More profitable for DC landlords to "sit" on empty storefronts than rent at market rate??

[Anonymous]

As someone who works in commercial real estate, there are a number of reasons that properties sit empty. Tenants typically want the landlord to invest a certain amount of money in tenant improvements up front and then the Landlord's investment is amortized over the term of the lease. That is a big upfront outlay of dollars by a landlord, both in paying for the tenant improvements and paying for the leasing commission to the landlord broker and the tenant broker. So a landlord wants to make sure that the tenant is going to be there paying rent for the long haul, otherwise that is a lot of money wasted up front. So, especially if the landlord owns the property debt-free---and a lot of properties in the Conn and Wisc corridors have been owned by the same families for a long time, the landlord will take their time underwriting tenants to find a good credit risk. Even pre-covid, it was difficult to get retail tenants, as the internet has severely impacted bricks and mortar dry use retail (like clothing stores, etc.) and compared to downtown neighborhoods there is not enough residential density in upper NW to support endless restaurants.
Sometimes properties sit when a building owner wants to redevelop the property to a more intensive use and is biding their time until all the tenants in the block have been bought out or had their leases expire. And while DC's commercial landlord tenant laws are nowhere near as hostile to landlords as the residential L&T laws, DC is still a tougher place to evict tenants than VA or MD so landlords are cautious about letting a "low cost" user take the space as/is, because it may be difficult to get them out.

And finally---this is a bit of a digression but most people are unaware of it-- in 2019, DC jacked the transfer and recordation tax rate on commercial property to 5%---the highest in the country. So in a marginal retail leasing environment, holding a property vacant while you try to assemble enough surrounding properties to convert to residential is a viable strategy. This is an example of where good city planning and the anti-business tax greed of the progressive council are in direct conflict. There are a lot of doctors/dentists and other professional service offices in the ground floor and basements of apartment buildings on Connecticut avenue. They are a great amenity to the community---my kids' pediatricians occupy such space. But because of the 5% transfer and recordation tax, it is no longer cost efficient for multi-family building owners to continue to lease such spaces---because when they go to sell their building they will incur a 5% tax on the entirety of the sale rather than the 2.5% tax if the building was solely residential. So on a $100M sale, the transfer & recordation tax is $5M if there is a drop of commercial use in the building, whereas it is $2.5M if the building is purely residential.

[Anonymous]

Anonymous wrote:As someone who works in commercial real estate, there are a number of reasons that properties sit empty. Tenants typically want the landlord to invest a certain amount of money in tenant improvements up front and then the Landlord's investment is amortized over the term of the lease. That is a big upfront outlay of dollars by a landlord, both in paying for the tenant improvements and paying for the leasing commission to the landlord broker and the tenant broker. So a landlord wants to make sure that the tenant is going to be there paying rent for the long haul, otherwise that is a lot of money wasted up front. So, especially if the landlord owns the property debt-free---and a lot of properties in the Conn and Wisc corridors have been owned by the same families for a long time, the landlord will take their time underwriting tenants to find a good credit risk. Even pre-covid, it was difficult to get retail tenants, as the internet has severely impacted bricks and mortar dry use retail (like clothing stores, etc.) and compared to downtown neighborhoods there is not enough residential density in upper NW to support endless restaurants.
Sometimes properties sit when a building owner wants to redevelop the property to a more intensive use and is biding their time until all the tenants in the block have been bought out or had their leases expire. And while DC's commercial landlord tenant laws are nowhere near as hostile to landlords as the residential L&T laws, DC is still a tougher place to evict tenants than VA or MD so landlords are cautious about letting a "low cost" user take the space as/is, because it may be difficult to get them out.

And finally---this is a bit of a digression but most people are unaware of it-- in 2019, DC jacked the transfer and recordation tax rate on commercial property to 5%---the highest in the country. So in a marginal retail leasing environment, holding a property vacant while you try to assemble enough surrounding properties to convert to residential is a viable strategy. This is an example of where good city planning and the anti-business tax greed of the progressive council are in direct conflict. There are a lot of doctors/dentists and other professional service offices in the ground floor and basements of apartment buildings on Connecticut avenue. They are a great amenity to the community---my kids' pediatricians occupy such space. But because of the 5% transfer and recordation tax, it is no longer cost efficient for multi-family building owners to continue to lease such spaces---because when they go to sell their building they will incur a 5% tax on the entirety of the sale rather than the 2.5% tax if the building was solely residential. So on a $100M sale, the transfer & recordation tax is $5M if there is a drop of commercial use in the building, whereas it is $2.5M if the building is purely residential.

