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Empty storefronts are killing neighbourhoods (thewalrus.ca)
291 points by pseudolus on July 24, 2021 | hide | past | favorite | 470 comments

I've thought about this for a long time.

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.

I have never met a landlord that would rather have a building sit empty than renting out to "save on taxes." By definition, the income from renting a property is greater than the taxes one could have deducted, because tax rates are not over 100%.

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)[1].

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.

[1] Except for things like the EITC, and this was a strong criticism of it.

> By definition, the income from renting a property is greater than the taxes one could have deducted, because tax rates are not over 100%.

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.

The thing I learned recently that happens in Spain is that if you have a property sitting empty, the government will calculate a "virtual rent" so to speak and charge you based on that (normally lower than actual market rate, but not much). If you rent it out, you get taxed based on what you actually make and not on this potential rent. Real estate taxes are apart/independent.

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).

Oh that's a great idea. Especially if the owner is insisting at only renting at a ridiculous price per area -- ok, fine, set your rates at whatever you like even if nobody is remotely willing to pay that, but you'll pay taxes at that rate so best not inflate it too much, hm?

Sounds like a good opportunity for a business to get paid to rent out your place for a profit that's a fraction of the virtual rent. The owner saves money ahead can kick you out when they find a good client

Yes, or a family member to rent it out for cheap.

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.

It should be much more harsh. If you own a building where a store should be but aren't using it as such you should be made to pay an insane tax for lowering the value of the entire shopping area.

I live in a block with around 6000 people and no stores. That what should be the mall was held hostage for decades by a supermarket chain who have a store 10 km from here. They didn't want their competitors to have it. Eventually the entire thing was changed into a giant day care.

"I think the issue is more with capital appreciation."

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.

How is this a problem? As far as I can see the landlord takes on zero risk there.

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?

Some commercial real estate deals will expect the landlord to contribute some amount for tenant improvements. So if you get a bad tenant you might be out that money. In addition, before they go out of business they probably stop paying rent. So if the business fails in the first year that could easily be a net loss to the landlord compared to waiting for a better tenant.

Transaction costs.

Everytime a lease is signed there are transaction costs and they are not immaterial.

It still appreciates if it's rented out, so that doesn't change anything. When it's rented, you get appreciation plus income, and when it's not rented, you get appreciation only.

Appreciation only + tax deductions can be a great combo in a hot market. why deal with the hassle of tenants when you can have rapid appreciation, and the more property is off the market, the higher the prices become?

You can employ a professional property manager to deal with the hassle of tenants.

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.

But many landlords (especially corporate ones) own a lot of property, and furthermore landlords can and do cooperate. I think you're assuming perfect competition, where all pricing is transparent and all market participants interact with each other exclusively through price signals. In reality landlords compete but also cooperate, and their associations are more integrated/coordinated than those of tenants. There are far fewer landlords than tenants, and a non-rental motivated by collective/cooperative solidarity means a lack of profit maximization for the landlord but often lack of a place to live for the tenant, so the incentives as well as the market structure are wildly asymmetrical.

If appreciation is 99% and rent is 1% does it change anything?

That's not a real situation that will arise, so it doesn't matter.

That’s a bit of a straw man, as that degree of market imbalance would completely end renting.

Isn't that what this thread is about though? The complete end of renting in this downtown strip. The buildings are sitting empty and not renting.

Why are they appreciating so much if there's no rent to collect? Are storefronts NFTs?

There are hordes of SBA dollars floating around, looking for a home.

Havent you seen the fed's balance sheet?

Because land is finite. Land within an established city even more so. Not only is there rent to collect should they want to, but it’s almost a guarantee that there will be rent to collect indefinitely into the future.

Lots of money out there looking for home, so to speak.

The risk-adjusted return differential is much less than appears at first glance.

There may be other factors besides what they nominally "want". Depending on their source of financing, landlords changing the rent on these spaces can be both logistically difficult and may cause a huge negative cashflow shock because of the way it effects capital requirements on commercial loans. Louis Rossmann covers it in a video (https://www.youtube.com/watch?v=NdfmMB1E_qk) based on this reddit comment (https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...).

I can only speak to residential, but when I worked in the industry, it was extremely rare for rents to go down because many existing tenants would see the new rate and demand a discount or leave.

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.

I now have the mental image of a tenant moving one unit over to start “new” and get the discount lease rate. Thanks for brightening my day.

That's how you deal with mobile phone operators :). Threaten them to leave if they won't give you a better offer, and if they don't, then just leave... and come back some time later, to get the much better "new customer" treatment.

Works for cable internet, too, if there’s more than one provider in your neighborhood.

A friend of mine did this during the pandemic. Asked for a rent reduction and the landlord refused but offered them an identical unit in the building at the lower price.

I’ve had to do this before to avoid my rent going up several hundred dollars at lease renewal time. They offered me the unit right next door for $500 less than what my then-current unit would cost. The new one was identical in all ways except it was mirrored.

