Redditor explains why commercial property sits vacant instead of reducing rent

[quarterdime]

I think this market has been headed for collapse since well before coronavirus. https://www.propublica.org/article/whistleblower-wall-street...

The industry is reading off the exact same script as 2008 but with all sorts of increasingly silly financial instruments based off commercial real estate. Because of course commercial real estate is different.

This is crazy and has been going on for a while. I fear this is every bit as big as 2008. A lot of wealth is about to evaporate. A lot of it from the middle class. I notice that the market is UP and Americans are killing one another in the streets. What is this going to look like when unemployment hits 30%? Our whole economy runs on credit. At some point the banks are going to get squeezed by this. Nobody is going to sign a lease on commercial property in 2020. Businesses need to borrow money. The fed is trying to print money fast enough to shrink the problem, but I do not think there is any way for them to stay ahead.

Totally unrelated question. That guy Jared Kushner: does anyone remember what industry he's in?

[PeterStuer]

Where was the lesson in 'if only we screw up bad enough we will be showered perpetually in lavish bailout wealth'?

[jessriedel]

Ok, forget re-writing old loans. Why do banks continue to write new loan with terms that incentivize their debtors to turn down free money? That must hurt the default rate.

[repsilat]

The problem might be recursive. If the shortfall is tacked onto the back end of the loan (plus interest), so long as the tenant is solvent it isn't problematic for the bank. If the client takes a write-down, though, the bank takes a write-down, and they may need to think about reserve ratios and regulation.

I suppose the bank isn't primarily interested in the loan being paid on time, they just want it paid some time. (Not sure, a delay might even be good for their business model?)

The bank is definitely interested in problems of solvency, and the tenant is interested in minimising cost, but kicking the can down the road might be the easiest option for them. Maybe a competitive creditor could break that impasse though. Threat of insolvency certainly would.

[rasz]

but .. this has been going on for years in NY. Rossmann video checking out commercial spaces he was considering full year ago https://www.youtube.com/watch?v=Fk5o6cbq_Qs all but one are still vacant. He sometimes shows stores he tried renting 7 years ago, and they are still empty.

[toomuchtodo]

I believe this is why the renewed interest (last paragraph):

> That said, Covid is changing everything. I can honestly say I’ve seen 10x more modifications in the last 3mo than I saw my entire career including the great financial crisis. There is a HUGE flurry of activity happing in the commercial finance sector that nobody outside of the industry is talking about.

[phendrenad2]

Maybe this is an ongoing game for commercial real estate speculators. Get a loan, try to get tenants, if you can't get people to pay full-price, default after a few years?

[jariel]

Add a vacancy tax into the mix and see what happens.

Also, seems as though the structural issues need to be updated on the 'owners' of said mortages.

[jesterson]

Vacancy tax won't solve the problem, will just escalate the inevitable crash

[innagadadavida]

> I’ve seen 10x more modifications in the last 3mo than I saw my entire career including the great financial crisis.

So what’s economic outcome of all this? It looks like more commercial properties should get rented out and the rents should also fall?

[throwaway1777]

In theory down cycles are healthy to clear unprofitable businesses out of the economy and replace them with new ones. But it’s always complicated. I’m sure some analysts are earning their salaries this year figuring it out.

[rasz]

As long as government keeps propping real estate in a bid to prop banks up nothing will change.