One undisputed victim of the pandemic is the commercial real-estate market — both offices and retail — as people work from home and go out less.
Why it matters: The problem is that commercial real estate prices are sticky. They go up a lot more easily than they come down. If they would come down to a market-clearing level, that would vastly increase economic activity and help cities — New York foremost among them — get back on their feet.
How it works: Columbia University law professor Tim Wu explains in the New York Times just why prices are sticky.
- Landlords have multiple incentives to keep real estate empty, rather than renting it out at a decreased rent. They range from the tax regime to clauses in mortgage contracts to accounting practices to simple hope that an empty space, kept empty long enough, will eventually find a top-dollar tenant.
- Those incentives collectively impose a huge negative externality on cities. Empty storefronts help no one.
The solution: Wu suggests that cities should raise property taxes when commercial real estate is empty for more than 90 days, giving landlords a countervailing incentive to rent their property out at lower-than-desired prices.
The bottom line: There's no shortage of potential tenants willing to fill empty spaces — at the right price.
- Maybe what we need here is an auction mechanism to ensure cities get moving again.