This is definitely true in large apartment buildings, where units are very comparable and leases are identical. Not so much in commercial where lease terms may vary widely, and even units in the same building may be meaningfully different in value based on how they're currently configured and who's looking to rent (e.g. if you want to rent a space to start a restaurant, and it was previously set up as a restaurant, you've got a lot of infrastructure there already, so it's more valuable to you as a tenant than it would be to someone who wants to use it as a hardware store).

If you say the rent is $100/sqft, then the tax break is for $100/sqft of unrealized rent.

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.

Wait, you’re saying they can write off rent that they should’ve gotten but didn’t because of vacancy? Not an accountant, but I don’t think that’s the case?

What’s stopping them from “asking” $500/sqft? $1000? At what point is it fraud?

I do not know the details, but my experience with accounting regulations, is that there's likely to be a lot of heavy-duty checks and balances. I doubt it would be anywhere near as simple as I stated. Remember that I am not an expert in this field.

I worked doing data entry in my teen years for a tax certiorari law firm in NYC and I can tell you that one of the favorite tricks of multiple-building owners is to have a mostly vacant building (or several) as a tax sink. Most of the time they would put their family in the units at no charge and write off the whole building to offset their others.

This is especially true of buildings they were holding for sale to property developers.

Wouldnt they make more money overall renting it although? There is only so many free units you can give your family and friends.

They're probably just holding onto the building to sell it to someone else. The next buyer, in turn, is only buying it to sell it for even more. Tenants may even be considered a liability. They don't want to manage a property, they want to hold an asset as an investment.

This only makes sense if tenants are a liability, because you get property value increase + rental income. As long as renting doesn't decrease the property value by more than the net rental income there's gotta be something else going on.

And if you don't want to manage a property, property management companies exist for that exact reason.

Tenants ask for things that family might not necessarily. Also you can leave most of the building in poor shape while keeping up the units you're letting family stay in.

I don't know the guy, but one property owner here is sitting on a lot of property he bought ages ago that he doesn't even bother to rent out.

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?

Is this in CA? This is one of the major problems that prop 13 causes, property taxes don’t rise commensurate with the value, so many are content to leave buildings vacant, given that holding costs are so low if the owner bought long ago.

> 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.

its because they are likely tied up in CMBSs with terms that state that the value of the building is based on the value its renting units out at, and if they lower the rent they have to recollateralize the loan (pay an additional down payment, to cover the lost 'value' of the property), but they can just apply missed rent from empty units to the end of the mortgage and take a tax write off.


This. I work in the industry and this is the reason.

What is the rationale for granting the tax write off?

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.

Small point on [1] - it's not only EITC, there are a number of benefits that are income-dependant where a small income increase could make you ineligible for a ton of benefits. Effective marginal tax rates for people right around poverty line is crazy high for their income - because each additional dollar earned turns into lost benefits. https://fee.org/articles/the-welfare-trap-labyrinth-of-progr...

The tax rates still aren't 100% there but even something like 50% may seriously discourage people.

Just to add: a receiver of "Hartz IV" long-term unemployment in Germany can earn an income of 100 EUR/month tax-free, with an 80% marginal tax rate for the next iirc ~700 EUR, due to unemployment benefits going down accordingly (think as if that tax was automatically deducted from your benefits).

There is actually a phenomenon colloquially called "extend and pretend," where it's better for commercial properties to sit vacant or half-vacant than lower the rent.

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."

It seems to me that real estate is the locus of a colossal regulatory failure that has already created one trainwreck (2008) and will just continue to spawn more until people start taking a look at the system and honestly evaluating how much of it is rational.

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.

This makes a lot of sense--it seems that the real problem is rent "stickiness."

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.

Is this also why apartment complexes seemingly refuse to lower the rent when demand slumps, but rely on one-time incentives?

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...

If I recall correctly, sometimes there are laws that put a % cap on yearly rent increases.

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.

Yes, exactly.

there is certainly a tension between the bank and the developer/owner over potential default, but the mechanism isn't simply the developer/owner presenting financial projections and bankers being relegated to only accepting their word and being stuck with a bankruptcy ultimatum if the deal goes sour. commercial appraisers must validate the assumptions and calculations based on prevailing conditions and comps.

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.

I still don't understand.

> 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?

> Why do they still owe $8M if the loan was changed to $4M?

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.

Ah okay. That makes more sense. I was confused by the wording "therefore the maximum loan is reduced to $4M."

If rents are bi-modal, as one of the parent posters suggests, then how can all properties be valued based on the higher end (e.g, tenants with deep pockets) when not all tenants actually have deep pockets? Shouldn't the entire demand curve be considered when deriving the multiplier and therefore the price of the commercial property?

Not everyone can get the deep pocket tenant. The staggering number of empty store fronts reflects that.

I don’t think there’s a sane answer to your question.

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.

I'm sure you'd make more money after takes renting it out but you have more costs associated with having a tenant (and risks). If you can just sit on a vacant property get some tax rebates and watch it appreciate you don't need to do anything. Your tenant won't break stuff, you don't need to find new ones, its just appreciating slowly and requires less hands on management.

> I have never met a landlord that would rather have a building sit empty than renting out to "save on taxes."

Good for you. My inlaws live near several. They suck.

What about inheritors?

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)

Land value taxes are effectively one implementation. Land value taxes necessitate that high-value land be put to productive economic use.

