Why do Landlords leave properties empty?

[Lucan Unlordly]

On a local forum many people are blaming commercial Landlords for pushing businesses over the edge during the pandemic by refusing to reduce rents.

Why is it that so many would rather the properties stay empty than re-negotiate or adjust rent according to market conditions?

 

[billybob99]

The empty property has more braincells, that's why they're landlords.

 

[tan_lan]

Many reasons, but one major one is borrowing.

If the bank sees you have properties with a rent-able value of 1 million, they will lend you X.

When you rent at a reduced rate, your borrowing potential decreased.

Of course its dumb.

 

[Mark T Jones]

As @tan_lan says; the value of commercial premises is based around rentable value. Not really dumb, it's a fairly sesnsible way of assessing value for security purposes.

Beyond borrowings money, disounting tends to be a one-way journey. the start of a race to the bottom. Savvy landlords will offer signicant up-front, one-off concessions rather than reducing their value.

And finally, the last thing any experienced landlord wants is a revolving door of shoddy start ups coming in, faling & having to be evicted - maintaining rents is one way to discourage this.

 

[mattk]

Two questions, then. Firstly, how do these commercial landlords repay their borrowing with no income being generated from these empty units? Surely any income is better than none and B&M retail is on a downward spiral, it isn't going to get any better than it is now.

Secondly, at what point does a bank re-revaluate the rentable value after a property had been sat empty? My local town centre has had large units empty for five years, it must be abundantly clear the rentable value of these is significantly lower than the asking price or more realistically zero.

 

[tan_lan]

I think its dumb because properties remain empty with no rent paid, all to meet the way the bank assess risk. Maybe the banks models were all based on data before the high street was a dessert.

 

[Darren_Ssc]

I think its dumb because properties remain empty with no rent paid, all to meet the way the bank assess risk. Maybe the banks models were all based on data before the high street was a dessert.

Borrowings aside, if you're renting to a local trader for a nominal rent because it's better than nothing then what happens when a big brand comes knocking? How are you going to justify asking 100 times the amount the sitting tenant is paying?

 

[Mark T Jones]

I've no doubt that banks constantly review their valuation process.

I also have no doubt that High street retail roperties will be seriously devalued in the near future. It woun't make sense for them to forclose en masse, but they will be very tight on extensions or new lending.

 

[mattk]

Borrowings aside, if you're renting to a local trader for a nominal rent because it's better than nothing then what happens when a big brand comes knocking? How are you going to justify asking 100 times the amount the sitting tenant is paying?

Do you think big brand are paying rent for units which have been sat empty for years? For every big brand opening a new store there are three closing. It is a tenants market and I'd be amazed if anyone opening a physical store aren't pulling landlords pants down for great long term deals.

 

[Alison Moore]

Most landlords want to keep the rent high so that subsequent tenants also have to pay high rent. If they lower the rents now, then the next tenants will just argue that they're due low rents too. Although I do agree with you, I've always through short term leases with low rent are better than empty properties, but I hadn't really considered the bank valuation aspect mentioned above.

In my experience lot of landlords have lots of properties and aren't very dynamic with the way they do business.. Some of the smaller landlords don't seem to want to duck and dive much either though - probably because they'd need to get legal advice for every variation on the lease and prefer to stick with what they know.

 

[Darren_Ssc]

Do you think big brand are paying rent for units which have been sat empty for years? For every big brand opening a new store there are three closing. It is a tenants market and I'd be amazed if anyone opening a physical store aren't pulling landlords pants down for great long term deals.

I agree, things have changed of late. There probably are some great deals being done but I expect there will also be landlords who are not desperate for cash flow and willing to hold out for Prince Charming to come along.

 

[Mr D]

On a local forum many people are blaming commercial Landlords for pushing businesses over the edge during the pandemic by refusing to reduce rents.

Why is it that so many would rather the properties stay empty than re-negotiate or adjust rent according to market conditions?

You have a business. Opportunity arises to reduce your business income considerably without reducing your costs. Do you take it?

That's the choice the landlords have. People often forget they also are businesses.

