Vacant Buildings in Downtown?

It is a fact that there is a level of rent that would fill every empty storefront in Laguna. Take a look at what some other cities are doing to confront the problem of long retail vacancies in their towns:

And a possible explanation for vacancies in new-owner properties or those that have been renovated:

Long Answer: Many of these landlords purchased these retail spaces at very high prices based on now unrealistic retail rents they had expected to receive. And these landlords took out bank loans. These landlords were expecting a certain amount of cash flow (retail rents) to pay the monthly bank payments. But these monthly bank payments were based on high valuations which is no longer the state of the market.

So the landlord now has 2 options: (1) Rent the space out at a much lower than the anticipated amount (e.g. current market rents) and not have enough cash flow to cover the bank’s monthly debt payments. Thereby suffering a monthly loss for decades as retail leases are typically for 10 years or more OR (2) Keep it vacant and stop paying the bank. In effect, they are forcing the bank to renegotiate their loan either by forgiving a significant amount of their debt in order to make the property cash flow positive or rework the payment terms. Otherwise, the landlord would just walk away from the property since their initial investment (down payment) has already evaporated with the market’s decline. Why compound the problem by renting it out and taking a loss every month?

From the bank’s perspective, the only other recourse it has is to foreclose and take back the property. But it’s an expensive and lengthy process and because the property was purchased during the market’s peak, the bank will probably not recoup all of the money they lent by foreclosing. So there is an incentive for them to work out a deal with the current landlord.

But if the bank ends up foreclosing, it will allow them to sell it to another landlord at a much reduced price, allowing said landlord to rent the space out a a much lower rent to reflect the current market. Or if the landlord is successful in renegotiating the loan terms, it will allow them to rent it out at the current market rates and not take a monthly loss.

So it will eventually be resolved.

Until then we are at an impasse until one side blinks – leaving the streets filled with vacant storefronts.

Leave a Reply

Your email address will not be published.