This is the only explanation so far that makes sense. Also this struck me: "compared to downtown neighborhoods there is not enough residential density in upper NW to support endless restaurants." So this is an explicit statement in support of YIMBY/upzoning policies. With retail dying, the only hope is increased density supporting more customers for other service industries. Otherwise you get the Woodley Park ace situation.

[Anonymous]

Anonymous wrote:

Anonymous wrote:As someone who works in commercial real estate, there are a number of reasons that properties sit empty. Tenants typically want the landlord to invest a certain amount of money in tenant improvements up front and then the Landlord's investment is amortized over the term of the lease. That is a big upfront outlay of dollars by a landlord, both in paying for the tenant improvements and paying for the leasing commission to the landlord broker and the tenant broker. So a landlord wants to make sure that the tenant is going to be there paying rent for the long haul, otherwise that is a lot of money wasted up front. So, especially if the landlord owns the property debt-free---and a lot of properties in the Conn and Wisc corridors have been owned by the same families for a long time, the landlord will take their time underwriting tenants to find a good credit risk. Even pre-covid, it was difficult to get retail tenants, as the internet has severely impacted bricks and mortar dry use retail (like clothing stores, etc.) and compared to downtown neighborhoods there is not enough residential density in upper NW to support endless restaurants.
Sometimes properties sit when a building owner wants to redevelop the property to a more intensive use and is biding their time until all the tenants in the block have been bought out or had their leases expire. And while DC's commercial landlord tenant laws are nowhere near as hostile to landlords as the residential L&T laws, DC is still a tougher place to evict tenants than VA or MD so landlords are cautious about letting a "low cost" user take the space as/is, because it may be difficult to get them out.

And finally---this is a bit of a digression but most people are unaware of it-- in 2019, DC jacked the transfer and recordation tax rate on commercial property to 5%---the highest in the country. So in a marginal retail leasing environment, holding a property vacant while you try to assemble enough surrounding properties to convert to residential is a viable strategy. This is an example of where good city planning and the anti-business tax greed of the progressive council are in direct conflict. There are a lot of doctors/dentists and other professional service offices in the ground floor and basements of apartment buildings on Connecticut avenue. They are a great amenity to the community---my kids' pediatricians occupy such space. But because of the 5% transfer and recordation tax, it is no longer cost efficient for multi-family building owners to continue to lease such spaces---because when they go to sell their building they will incur a 5% tax on the entirety of the sale rather than the 2.5% tax if the building was solely residential. So on a $100M sale, the transfer & recordation tax is $5M if there is a drop of commercial use in the building, whereas it is $2.5M if the building is purely residential.

This is the only explanation so far that makes sense. Also this struck me: "compared to downtown neighborhoods there is not enough residential density in upper NW to support endless restaurants." So this is an explicit statement in support of YIMBY/upzoning policies. With retail dying, the only hope is increased density supporting more customers for other service industries. Otherwise you get the Woodley Park ace situation.

NP to add to that, I think that it's not just about density but about relative density. 15-20 years ago, there were far fewer restaurants and businesses in EOTP neighborhoods, and so it was pretty typical for those of us who lived in places like Columbia Heights or U Street to head across the park to dine or run errands, just as it was typical to leave the city to run to Target.

Now there are thousands more people living in these EOTP neighborhoods, and far more businesses of all types. Little need for residents of those neighborhoods to cross the park, and so the foot traffic to places like Woodley Park or Cleveland Park or Friendship Heights has dwindled, even though/because these neighborhoods haven't changed that much. Because of the incentives of landlords, commerical rents haven't fallen to match. Adding to that, the average age in WOTP neighborhoods has likely gone up as young people are more drawn to the livelier and newer neighborhoods to the East.

The lack of residential construction keeps home prices in the neighborhood high, but it ultimately damages the commercial districts.