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).

I agree, but not just on land value. If you adjust the base rate for the land by how wide the plot is on the street you end up with a MUCH more walkable city. It's like a more efficient sorting algorithm, because once you get to the store you need you can just walk right in and find everything you need. Right, like imagine how stupid it is for us to be walking by squares. We have to walk across 25% of the perimeter of every building we go by. If they're thin rectangles then you only walk by, say 5% until you get to the store you need.

At least in theory, an ordinary land value tax would have this effect, as if having street side property is considered desirable by the market, the value of such properties with more would increase.

Of course the effect could be amplified by add-on adjustments, but one of the beauties of LVT is the simplicity.

In a dense urban environment the LVT wouldn't cover this case well because the land value of a rectangle of the same area of a square is roughly the same. It's access to the street that is valuable, at least for reasonably sized blocks.

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.

A LVT doesn't have to be based on the land area. A plot with more frontage on a busy main street will be more valuable and hence taxed more.

I don't understand how this would make a difference. The depth of the block is already fixed so the only way to add area is to make your store wider and increase the space it takes up on the street. Taxing width just seems like it would artifically raise the value of buildings on blocks that are deeper if the blocks are irregular enough to have some variation.

land value tax (or economic land rent) is normally seen as a REPLACEMENT for all other taxation, not an addition to it.

"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

> The value of his building's keep increasing so he doesn't care.

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.

the value of the building might be dropping but the value of the land keeps going up. eventually somebody will buy it to tear down and build condos.

The value of the building drops all the time. The value of the land is also dropping, as described. Loss of foot traffic is a blow to the value of the land, not the building.

Who wants a condo in the middle of nowhere? The replace-it-with-condos plan requires the area to be growing, not shrinking.

We're not talking about the actual middle of nowhere here. There are plenty of towns or smaller cities in the Midwestern US or the Canadian prairie that are still nice places to live but have downtown commercial districts which have shrunk over the last couple decades, and are now adjacent to functional main streets and held vacant by landlords who think commercial tenants will at some point be willing to pay the same high rents again.

Amazon, e-commerce, and remote work mean towns can be growing at the same time as their central business districts are shrinking.

Because the alternatives are going through the same process. It's not like only one neighborhood suffers from this, it's market wide, so as a renter, there is no better elsewhere to move too. The dying once lively neighborhood is still livelier than the dying was never lively neighborhood next to it, etc.

The question is whether it's livelier now than it was last year, or more dead. If it's livelier now, property there is increasing in value. If it's deader now, property there is falling in value.

Not if other neighborhoods have also gone down in liveliness to the same extent.

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?

There is no law of conservation of total value over a locality. If one neighborhood declines, and every neighborhood around it also declines, they have all lost value. In your model of real estate, there is no such thing as a ghost town.

> 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.

> 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.

They were moving out before those rent increases. The problem is the kind of boutique retail people seem to want in cities isn't profitable; even the older midsized or speciality chains got edged out by national ones. This is kind of like wondering what happened to all those computer places back in the 80s and 90s that would build you custom PCs.

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.

> They were moving out before those rent increases

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.

How would value be dropping if the commercial space has a $100/ft sticker on it and keeps going up. Its the same mechanism putting Tesla and shitcoins valuation on the moon.

You can put a sticker on anything you want. You already know the value is less than that because it's not being rented at that price.

As much as I hate _Kelo vs. City of New London_, I can see the temptation in this case to invoke eminent domain and hand over those vacant properties to another private owner who will put them to good use.

The cause and effects can be weird sometimes. Suppose that guy wants a lot for rent but no one can afford it. He either lowers the price (in turn the value of the property) which depreciates the value of the other property owners in the area. Lower values then shakes out eventually in other taxes.

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.

this is visibly happening with retail and commercial properties, but people here swear up and down it absolutely is not happening with residential properties.

The incentives are nearly identical.

It would be insanely ideologically inconvenient, yet it's a known reality.

The only possible solution is to make housing a bad invenstment, but that's too unpopular.

You don't have to make it a bad investment. You can differentiate vacant and non-vacant investments.

I.e. Vancouver's Vacant Homes Tax (11674) http://bylaws.vancouver.ca/11674c.PDF

This document is dated only 8 months ago. Is there any evidence it has worked so far? (There's a long history of intelligent people gaming laws, where the original intentions of the law were noble enough.)

A prime example of a problem solved by Georgism and LVT.

Honestly there's something broken with the way fundamental property laws work when we allow something like this.

What property tax breaks are you talking about?

> Bradford brought a vacancy tax to the council in early 2020. Similar measures were put forward at roughly the same time in other areas, including New York, Boston, and Montreal. But many of these efforts are on hold while cities grapple with the impact of the pandemic on their budgets. A vacancy tax sounds like an easy balm to the problem of chronically vacant storefronts, but counterintuitively, cities have instead often given tax rebates to the owners of vacant property. Until recently, Ontario mandated a flat 30 percent tax break to owners whose buildings had been empty for at least ninety days, with no maximum time limit. It was a measure born of the ’90s recession, intended to help ease the effects of economic downturn and falling property values.

