Expert breakdown of NYC’s overpriced commercial vacancies.

Written by Louis Rossmann


  1. It probably didn't start out as a Ponzi scheme, let me explain why.

    Let's examine how this situation came to be. The only reason this is a problem is because people can't afford a lower value of the property. This is because they borrowed almost the whole value of the investment. This is called being "highly leveraged"*. Now why would they do that?

    When you borrow money to invest you make the regular return on your money plus the return minus the interest on the money you borrowed. Say you invest $100K of your own money and borrow $400K @ 5% to buy something worth $500K. If the value of that thing, plus the returns from it add up to $550K, a 10% return, your profit is $50K – $20K interest = $30K. That's a 30% profit, not bad. If the interest is higher you make a lot less money. So leverage makes the most sense when interest is low and potential profits are high. But if potential profits are high, why isn't everybody borrowing money to invest, pushing up the interest rate?

    Well the interest rate isn't determined by the free market. It's decided by people who work for the "Federal Reserve System" (the Fed). You may have heard that this is a private company but it's profits go to the government and it's leadership is approved by the Senate. The Fed (or other "central banks" in other countries) can produce money out of thin air. That pushes down the interest rate. It also increases prices including the prices of productive assets like real estate. The lower the interest rate the more you can pay for an asset and afford to pay back the interest from it's revenue. So the more money they print the lower interest rates are and the more the price of real estate will go up, making highly leveraged real estate purchases sensible, for a while. The problem is that if they "tighten" monetary policy, that is effectively reduce the amount of money, both effects go in reverse, the asset prices go down, or at least don't increase faster than the interest, and the interest rate goes up. So the success of the operation depends entirely on what Fed does.

    Investing in real estate with high leverage is effectively speculating. Speculating is a type of investment where you trade something for something else in the hope that the thing you traded for will become worth more than that what you traded. For instance if you buy a share of Louiscorp for $10 not so that you can collect the dividends but because you think people will soon realise that it's worth $12 and buy it at that price. Because most of the profits from highly leveraged real estate will be the change in value in the property, not the actual rent collected. If the rent goes up $1,000 a month the value of the property goes up $144K to $168K. Since the value is the most important thing in terms of keeping the loan above water, the investment ends up being speculative if you loaned enough money.

    So government monetary policy made the highly leveraged investment make sense, for a while. It then turned it speculative investment, because it can change the value of the property. Now the people who speculate in real estate during a period of loose money will be the ones who most believe that period will last. If you monetary policy will tighten soon it's not a good idea to borrow to invest. So the most optimistic, who are most prepared to borrow will tend to buy up all the real estate in a low-interest boom. When policy tightens up those who didn't leverage too much will still be above water. Their investment will be worth less than it was but not so much that they can't sell it and pay back the bank. They might well do so. The overleveraged by definition can't do that, their loans are underwater and their only hope is another boom pushing prices back up.

    But what happens if even the next loose monetary policy boom doesn't lift asset prices enough so that you can sell? Well you keep the property, but other properties are bought by overleveraged optimists. So each boom has more and more properties owned by people deep underwater.

    Long story short ("Too late" I hear you cry) this is all the result of government distorting the market signals.

    * It's called "leverage" because the loaned money allows you to make a bigger investment than your own money would. The profit/loss is bigger like the movement of the end of a long lever.

  2. There really isn't that much difference from commercial real estate and the housing market. The only difference is people are willing to pay for the overpriced shit that's on the market

  3. We can see the same pattern of prices going only up , never down in residential rental buildings . I believe it’s mostly a mentality of greed from the landlords . The idea is never lower the rent even if half the building is empty , instead give a number of months of free rent . The reason behind this is never lower the long term market value . For example a one year lease in Manhattan is a third lower in this COVID times , but they never tell you your rent is one third lower , but they phrase it you get bargain of four months free . Because nobody would stay in a place that raised your rent by the third in a new lease and I think it’s illegal too. It could be also a way to go around the bank / investors clause .

  4. A sequence of owners who don't really own the property, hoping for the next sucker to take on more debt than the former. The latest in debt to the sum of the original value and the amount that the previous owners profited.

  5. Shooting this for someone with knowledge on this: If this is how it all works, wouldn't it be possible to appease "everyone" by saying: "Ok, I want to lower rent. I won't screw up with you and making you lose cash, so I will still pay the full amount, but by extending it over a bigger time period" or something similar?" Yes, you still have to talk to the 50 or so investors, but better than not earning a dime. Or as someone has already said "You pay me the full rent on the top of the table and I will "unofficially" give you the difference under the table."

  6. I cannot say "Hey everybody" the way Louis says it but when I say "Hey little buddy" to my dog it always comes out in the exact tone Louis has when he says "Hey everybody!" lol