[Anonymous]

Anonymous wrote:As someone who works in commercial real estate, there are a number of reasons that properties sit empty. Tenants typically want the landlord to invest a certain amount of money in tenant improvements up front and then the Landlord's investment is amortized over the term of the lease. That is a big upfront outlay of dollars by a landlord, both in paying for the tenant improvements and paying for the leasing commission to the landlord broker and the tenant broker. So a landlord wants to make sure that the tenant is going to be there paying rent for the long haul, otherwise that is a lot of money wasted up front. So, especially if the landlord owns the property debt-free---and a lot of properties in the Conn and Wisc corridors have been owned by the same families for a long time, the landlord will take their time underwriting tenants to find a good credit risk. Even pre-covid, it was difficult to get retail tenants, as the internet has severely impacted bricks and mortar dry use retail (like clothing stores, etc.) and compared to downtown neighborhoods there is not enough residential density in upper NW to support endless restaurants.
Sometimes properties sit when a building owner wants to redevelop the property to a more intensive use and is biding their time until all the tenants in the block have been bought out or had their leases expire. And while DC's commercial landlord tenant laws are nowhere near as hostile to landlords as the residential L&T laws, DC is still a tougher place to evict tenants than VA or MD so landlords are cautious about letting a "low cost" user take the space as/is, because it may be difficult to get them out.

And finally---this is a bit of a digression but most people are unaware of it-- in 2019, DC jacked the transfer and recordation tax rate on commercial property to 5%---the highest in the country. So in a marginal retail leasing environment, holding a property vacant while you try to assemble enough surrounding properties to convert to residential is a viable strategy. This is an example of where good city planning and the anti-business tax greed of the progressive council are in direct conflict. There are a lot of doctors/dentists and other professional service offices in the ground floor and basements of apartment buildings on Connecticut avenue. They are a great amenity to the community---my kids' pediatricians occupy such space. But because of the 5% transfer and recordation tax, it is no longer cost efficient for multi-family building owners to continue to lease such spaces---because when they go to sell their building they will incur a 5% tax on the entirety of the sale rather than the 2.5% tax if the building was solely residential. So on a $100M sale, the transfer & recordation tax is $5M if there is a drop of commercial use in the building, whereas it is $2.5M if the building is purely residential.

Thank you for this insight, but I don't think it really answers why commercial landlords are charging astronomical rents per month and keep raising them, even when it then drives a restaurant that does "good" business out. Ie, the restaurant would stay if the rent didn't keep soaring to unobtainable prices. In our neighborhood weve ended up with only fast food and fast express (high volume businesses). And banks. How does adding more residential density change anything? A sit down restaurant can only seat so many at a time. Perhaps the rents are what need to to be looked at, and a penalty for properties that sit empty for ages.

[Anonymous]

Thank you for this insight, but I don't think it really answers why commercial landlords are charging astronomical rents per month and keep raising them, even when it then drives a restaurant that does "good" business out. Ie, the restaurant would stay if the rent didn't keep soaring to unobtainable prices. In our neighborhood weve ended up with only fast food and fast express (high volume businesses). And banks. How does adding more residential density change anything? A sit down restaurant can only seat so many at a time. Perhaps the rents are what need to to be looked at, and a penalty for properties that sit empty for ages.

We live in a free market economy. What you think of as an "astronomical" rent may in fact not be. Landlords ask for the highest rent they think they can get. Sometimes, especially with new developments or heavily leveraged refinancings, a landlord's lender has set rent levels within the loan documents so that the landlord has to try to obtain those rents and is willing to wait for months in order to get them. Fast food and banks pay high rent. Banks are great credit---they always pay the rent and they require much less than the average restaurant in terms of Tenant improvement allowances. WaWa is a great example of a fast express user who set out 5 years ago on a major effort to compete with 7-11 in urban markets---they went into Columbia Heights, Adams Morgan, G-town etc., with a willingness to pay a huge premium over the asking rents at the time.

[Anonymous]

Anonymous wrote:

Thank you for this insight, but I don't think it really answers why commercial landlords are charging astronomical rents per month and keep raising them, even when it then drives a restaurant that does "good" business out. Ie, the restaurant would stay if the rent didn't keep soaring to unobtainable prices. In our neighborhood weve ended up with only fast food and fast express (high volume businesses). And banks. How does adding more residential density change anything? A sit down restaurant can only seat so many at a time. Perhaps the rents are what need to to be looked at, and a penalty for properties that sit empty for ages.