> 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.

What is the public good here?

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.

The owner is still paying property tax and not taking any income from those buildings...their value would have to be growing aggressively each year for that to be remotely worth it.

I think two things happen, the first is that yes, the value is in fact growing aggressively each year. The second is that eventually, it will find some tenant that are willing to pay double, by choking everyone to eventually accept that rent is just now more expensive than ever. Once that happens you'll quickly recoup the time where it didn't rent.

This is not very accurate you can deprecate the building offsetting the rent income and only pay the tax if you sell the building and do not reinvest into a different property. In reality you can defer taxes indefinitely by just rolling over into the next purchase. If you need the cash you just take out a loan against the property.

It would be interesting if squatting became legal in the USA, or at least just in your town.

How can the value of those buildings still increase in an otherwise deserted area. That doesn’t make any kind of sense.

Nobody in their right mind would start a shop there, much less for extortionate prices.

No word on the street that the big box stores had moved in and captured all the local business?

it is easy to put all the blame on the land lord, and I am sure they are partially to blame.

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...

But dense urban cores tend to subsidize all of the infrastructure that makes suburban life possible. If the money weren't funneled in the wrong directions, there's no way it would make sense to be out of the urban core.

Aside from that being a false statement.

"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

Depends how you define blame. They chose to invest in the area which comes with its risks?

Sure. I am not clear on your point. I am not defending tax breaks just explaining why "downtown" decay is not simply a by product of "greedy evil landlords"

Right. Its not their job to do city planning, they were just looking to invest in something. Its hard to say when one becomes greedy, does trying not to end up in debt count? What does it matter really, motivation changes nothing to the situation.

>A vacant retail building should be the landlord's problem, not the town's.

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.

IMHO it should be by specific designation and the tax should be like a fine - for not using it. Say, you can buy a train station but you are going to have trains stop there. Buy a gas station and you are going to sell gas. Buy a store front and there shall be a store. Own farm land? Then farm? It should be like that even if local politics doesn't want it. Anything else makes a mockery of city planning and it could destroy decades of work.

This doesn't make any sense. The value of a lease on these properties vastly outweighs any property tax deduction.

Yes but I think the suggestion is that the taxes ought to (eventually) exceed the gains from asset value growth. We should want active main streets, and discourage squatters with empty space.

A much better solution is to eliminate the zoning restrictions that lock properties into specific uses and ease the permitting process that makes it hard to convert these empty storefronts into something else (while also discouraging speculation by letting supply naturally grow to meet demand).

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.

you're correct, when considering a single property.

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.

> don't have to pay property taxes [...] on the vacant ones

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.)".

This still doesn't make any sense! Lower rent is worth more than no rent and the property appreciates either way. Keeping a unit off the market to keep the rents up is kind of a silly plan if you never end up actually renting any of the units.

Any tenant comes with risk. Risk has a financial cost.

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.

Sure, there is some number at which this becomes true. But we’re talking about landlords who have supposedly kept properties off the market for years at a time in order to rake in the tax benefits.

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.

My understand is that commercial real estate loans require additional collateral for lower rents than what was agreed to when the mortgage was created. Building value is basically (monthly rent * constant).Accepting lower than when the mortgage was written will trigger provisions that value the property differently and require the building owner to add principal to get back to 25%.

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.

I have no idea if this is true, but unlike every other response to me in this thread, this is at least a coherent explanation that isn't immediately and obviously ridiculous. If this is true, it at least makes arithmetic sense.

People don’t keep units empty for tax breaks. That’s absurd.

I don't know which city johnnyApple is commenting on but if it's American ones what is happening is there a glut of commerical/retail properties https://www.bloomberg.com/graphics/2020-commercial-real-esta... (There was excessive retail even before covid aka also why many malls are dying). However the land is still appreciating if it can be converted to residential apartments/homes though it does depending on zoning laws.

I am sorry, but I don't understand this logic. The owner still has to make mortgage and property tax payments on an asset that is not yeilding anything. Sure the value may be growing but how fast is it growing if it is sitting empty. Empty building with no maintenance tend to wear down and often get graffitied and broken into - all of which involves further mitigation costs.

I am not sure what societal benefit we're getting from bailing out failing landlords. It's not as though they're employing a lot of people, or any of the usual justifications we might have for propping up a failing business.

In this particular case, the owner has had full ownership of these properties for over 50 years. No mortgages necessary.

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.

Land is an easily leveraged asset. While an individual can only typically borrow 80% of the value, a bank/investment operation could easily leverage the land to 95%+.

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 logic is that you either lower the rent until a building is being used or sell the property to somebody who has a better idea for something to do with it.

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.

>The owner still has to make mortgage and property tax payments

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.

In a similar vein Louis Rossmann has been walking through NYC showing current commercial storefront vacancies. While each video focuses on one street the rates of empty spaces seem to be higher than in the posted article. The rents do seem to be very steep as well, which you might expect out of NYC ($40,000/month is one price which stuck with me). One root cause cited in NYC, which isn't mentioned in the above article, is that commercial loans may prohibit leasing a space at a lower rate without lender approval (as it impacts the value of the building), though I do not know if the same issue applies in Canada.

