AFAIK Commercial is priced at a multiple of rent. So when an owner still has a loan on a building that was based off of multiple of 3000/mo and decides to rent it out for 1500/mo it effectively cuts the value of that building in half.

Just an accounting issue for someone who owns it out right, but devastating for someone with a loan. I think this is why you’re seeing landlords offering multiple free months of rent nowadays. It allows them to adjust to actual market pricing annualized, while being able to call the “free” months an expense

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marcus_holmes 2 hours ago | parent | next [-]

We had this experience with a local town centre where the high street basically died. Retailers priced out by high rents, which was fine when the economy was good and people were spending, but as soon as it took a dip there was nowhere to go and they had to shut up shop.

And this mechanism was why; almost all the real estate was owned by funds and leveraged. Property values based on a multiplier of rent. They could weather a long spell of zero rental income because that effectively cost them nothing, but if the rent went down then the value went down and they had to come up with the difference.

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salynchnew 43 minutes ago | parent [-]

That seems like a rather inefficient use of resources. How long will a fund typically keep that on the books before they have to offload the asset or declare bankruptcy? At a certain point, that smells like a scam with a real estate business attached to it.

	▲	gizajob a minute ago \| parent \| next [-]
		I think that about nails it for most commercial real estate.
	▲	ThrustVectoring 11 minutes ago \| parent \| prev [-]
		Commercial real estate lending typically has a clause that allows pausing of payments during a vacancy and letting the interest accrue into the balance of the loan - effectively, the banks are giving the property owners a free option to try and get the vacancy cleared without affecting long-term incomes and asset prices.

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LPisGood 2 hours ago | parent | prev [-]

I’m not sure if the explanation in the second part holds water. Wouldn’t the reduction in property value be the same as the ammortized free rent?

	▲	Arainach 2 hours ago \| parent \| next [-]
		No, because the mortgage companies' valuation is based on rent and does not consider any incentives.
	▲	netcan an hour ago \| parent \| prev [-]
		No. Not if the valuations and downstream effects of valuations are formulaic, which they often are.