We live in a free market economy. What you think of as an "astronomical" rent may in fact not be. Landlords ask for the highest rent they think they can get. Sometimes, especially with new developments or heavily leveraged refinancings, a landlord's lender has set rent levels within the loan documents so that the landlord has to try to obtain those rents and is willing to wait for months in order to get them. Fast food and banks pay high rent. Banks are great credit---they always pay the rent and they require much less than the average restaurant in terms of Tenant improvement allowances. WaWa is a great example of a fast express user who set out 5 years ago on a major effort to compete with 7-11 in urban markets---they went into Columbia Heights, Adams Morgan, G-town etc., with a willingness to pay a huge premium over the asking rents at the time.

We live in a freeish-market economy. Property rights are not absolute, and hardly anyone disputes that they should be. In particular, uses of property that adversely affect neighbors are highly regulated, the owners of those plots wouldn't be able to open a slaughterhouse or a junkyard there, in fact the scope of legal use under the zoning is quite constrained. It's hard to dispute that having a property sit vacant adversely affects the neighbors, it's just that our system of land-use regulation hasn't come up with a way of regulating it.

[Anonymous]

And, the landlord owes you no duty to damage their business (which is making money from renting commercial property) in order to retain a neighborhood restaurant that can no longer pay what the landlord thinks they can get for the space. It is the landlord's risk (i.e., foregoing income) of keeping a building vacant. It's like me walking up to you and saying "Sell me your house for $500K. That's all I can pay. And your neighbors all like me better than the other guy who is offering you $750K for it, so you should pick me as your buyer and bear the $250K loss but hey! your neighbors will be thrilled."

[Anonymous]

Anonymous wrote:

Thank you for this insight, but I don't think it really answers why commercial landlords are charging astronomical rents per month and keep raising them, even when it then drives a restaurant that does "good" business out. Ie, the restaurant would stay if the rent didn't keep soaring to unobtainable prices. In our neighborhood weve ended up with only fast food and fast express (high volume businesses). And banks. How does adding more residential density change anything? A sit down restaurant can only seat so many at a time. Perhaps the rents are what need to to be looked at, and a penalty for properties that sit empty for ages.

We live in a free market economy. What you think of as an "astronomical" rent may in fact not be. Landlords ask for the highest rent they think they can get. Sometimes, especially with new developments or heavily leveraged refinancings, a landlord's lender has set rent levels within the loan documents so that the landlord has to try to obtain those rents and is willing to wait for months in order to get them. Fast food and banks pay high rent. Banks are great credit---they always pay the rent and they require much less than the average restaurant in terms of Tenant improvement allowances. WaWa is a great example of a fast express user who set out 5 years ago on a major effort to compete with 7-11 in urban markets---they went into Columbia Heights, Adams Morgan, G-town etc., with a willingness to pay a huge premium over the asking rents at the time.

So we want more vibrant density (ie high population) to get money out from the bank and dine at Wawa? Or the empty storefront next to it? That doesn't sound like any urban planning to me.

[Anonymous]

Anonymous wrote:And, the landlord owes you no duty to damage their business (which is making money from renting commercial property) in order to retain a neighborhood restaurant that can no longer pay what the landlord thinks they can get for the space. It is the landlord's risk (i.e., foregoing income) of keeping a building vacant. It's like me walking up to you and saying "Sell me your house for $500K. That's all I can pay. And your neighbors all like me better than the other guy who is offering you $750K for it, so you should pick me as your buyer and bear the $250K loss but hey! your neighbors will be thrilled."

You are missing the point of the thread that a lot of these properties sit empty for years until the landlord finds a WaWa to move in. And there are plenty of regulations on private property owners in DC, believe me...

[Anonymous]

I’ve asked commercial real estate agents about this and they say it is more likely to to happen where a family has owned the property outright for years.

It is less likely to happen when a property is owned by a business with stockholders.