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

My rent stabilized building in a desirable and convenient part of midtown manhattan is sitting at almost 30% vacant. This is completely unprecedented and wasn't even like this in the 80s. I'm leaving myself soon.

New York is in serious trouble and everyone is acting like things are somehow normal again.

Maybe in Manhattan, but Brooklyn is booming – apartments are being snatched up in days and rents seem to be trending towards all time highs right now. "New York" is bigger than just Midtown Manhattan.

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.

But New York isn't just Brooklyn either. The rest of the city and the state (especially the state) are cratering. Brooklyn, or at least the wealthy, fashionable parts can keep their heads down and act like things are great for a while but eventually poor conditions in the city will reach them.

And people will leave.

Brooklyn has been booming for some time. Hell if I had piles of money, I would never buy a property in Manhattan and have to deal with tourist hell prepandemic. Brooklyn still has 'real residents' as the majority roaming about.

What happened? Mass exodus of people from NY due to covid / work from home?

Serious question, I haven't seen any articles about this so just guessing

Mass exodus from Manhattan into the other boroughs. The biggest sacrifice you make in Manhattan is space, but you make it to be near your job.

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.

My educated guess: internet shopping, combined with property owners that don’t want to face reality and tell their accountants their shops aren’t worth what they used to be (a 100% guess is that’s sometimes due to incorrect incentives. If a property manager gets a bonus based on the (perceived) value of a property, more so than on the income it generates, raising prices can be the optimal short-term strategy, even if it means shops close left and right)

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.

Can only speak anecdotally, but…

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.

Do you feel the ones who moved out are doing so permanently? From coworkers I know who did this, it seems they are all “city people” but are finding that they really like single family zoned neighborhoods, more space, and a slower paced environment. It seems to me like what began as an experiment is likely to be a permanent change for them. Anecdotally, my sense is that these are people that never gave living outside the city a chance, or had preconceptions about it, but with this pandemic driven experience they are figuring out their actual tastes or priorities.

I’m really not sure but I think it kind of depends on the people. All our friends who bought outside the city grew up elsewhere so they seemed to be really comfortable (and in many cases excited) about it. It was as if they had a multi-year plan that would culminate in this move and the pandemic just accelerated it.

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.

I'm from the NYC Metro.

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.

Florida to me will always be the place that people’s grandparents go when they get too old to deal with NYC winters. I realize that’s foolish but there it is.

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.

Florida is also extremely suburban, even in its biggest cities the truly “city” like parts are quite small. That lifestyle is not for everyone.

Florida is an ecodisaster slowly unfolding. I get that a winter hovel is a nice thing, but a permanent move to Florida? Between sea rise, and temperature rise....

As stated elsewhere... Slowly boiling frogs.

If you are wealthy with fuck you money, a summer home in Miami is pretty good spend even if it sinks. Anyone else however should strongly consider their plans on how long they intend to live there.

it will be something to see when people realize miami is not the netherlands and can't just be "sea walled from the sea"

And since the rich make policy in our techno-oligarchy either overtly or covertly, that is the problem. The rich will simply move latitudes/location rather than deal with the problem to avoid billions of poor people effectively drowning (ok they won't LITERALLY drown, they'll starve from farmland loss or when their cities become uninhabitable).

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.

I moved from Boulder to Florida maybe 2.5 - 3 years ago.

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.

In two months I'm joining you. Finding an apartment was hard too -- buildings are at 99% occupancy and go within hours.

What makes Philadelphia “horrible” in your eyes? As somehow who has lived in what I think were nice but not luxurious parts of both urban cores, I found Philly every bit as livable and probably more pleasant and friendly, but I’m in New York now for social and work reasons

Lived in Philadelphia from college years in the mid 2000s up until about 2019.

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.

Perhaps voters should consider another party in the city. If your leaders are not making the right decisions, why don’t you vote for different leaders? Being completely married to a single party seems to lead to these types of outcomes. No matter how bad the politicians do, no one will vote against them because they are married to the party, for better or worse.

Delta loves Doris Florida are you ready for it?

Philadelphia is a wonderful city of great beauty and culture. What do you find so horrible?

I too am thinking of FL. Any particular city you are interested in?

I don't know about commercial, but a few years ago it seemed half or more of the new construction condos sat empty because they were investment speculation, foreign investment/hiding, and other real estate shenanigans.

The fact that quant spreadsheets extend to commercial is unsurprising.

The spreadsheets forget that you need people to make a city work.

New york will just continue to become a store for capital like Miami, or the chinese ghost cities, no one will really live there. Just a place to park ill gotten cash.

For someone not familiar with NYC at all, what was going on in the 80s?

Suburbaniztion in the 70s hollowed out the middle class leaving just the extremely wealthy and extremely poor. Crack epidemic and the War on Drugs and the resultant crime accelerated the exodus. With the loss of tax base the city was going bankrupt, cutting back services (like police), and the infrastructure began to rot.

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.

This is pretty much it exactly except what really gutted the artistic community wasn't pricing but HIV.

Drug use and HIV infection went hand in hand in those days and there was just so much death.

