PSA: That Long-Vacant Storefront Might Be a Bank's Fault

Commercial properties don’t have rent stabilization (at least in Los Angeles). That’s strictly for residential properties that fall under RSO.

If the rent for a commercial property becomes too high to pencil out, it can have the unintended effect of forcing businesses to close brick-and-mortar locations. Some can pivot to popups, online only, or a mobile business (such as a restaurant switching to a food truck). Some may have to close entirely.

Speaking of businesses, I think you’ll find most banks are averse to things that aren’t profitable (or that aren’t profitable enough).

Which brings me to this Reddit post concerning 325 West 8th Street, which according to the OP, has been vacant for 11 years. There are “for lease” signs in some of the windows. (The upper floors of this building house the Union Lofts, so this isn’t a case of an entire building being empty. Presumably, the leasing signage is for the vacant ground floor space.)

I suggest having a look at the comments, which are rife with reports of smaller businesses unable to handle high rents - or hefty rent hikes.

So why don’t commercial landlords lower rents to bring in business tenants, you ask?

It’s not necessarily the landlord’s doing. It might be the bank.

User r/watsonwelch notes the following:

The underlying issue is that banks have lent out trillions of dollars in commercial real estate loans, and — as it’s been noted — if the landlords lower the rent, the property values nosedive, and suddenly the loans are massively underwater, destroying the balance sheets of the banks.

To avoid this, all the banks have been “extending and pretending” — extending the payment terms of the loans and pretending that people will suddenly start renting these properties at the rates they expect. Unfortunately this has meant that — all over the country — a massive amount of commercial real estate has been sitting fallow for (in some cases) a decade or longer.

This isn’t a crackpot theory, the NY Fed wrote about it a year ago (and it’s only gotten worse since then): https://www.newyorkfed.org/research/staff_reports/sr1130.html

The final sentence of the report: “The materialization of this financial fragility depends on whether banks will be able to deal with rising defaults in an orderly fashion or whether widespread defaults will lead to sudden and extensive losses.” 🫠

(As usual, all bolding is mine.)

Meanwhile, over on the Long Beach subreddit, there’s a thread about a vacant former Rite Aid attracting drug users.

User r/LBChango comments:

The reason they’re empty is because rents are stupid high and only large corporate owned companies can afford to run businesses in them. Reason why they can’t simply lower the rents is because most of these properties aren’t paid off or used as leverage for bigger loans. Lowering rent devalues the properties which can put the owners under water on their loans. If they leveraged loans on the properties, banks may force them to pay the difference if the properties drop in value.

We really need to have some serious nation wide banking reform if we want to fix the problem. The debt based economy is really screwing everyone over.

If anyone out there has personal or professional experience with commercial real estate lending and would be willing to help me explain this to my readers in further detail, please do reach out.

325 West 8th Street, Downtown.

3300 East Anaheim Street, Long Beach.