Perhaps a particular landlord has no or only small mortgage on the property and is raking it in - can afford to be generous to tenants.
While another may have borrowed a million to buy a 1.5 million building with a bunch of shop fronts. Reducing rent - who pays for the mortgage?

There will also be a few who have principles - they will not reduce the rent because its a matter of principle.

 

[Mr D]

I agree, things have changed of late. There probably are some great deals being done but I expect there will also be landlords who are not desperate for cash flow and willing to hold out for Prince Charming to come along.

Or even set up a short term shop / have a relative set up a short term shop in empty property.
There's a guy I know in the nearby town he sets up 2 shops a year in two different towns. Each one for 6 months then leaves.
He often finds among his clan at least someone willing to put up with his paying rent for 6 months when he needs it.

 

[mattk]

Most landlords want to keep the rent high so that subsequent tenants also have to pay high rent. If they lower the rents now, then the next tenants will just argue that they're due low rents too. Although I do agree with you, I've always through short term leases with low rent are better than empty properties, but I hadn't really considered the bank valuation aspect mentioned above.

There are no "subsequent tenants" though. The number of empty retail units has been increasing steadily for a decade. Covid has vastly accelerated this, but I don't see now post-Covid anyone will want to open a physical shop, bar, restaurant etc. certainly not in numbers greater than the closures.

 

[Mr D]

There are no "subsequent tenants" though. The number of empty retail units has been increasing steadily for a decade. Covid has vastly accelerated this, but I don't see now post-Covid anyone will want to open a physical shop, bar, restaurant etc. certainly not in numbers greater than the closures.

Depends where you look.

I can think of just two places, different urban areas, where there have been shops shut for multiple years.
Most appear to have had some sort of turnover in tenants - the bigger units harder to rent out it appears than smaller.

Covid has as you say vastly accelerated the closure rate.
Demand still exists - some of those currently empty units will get taken on.

For many years people have been saying the high street is dead. Perhaps they are right - however there have been areas where more units have been opened than closed. There have been particular types of shop that have bucked the trend some years too.
Bookshops for example. Some years the number grows - despite what the big names did to the market.

 

[Alison Moore]

There are no "subsequent tenants" though.

True, but as I mentioned earlier in my experience as lot of landlords aren't very dynamic in their dealings..

 

[jimbof]

So are all these landlords having to foot the business rates bills for these empty properties? You'd think that would be incentive enough not to leave the properties empty.

 

[Alan]

For some types of commercial property a good reason to hold empty is to persuade the local council that redevelopment as residential flats or partial residential flats / partial commercial is preferable to derelict towns. Certainly that seems to be the approach around where I live.

 

[Vin Gupta]

One possible reason to keep it empty is that they're waiting for the market to recover. Commercial Leases are often 5-20Y, and they may not want to lock in a low rent for such a long time

 

[Jass T]

As a landlord, who has some commercial units, I have reduced rent in one of my shops. But that was because the previous tenants lease had expired mid Covid.
He didn't want to renew but had found a new tenant to move in right away without interruption. They have signed a 10 year lease and the rent is only reduced for the 1st year. Then it will go up to slight more than the previous tenants lease.
In other units where I had good long term Tennants who I gave them a rent free period for the duration of the first lockdown.
I know they got government help but I would rather they used that as a safety net for the times ahead. I don't have much borrowing so could afford to do that. I don't think I could if I did have a large debt.
Concerning the rates, all my units are under the rate limit for payment so not a issue there.
I have found with commercial and private Tennants, if your fair with them, look after the properties. You gain a lot of goodwill and long term gain.
I have not had one property empty for more than 2 weeks. I have one private tenant who are in their 15th year in the property and never been late once.

 

[Chris Ashdown]

Do the landlords just look at it like a retail business. which buys in stock hoping to sell it on at a profit but at year end they try anything to sell off their unsold stock, so landlords work on multiple units , some making high profits others empty, but the company on the whole remains in profit

Also many business units of all sorts and owned by pension funds looking into the distance rather than next week. if the y brought the units many years ago the unit value has increased by a large amount as a asset

 

[Lucan Unlordly]

At least 10 years ago around 50 flats were built with 2 freehold commercial units on the ground floor. They were poorly positioned alongside the foot of a bridge so could only be seen from the road when it was too late to stop, and parking was minimal. It would take a very niche business to make a success of the space.