Commercially zoned real estate was at 80%+ vacancy for more than a decade. Business only concentrated in a few areas.

Most of midtown manhattan storefronts were just boarded up and covered in graffiti.

Lots of crime and cities not thought to be attractive places to live. Crack is often cited as the main driver of urban decay but there myriad reasons cities like nyc began a decline in the late 60’s until the early 90’s when cities began to be sought after again.

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.

The problem is NYC has learned nothing. In fact, it passed a record multibillion budget for this year after federal aid. Everyone is putting their head in the sand pretending everything is back to normal. I expect the city to crash and burn financially in another year or two. Or start begging for a federal bailout.

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.

For a few decades NYC settled into a truce—-things would be good for real estate moguls, bankers, jet setters with 2nd/3rd/5th houses in the city, etc.

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.

The police riots were indeed awful but unfortunately I don’t think there’s going to be a correction- as they showed when they were cracking skulls in Washington sq park the NYPD can operate basically independent of the civilian authorities

I have a friend who is an NYPD and he retired early along with his batch mate, he cited the cities policies is increasing crime and it's becoming dangerous to be out there. One of his mate got shot and died after he retired this year and he said that guy was also retiring soon and got unlucky.

I've heard that bit about the value of buildings being impacted by units with lowered rents, but I've never understood why that wouldn't also apply to units bringing in zero rent.

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.

Purchases can be made on expectations of returns based on comparable properties, or prices may be assumed based on other filled units. Filling at a lower rate definitively lowers those expectations.

On a 30 year model, small fluctuations have big consequences, and they cascade even further if there are multiple units.

> Filling at a lower rate definitively lowers those expectations

Not filling at all should too though.

It just depends on the difference between what you can get today, and what you expect to get in the future and when.

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.

And that doesn't even factor in what also happens a lot in NYC, owners wanting to redevelop. Your building sits empty for a while, as horrible as it sounds, it can speed approvals that you might not get if they were full. Never miss an opportunity to take advantage of a crisis, and a crisis like the pandemic doesn't come along very often.

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.)

A quick CTRL+F shows nobody mentioning it, so I'm just gonna say that Louis has repeatedly stated that "Commercially Backed Mortgages" are to blame.

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.

A tax on vacant property is an exceptional idea.

I came here to read the inevitable second-order effects discussion, that is to say, if cities enact things like vacancy rate they will cause extra unforeseen problems.

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?

> But, I've never seen anyone discuss second order effects from hedge funds, or rich developers.

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.

To start, the huge elephant in the room is that it is insane that cities are more expensive when city dwellers consume less resources and incur fewer environmental externalities, and are more productive. If our only hope is continued "suburbanization with li-ion characteristics", as so many people seem to believe, we're fucked as a country.

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.

> public transportation

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.

Last BART train going to the East Bay left Civic Center after midnight, not sure if this got dialed back for Covid, but I used to take this all the time.

Indeed. The pre-COVID schedule was that all active lines had their last train leave from the end of their line at midnight. The last SF to East Bay would be the SFO train, which would hit Civic Center around 12:30 am.

NYC is better, but there is still to much sprawl there too.

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.

NYC metropolitan region was what I was calling sprawl, to be clear. But yes, NYC proper isn't dense enough in parts either.

> it is insane that cities are more expensive when city dwellers consume less resources and incur fewer environmental externalities, and are more productive

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's not "just supply and demand". Supply can increase to match demand! The production of almost everything in our lives has economies of scale, so it's surprising that this isn't the case for cost of living in cities.

It also use to be true! The main thing that changed is government policies increasingly restricting supply.

I think you're (and Ericson2314) confusing/conflating two different ideas.

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".

For green house gas emissions, at least, it is absolute. See https://coolclimate.org/maps.

True rural and true urban (with public transit predominating) is good. But the suburbs where most people live are absolute trash.

>the suburbs where most people live

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.

The amount of land in a given area of a city in largely fixed. You can build upwards to create more usable space, but there are no economies of scale in doing this. The relationship is the opposite —- taller buildings are more expensive per unit of area as you go up. Space is a multi-floor building is not constructed marginally like a widget in a factory. Each floor must support the floor above it.

While this is true, the expectations of the US have also overshot. The US is an outlier in terms of square footage in new homes, American homes are very large. And personally I don't want some 2000 sq ft McMansion because that means all the cooling, heating, cleaning, and maintenance of such a large space that I've only ever seen really used to accumulate lots of stuff.

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.

Those homes aren’t in cities where space is a concern. They’re in sprawling suburbs where land is highly available. The construction costs of those 2000 square foot homes is cheaper than 1000 square foot on the 25th floor of a building.

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.

People are choosing suburbs based on costs. The aver person has little ability to choose based on any other reason.

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.

They’re choosing suburbs for value, not cost. There are plenty of apartments available in cities at rents lower than the average suburban mortgage payment.

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.

But there are many many things you cannot do living in an apartment that you can do with your own home/property. It's not simply a calculation of value in a $/sq-ft sense that people are making.

Yes, that’s part of what I mean by value as opposed to cost.

Cities have amenities that are supposed to allow for those same things. Fancier apartments sometimes do too.

