The Ghost Town Phenomenon: Exploring High Vacancy Rates in Commercial Spaces

Sophia Moonstone

Updated Monday, April 8, 2024 at 9:49 AM CDT

The Ghost Town Phenomenon: Exploring High Vacancy Rates in Commercial Spaces

The Impact of High Vacancy Rates on Business Communities

In some areas, such as Beverly Hills, there are high vacancy rates in commercial spaces, leading to a ghost town-like atmosphere. This phenomenon is not limited to luxury areas but can also be observed in locations near downtown Los Angeles (DTLA) and cities like San Francisco, where vacancy rates can reach as high as 30%. Despite the high number of empty commercial spaces, lease prices have not decreased, making it challenging for businesses, especially luxury brands, to afford renting these spaces.

The Motivations of Property Owners

One reason for the high vacancy rates is that some property owners prefer to keep their commercial spaces empty rather than lowering the lease prices, even if no one can afford to rent them. This may be particularly true for property owners who have already paid off the mortgage and have a large investment portfolio. With no incentive to lower lease costs, they choose to keep the building vacant.

Financial Considerations and Implications

Lowering rent prices can have financial implications for property owners. Commercial property mortgages often require a certain percentage of equity in the property, and a decrease in property value can result in additional cash owed to the bank. The value of a commercial property is often calculated based on the rent it generates, so lowering rent can lead to a decrease in property value and potential financial issues for the owner. Financing terms for commercial buildings are affected by estimated rent, and lowering rent can impact the bank's calculations, potentially leading to loan default or bankruptcy.

Portfolio Management and Investment Perspectives

Landlords who own multiple properties may be hesitant to lower rent prices as it would undercut existing leases and lower the overall value of their property portfolio. Additionally, lowering rent prices can affect the collateral value of a commercial loan, potentially making it difficult to refinance or leading to loan default. Many landlords view their properties as long-term investments, and even with sporadic occupancy due to high rent, they can still value the building based on the potential rental income it could earn.

Perception and Future Prospects

Some property owners may choose to keep rent high to maintain the perception of exclusivity and desirability for potential tenants. They may be waiting for a specific type of tenant or business that can afford the high rent, rather than lowering prices for businesses that may not align with their desired image. Keeping commercial spaces empty for extended periods allows property owners to avoid the costs and responsibilities associated with maintaining and managing a rented space. Additionally, property owners may be waiting for the market conditions to improve before leasing out their commercial spaces, hoping for higher rental rates in the future.

Long-Term Investment Strategies

Commercial property owners may have other sources of income or investments that allow them to keep their spaces vacant without financial strain. Owning vacant commercial spaces can serve as a form of land banking, where property owners can benefit from the potential appreciation of the property's value over time. Some property owners may prioritize long-term investment gains over short-term rental income, leading them to keep their commercial spaces unleased.

The high vacancy rates in commercial spaces have various motivations and implications for property owners. While some choose to keep their spaces empty due to financial considerations and investment perspectives, others prioritize maintaining exclusivity and waiting for the right tenant or market conditions. Regardless of the reasons, the ghost town-like atmosphere created by these vacant spaces poses challenges for businesses and the overall vitality of the community.

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