Why do commercial spaces sit vacant?

Visible Problem: High Rents, Long Vacancies

• Multiple people report long‑vacant storefronts in LA, SF, Bay Area, etc., often after steep rent hikes drive out long‑standing local businesses.
• Some note only well‑capitalized or property‑owning businesses survive; non‑capital‑intensive or community‑oriented shops (delis, cinemas, bookstores) get wiped out.
• There’s confusion over why landlords prefer years of vacancy over lower rent.

Tax Policy: Land Value Tax vs. Prop 13 vs. Vacancy Taxes

• Strong support from several commenters for a land value tax (LVT) to penalize under‑use, especially empty lots/parking and speculative holding.
• Others say LVT alone doesn’t fix the specific loan‑valuation mechanism described in the article; it mainly changes incentives for vacant/underbuilt land.
• In California, many argue Prop 13 (especially for commercial/investment property and inherited assets) massively distorts markets and enables cheap long‑term holding of underused sites.
• Suggested reforms include: repeal or partial repeal of Prop 13, especially on commercial/investment property; liens to defer tax increases for cash‑poor owners; phased‑in reassessments.
• Vacancy taxes are proposed (sometimes escalating over time), but critics warn they:
  • Can be gamed with token “use” (vending machines, fake offices).
  • Risk triggering foreclosures and area‑wide devaluation, especially in weak markets.

Banking, Valuation, and “Extend and Pretend”

• Many accept the article’s thesis: buildings are treated as financial products; banks and owners resist lowering headline rents because:
  • Lower recorded rent forces a revaluation and breaches loan‑to‑value limits.
  • Vacancies can be hand‑waved as “temporary market slumps.”
• Others question whether lenders really are that credulous or rigid, arguing:
  • Banks should, and often do, mark down assets when income falls.
  • Some incentives are driven by regulators and capital requirements, not pure stupidity.
• Examples are given of “extend and pretend” in other asset classes (bonds, Treasuries) and how avoiding mark‑to‑market can delay but magnify crises.

Competing Policy Ideas and Concerns

• Proposals:
  • Track vacancy and restrict new commercial construction until existing stock is absorbed.
  • Convert excess commercial to residential; incentivize adaptive reuse.
  • Impose special fees on “vacant or not used for its zoning purpose.”
• Pushback:
  • Restricting new supply can entrench high‑rent, high‑vacancy incumbents.
  • Planning commissions already wield too much, sometimes politicized, veto power.
  • Tight rules can create “intervention spirals” and more loophole‑driven gaming.

Differing Views from Practice vs. Theory

• A commercial real‑estate professional says:
  • Cap rates are primarily based on existing income and comparables, not fantasies.
  • Empty space already lowers net operating income and value; banks generally don’t “pretend” it’s fully leased.
  • Owners do negotiate down from asking rents; refusal to cut is rare.
• Others insist over‑optimistic pro formas and loose valuations are common, especially pre‑pandemic, and that regulatory arbitrage is central to the problem.

Demand Side: E‑Commerce and Changing Habits

• Some argue online shopping and home‑centric lifestyles are the main drivers: many local shops simply aren’t viable, regardless of financing games.
• Others counter that financing structures and tax distortions still matter, because they:
  • Keep prices and rents artificially high.
  • Prevent downward adjustment that would allow new, lower‑margin or community‑oriented businesses to emerge.

Broader Systemic and Moral Framing

• Several participants frame this as:
  • Financialization turning buildings into abstractions, misaligning market incentives with social utility.
  • A social cost borne by neighborhoods (dead streets, lost local culture) to preserve asset values and bank balance sheets.
• Some see “hurting the banks” via honest mark‑to‑market and accepting losses as necessary to reset the system; others fear systemic crises and bailouts.