Sure, value not costs.

> 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 agree with everything here except I’m not sure that value will necessarily result from focusing on cost.

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.

I'm not sure poor neighborhoods are built. Most construction these days is shit quality, with just a few cheap trappings making something "luxury".

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.

The congregation of public housing into one place is an example of what I’m referring to as “building poor neighborhoods”. In contrast, you can build rich neighborhoods depending on the structure and how the land-use is controlled.

The trick is to not really do anything at all and let the magic of agglomeration do its thing.

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.

I'm worried that cars, given subsidies, are too much of an anti-agglomerator, and thus active measures must be taken.

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.

The costs are out of whack. Environmental externalities are paid for by everybody instead of the person creating them. We need carbon taxes to fix that problem.

This is on top how much zoning craziness distorts the market.

I think that discussion about "suburbs" tend not to accomplish much because the word isn't really defined. I mean, in common parlance, but also in the US government I believe that things like the census divide everything into urban and rural.

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.

A suburb is where people's work aren't tied to the land (agriculture, logging, etc.) And virtually all transport is done by car.

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'm within easy walking distance of a bus stop. However, the bus goes mostly east and west, rather than north to where I work.

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.

> I'm within easy walking distance of a bus stop. However, the bus goes mostly east and west, rather than north to where I work.

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.

> People are choosing suburbs based on costs. The aver person has little ability to choose based on any other reason.

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.

In hot housing markets there is nowhere near enough supply to meet demand.

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.

> there are no economies of scale in doing this

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.

I was responding to the parent comment about the economies of production specifically.

OK, fair enough. I read "production" to not just be about the production of housing in isolation, but it is ambiguous.

Real estate isn’t instantly scalable. It takes years of planning and decades of execution to create a truly scalable city.

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.

The dominant factor making US cities expensive to live in is that they ban housing construction.

Legalizing a healthy housing supply would improve this country more than anything I can think of.

Then we should repeal the majority of Dodd-Frank.

Repealing zoning is the more common answer :)

What in Dodd-Frank stops housing construction?

It makes financing single family homes near impossible for speculative builders. Builders need to find a buyer to do the financing before construction can start.

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.

> Which is why you see crappy apartments being built at a faster rate than cookie cutter homes were being built in 2007.

I wish this were true!

Thanks. Hadn't heard about that before.

from Wikipedia --

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,[8] or failed to provide adequate regulation to the financial industry.[9] Many Republicans have called for the partial or total repeal of the law.[10][11][12]

There are enough houses to house everyone in the US. The problem is that half of them are for rent which enriches one person off the dime of another.

We don’t need more houses unless we want to continue wrecking the environment. Better to block renting and use what we have.

Homeownership is stupid speculation which makes things unaffordable. Single family homes also prevent density. We could have a "condo economy" but there's no good reason to.

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.

> 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.

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.

> we now know rent control isn't bad

Huge ask that we all accept that conclusion from the speech you linked.

Yeah. One has only to look at the housing market in Berlin to see that it can be bad. Of course that is one extreme and there are many different ways to implement rent control. Overall I think this is a whole other can of worms in itself though

Ideally we should build enough public housing that rent control isn't needed, just as ideally we should have strong enough unions that minimum wages aren't needed.

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.

There are actual economists who think rent control doesn't hurt supply. And there are actual economists who think the opposite. Given that, saying "we now know rent control isn't bad" is quite a stretch.

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.

We know, empirically, that rent control, when it satisfies some key constraints, is effective.

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.

You and the above poster are overstating your case. Your post boils down to "don't u believe in science lol?"

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.

It's on you to show an example of a city where these various regulations are absent and where rent control hurt housing supply. Good luck.

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.

There's nothing vague about the argument against rent control. Further, I don't agree with your view of science. Empirical evidence matters but the pure empiricism that you're advocating is not convincing to me.

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.

No, the argument is indeed vague. There are plenty of situations where intervening in the market actually increases efficiency - for example, patents, state monopolies on utilities, minimum wages, etc...

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.

> 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.

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.

There is evidence that in San Francisco rent control decreased the supply of housing


Actually, the paper doesn't make any claims on the supply of housing, it makes claims on the rental supply. There is an important distinction.

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.

> All in all, the article doesn't actually make the claim or even suggestion that rent control decreased the supply of housing

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.

No, it's not a claim that market rents increased in the long run, it's a suggestion. I can assure you I've read the entire article, and if you re-read my reply you're going to notice that I specifically talked about claims vs suggestions.

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.

the more compelling critique of rent control is that it's a tiny patch on a heavily distorted market--just enough bone to keep the riff-raff distracted from the naked engorgement of capital on real estate. if we had highly dynamic, fair, and transparent real estate markets, we'd have no need for rent control, because a high-functioning market keeps prices just above the cost to create/provide, that is, a fair market price.

What Prop 13 does for owners, rent control does for renters. Both gives huge advantages to current residents at the expense of future residents. It's obvious why current residents would vote for such a change. This allows current residents to ignore problems as they occur, so these problems grow out of control.

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.

Rent control doesn't just benefit current residents, any sane rent control policy carries forwards when tenants change. Those that don't are ineffective on purpose.