They were on the market for £200k each. 5 years after being built a guy I know made an offer to buy both but there was zero movement on price. On Google earth they still stand empty?

 

[Vin Gupta]

Do the landlords just look at it like a retail business. which buys in stock hoping to sell it on at a profit but at year end they try anything to sell off their unsold stock, so landlords work on multiple units , some making high profits others empty, but the company on the whole remains in profit

Also many business units of all sorts and owned by pension funds looking into the distance rather than next week. if the y brought the units many years ago the unit value has increased by a large amount as a asset

Landlords will typically be looking be looking for a good yield from a commercial property. Yields range from 5-10%, which is probably higher than residential.

A commercial landlord has far fewer responsibilites. The tenant is responsible for maintenance and insurance. The tenant also pays rent 3 months in advance

 

[Mr D]

Landlords will typically be looking be looking for a good yield from a commercial property. Yields range from 5-10%, which is probably higher than residential.

A commercial landlord has far fewer responsibilites. The tenant is responsible for maintenance and insurance. The tenant also pays rent 3 months in advance

Yield will vary.

Saw one block of shops for sale locally early this year, return based on current rent would have been about 3% - which is still more than some commercial investment in the bank will give.

Rent 3 months in advance?
Perhaps some landlords. Certainly not all.

I paid zero rent in advance on the warehouse, did pay a grand deposit though. Nowhere near 3 months rent.
Come to think of it, the shop we looked at had 1 month's rent in advance and £250 deposit - rent was £380 a month last January.

 

[Vin Gupta]

Obviously not every lease will be exactly the same. But the standard for FRI (Full Repairing and Insuring lease) is 3 months in advance. If you're renting out a commercial property right now, then you'll have a lot of leverage to negotiate with the landlord.

I'm surprised that the shops you mentioned only earned 3%. Was it is a super prime area? Sometimes, commercial sellers don't like to discount their properties, although they will take an offer

 

[Mr D]

Obviously not every lease will be exactly the same. But the standard for FRI (Full Repairing and Insuring lease) is 3 months in advance. If you're renting out a commercial property right now, then you'll have a lot of leverage to negotiate with the landlord.

I'm surprised that the shops you mentioned only earned 3%. Was it is a super prime area? Sometimes, commercial sellers don't like to discount their properties, although they will take an offer

No, was just higher price than it was a decade or so ago.

You know, rent goes up by x% a year in the leases. However you come to sell the property you value the building now at a much higher figure than you paid for it.

So while for one landlord a particular portfolio can give say 7% return, for a later landlord with the same properties the return can be lower. Because of paying higher price.

Bit like houses that way.

House landlord may get 10% return on their investment while someone buying the same property to rent out later may make less than 5%.

 

[SillyBill]

I both understand the business model and don't understand the business model. Must be some deep pockets is my conclusion if my anecdotal experience is anything to go by.

I don't even know how long next door to us has been empty now (0.7 acre warehouse/office), place is looking more tired by the week, I'd actually genuinely be gobsmacked if it had a tenant inside within the next 12 months. We approached the owner years ago to buy it and expand our site but told in no uncertain terms he'd never sell, I am hoping it stays empty and he is forced to pick up the phone.

I can't quite fathom this either but there are more commercial units being built within a 1 mile radius of us despite the industrial estate we're on being I'd guess sub 80% occupancy. On our road of 4 sites we were at one point at 25% occupancy (only us on the road).

On the main road around the corner a few retail businesses went out of business a decent while back (2 years+) and still empty apart from a charity which moved into one. The area itself looks so rundown now by the properties all falling into disrepair I can't see what tenant would want to move a retail business in against that backdrop. Place looks like detroit.

 

[mattk]

I've started watching some urban exploration videos of my local town. It is fascinating to see the insides of these empty units. Many of which still have electricity. Then you look on Rightmove and they are for lease for £100k/month upwards or for sale for anything between £600-850k for a worthless derelict shell.

As others have said, completely bonkers and a business model which I simply cannot understand.