inherent friction in finding a user who needs exactly that amount/mix/configuration of space), how does one determine that 123 Commercial St that's been vacant for 9, 12, 15, or even 30 months is being incorrectly valued or valued at less than the bank's note?
It sounds to me like you're perhaps pulling on the wrong rope. If your concern is encouraging occupancy, go directly to policies that encourage occupancy rather than concluding that this is banking problem at its root. Maybe it is; maybe it isn't, but rather than trying to puppeteer an outcome by tweaking something in banking, there might be more direct policy frameworks that would help more.
The most direct policy framework would be wielding the sledgehammer that is eminent domain. However, I think government should use the lightest touch possible to achieve the public purpose, so I’d prefer setting the rules in a way that maximizes freedom while still achieving the public purpose of having non-blighted commercial districts.
Property with no bank note on it would behave the same way. (It’s just exceedingly rare, especially in an easy-borrowing, money-printing presses running environment.
There is a huge body of research on it. When private entities do it the term used is an "externality".
A monopoly on the use of force.
Meanwhile, there are many multinationals that are not accountable at all to the citizens of countries they operate in.
Actually, there might only be a few government that are accountable to citizens. Maybe most governments care for their citizens, but accountable? I don't think so.
Guess what the us government is dominated by?