Beyond that, lowering rents benefits even future residents and homeowners-to-be as they lower property values and dampen speculation.

> What Prop 13 does for owners, rent control does for renters.

Economically trap them in their home/apartment forever, thus achieving segregation with extra steps? I agree.

Right. There are measured lock in effects of both laws and both laws should go.

> In a setting where the supply of new housing is already limited by other factors – whether land-use policy or the capacity of existing infrastructure or sheer physical limits on construction – rent regulation will have little or no additional effect on housing supply.

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.

Keep in reading, including the comments such as the author's in https://jwmason.org/slackwire/considerations-on-rent-control... :

> 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.

Actually, that is not his position. He includes economic constraints to construction, ie, the price of the land being too high.

>the huge elephant in the room is that it is insane that cities are more expensive when city dwellers consume less resources

50% of the world lives in cities yet they consume 70% of the worlds energy.

To enjoy modern standards of living, medium to high density urban arrangements are much less resource intensive than suburban sprawl, which the relevant comparison point.

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.

> 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.

Literally pre-industrial [1]. 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.

[1] http://www.fao.org/3/i5251e/i5251e.pdf

Also keep in mind that turning nature into agriculture also has huge environmental costs not captured in energy usage.

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.

What are those numbers for American suburbs?

We're not comparing to the third world here, we're comparing across models of living in the developed world.

Is that because the 50% who don’t live in cities spend half their typical day in the nearest city?

I assume it's because people in cities are richer so they tend to consume more.

> 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.

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.

Actually, many of your points are good, just not your first one

> 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.

Also true!


> 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.

It's not families living in San Francisco. It's single, urban professionals and engineers. I don't like that people aren't really having families anymore, but just pretending that it's still the 70s doesn't exactly work either.

It's definitely a matter of what the commenters view as "right". Obviously everything affects everything else, to infinite degrees. But assuming an American perspective, hedge funds and developers are both dealing in their own private assets, that being their reserves of capital and valuable labor. So whatever they do with those things is... primarily their business. Of course most reasonable people accept some small intrusions to this situation, but the overall perspective remains the same.

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.

> Hedge funds and large corporations often seem like they have more power and often much more agility than governments.

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.

That provision is because commercial property is often valued by reference to a cap rate (essentially a net-operating-income multiplier to get to the property value). This is not a property of the banking system but of the market for commercial property.

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.

You seems to be understanding this better than I do.

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?

Commercial property as a category has some characteristic vacancy rate. (For office and retail, this can be around 10% under typical market conditions. It's not at all weird for "good" property to sit vacant for 18 months at a stretch.)

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.

As you say, it means the bank’s underwriting process failed. It makes more sense to me that they eat the loss caused by their error and auction off the property at a price the rental market will bear. Papering over bad underwriting with dishonest valuations doesn’t strike me as worth sacrificing cities’ commercial vibrancy for.

That's the thing the bank is (sort of) "trying to do" and the landlord is seeking to prevent them doing. If the landlord lowers the rent such that the property would now be in violation of the loan covenants, the bank has the option to foreclose on the loan and auction the property off. If the landlord does not lower the rent, they can avoid being in violation of the loan covenants and the bank does not have the right to foreclose and force an auction (provided the landlord keeps making the loan payments, of course).

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.)

> I f 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.

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.

The question remains "how [and when] do we determine that this specific property is being valued dishonestly?"

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.

This is circular reasoning. These multi-year vacancies exist precisely because the present regime encourages it. One determines the appropriate vacancy rate and then tunes the regulatory framework to remove barriers to achieving that public purpose.

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.

It’s not just banking ratios that cause this behavior, though, but rather in part the owners of commercial property, often let out for 5 year terms with 2 5-year renewal options, who don’t want to be too quick to lower their rental base for possibly 15 years for a 1-2 year recession.

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.

> But, I've never seen anyone discuss second order effects from hedge funds, or rich developers.

There is a huge body of research on it. When private entities do it the term used is an "externality".

There is only one thing that distinguishes the difference between government and all other social entities:

A monopoly on the use of force.

A government is also accountable to the citizens while a private company is only accountable to its shareholders. That's a pretty big difference.

Private companies and governments can both exist without accountability.

There is literally no government in the world that isn't somewhat accountable to citizens.

Meanwhile, there are many multinationals that are not accountable at all to the citizens of countries they operate in.

> There is literally no government in the world that isn't somewhat accountable to citizens.

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.

Every government is afraid of rebellion or strikes, or otherwise accountable to public opinion. The power that the average person has is considerable, and revolutions and revolts are not so uncommon.

Orders of magnitude less common than customers switching brands.

Companies are dominated by the major shareholders, basically the rich.

Guess what the us government is dominated by?

Sufficiently wealthy private entities can buy access to that force, which makes it more of an oligopoly than a monopoly. Not to mention there are private security services who are also granted force.

I expect that companies create larger second order effects than governments. However governments last longer than private companies so they are a more reliable target for criticism. When a company messes up it can morph it's constituent parts into something else.

Regulatory capture is like boiling a frog. Hedge funds and developers make us warm wet and happy until it's too late.

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