[Anonymous]

I asked an agent about the empty banks. With the bank mergers the bank is still on the hook for paying the rent even if the building sits empty with a “for rent” sign on it.

If the bank is paying $450,000 for the site and the landlord doesn’t find someone else willing to take that price, the landlord will enjoy holding the bank to the contract.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Thank you for this insight, but I don't think it really answers why commercial landlords are charging astronomical rents per month and keep raising them, even when it then drives a restaurant that does "good" business out. Ie, the restaurant would stay if the rent didn't keep soaring to unobtainable prices. In our neighborhood weve ended up with only fast food and fast express (high volume businesses). And banks. How does adding more residential density change anything? A sit down restaurant can only seat so many at a time. Perhaps the rents are what need to to be looked at, and a penalty for properties that sit empty for ages.

We live in a free market economy. What you think of as an "astronomical" rent may in fact not be. Landlords ask for the highest rent they think they can get. Sometimes, especially with new developments or heavily leveraged refinancings, a landlord's lender has set rent levels within the loan documents so that the landlord has to try to obtain those rents and is willing to wait for months in order to get them. Fast food and banks pay high rent. Banks are great credit---they always pay the rent and they require much less than the average restaurant in terms of Tenant improvement allowances. WaWa is a great example of a fast express user who set out 5 years ago on a major effort to compete with 7-11 in urban markets---they went into Columbia Heights, Adams Morgan, G-town etc., with a willingness to pay a huge premium over the asking rents at the time.

So we want more vibrant density (ie high population) to get money out from the bank and dine at Wawa? Or the empty storefront next to it? That doesn't sound like any urban planning to me.

The restaurant tenants want the Landlord to pay for their build out which can be very expensive and to provide a certain amount of free rent and there is a brokerage commission associated with a new lease - that requires the landlord to come out of pocket for those funds or borrow them - neither of which is likely to happen unless the tenant seems like a good credit risk which is often not the case with restaurants - you are asking the LL to make a pretty significant investment in a business that might not make it just for a neighborhood amenity. The banks, kinkos, fedexes, etc.. all are a much better bet for the rent. If you want to see what the DC gov should do - you could push for more low interest loans to mom and pop businesses that would put less of the financial burden of opening on the LL and then the rent would be lower. The costs of the lease are factored into the rent

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Thank you for this insight, but I don't think it really answers why commercial landlords are charging astronomical rents per month and keep raising them, even when it then drives a restaurant that does "good" business out. Ie, the restaurant would stay if the rent didn't keep soaring to unobtainable prices. In our neighborhood weve ended up with only fast food and fast express (high volume businesses). And banks. How does adding more residential density change anything? A sit down restaurant can only seat so many at a time. Perhaps the rents are what need to to be looked at, and a penalty for properties that sit empty for ages.

We live in a free market economy. What you think of as an "astronomical" rent may in fact not be. Landlords ask for the highest rent they think they can get. Sometimes, especially with new developments or heavily leveraged refinancings, a landlord's lender has set rent levels within the loan documents so that the landlord has to try to obtain those rents and is willing to wait for months in order to get them. Fast food and banks pay high rent. Banks are great credit---they always pay the rent and they require much less than the average restaurant in terms of Tenant improvement allowances. WaWa is a great example of a fast express user who set out 5 years ago on a major effort to compete with 7-11 in urban markets---they went into Columbia Heights, Adams Morgan, G-town etc., with a willingness to pay a huge premium over the asking rents at the time.

Wouldn't landlords just raise their rents to account for the subsidy?
So we want more vibrant density (ie high population) to get money out from the bank and dine at Wawa? Or the empty storefront next to it? That doesn't sound like any urban planning to me.

The restaurant tenants want the Landlord to pay for their build out which can be very expensive and to provide a certain amount of free rent and there is a brokerage commission associated with a new lease - that requires the landlord to come out of pocket for those funds or borrow them - neither of which is likely to happen unless the tenant seems like a good credit risk which is often not the case with restaurants - you are asking the LL to make a pretty significant investment in a business that might not make it just for a neighborhood amenity. The banks, kinkos, fedexes, etc.. all are a much better bet for the rent. If you want to see what the DC gov should do - you could push for more low interest loans to mom and pop businesses that would put less of the financial burden of opening on the LL and then the rent would be lower. The costs of the lease are factored into the rent

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Thank you for this insight, but I don't think it really answers why commercial landlords are charging astronomical rents per month and keep raising them, even when it then drives a restaurant that does "good" business out. Ie, the restaurant would stay if the rent didn't keep soaring to unobtainable prices. In our neighborhood weve ended up with only fast food and fast express (high volume businesses). And banks. How does adding more residential density change anything? A sit down restaurant can only seat so many at a time. Perhaps the rents are what need to to be looked at, and a penalty for properties that sit empty for ages.

We live in a free market economy. What you think of as an "astronomical" rent may in fact not be. Landlords ask for the highest rent they think they can get. Sometimes, especially with new developments or heavily leveraged refinancings, a landlord's lender has set rent levels within the loan documents so that the landlord has to try to obtain those rents and is willing to wait for months in order to get them. Fast food and banks pay high rent. Banks are great credit---they always pay the rent and they require much less than the average restaurant in terms of Tenant improvement allowances. WaWa is a great example of a fast express user who set out 5 years ago on a major effort to compete with 7-11 in urban markets---they went into Columbia Heights, Adams Morgan, G-town etc., with a willingness to pay a huge premium over the asking rents at the time.

So we want more vibrant density (ie high population) to get money out from the bank and dine at Wawa? Or the empty storefront next to it? That doesn't sound like any urban planning to me.

The restaurant tenants want the Landlord to pay for their build out which can be very expensive and to provide a certain amount of free rent and there is a brokerage commission associated with a new lease - that requires the landlord to come out of pocket for those funds or borrow them - neither of which is likely to happen unless the tenant seems like a good credit risk which is often not the case with restaurants - you are asking the LL to make a pretty significant investment in a business that might not make it just for a neighborhood amenity. The banks, kinkos, fedexes, etc.. all are a much better bet for the rent. If you want to see what the DC gov should do - you could push for more low interest loans to mom and pop businesses that would put less of the financial burden of opening on the LL and then the rent would be lower. The costs of the lease are factored into the rent

Why wouldn't landlords just raise their rents to account for the subsidy?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Thank you for this insight, but I don't think it really answers why commercial landlords are charging astronomical rents per month and keep raising them, even when it then drives a restaurant that does "good" business out. Ie, the restaurant would stay if the rent didn't keep soaring to unobtainable prices. In our neighborhood weve ended up with only fast food and fast express (high volume businesses). And banks. How does adding more residential density change anything? A sit down restaurant can only seat so many at a time. Perhaps the rents are what need to to be looked at, and a penalty for properties that sit empty for ages.

We live in a free market economy. What you think of as an "astronomical" rent may in fact not be. Landlords ask for the highest rent they think they can get. Sometimes, especially with new developments or heavily leveraged refinancings, a landlord's lender has set rent levels within the loan documents so that the landlord has to try to obtain those rents and is willing to wait for months in order to get them. Fast food and banks pay high rent. Banks are great credit---they always pay the rent and they require much less than the average restaurant in terms of Tenant improvement allowances. WaWa is a great example of a fast express user who set out 5 years ago on a major effort to compete with 7-11 in urban markets---they went into Columbia Heights, Adams Morgan, G-town etc., with a willingness to pay a huge premium over the asking rents at the time.

So we want more vibrant density (ie high population) to get money out from the bank and dine at Wawa? Or the empty storefront next to it? That doesn't sound like any urban planning to me.

The restaurant tenants want the Landlord to pay for their build out which can be very expensive and to provide a certain amount of free rent and there is a brokerage commission associated with a new lease - that requires the landlord to come out of pocket for those funds or borrow them - neither of which is likely to happen unless the tenant seems like a good credit risk which is often not the case with restaurants - you are asking the LL to make a pretty significant investment in a business that might not make it just for a neighborhood amenity. The banks, kinkos, fedexes, etc.. all are a much better bet for the rent. If you want to see what the DC gov should do - you could push for more low interest loans to mom and pop businesses that would put less of the financial burden of opening on the LL and then the rent would be lower. The costs of the lease are factored into the rent

Why wouldn't landlords just raise their rents to account for the subsidy?

They would. Same thing happens with student loans.