Ethics of Real Estate Investment, NIMYism and the Housing Crisis

In reply to Toyman! :

That's an interesting number.  ( 3.6 /4% )  does that include the trend towards commercial Hydroponics ?     Several former grocery stores have been converted to growing vegetables etc such as tomato's  flowers etc. 

  Now I saw a new strawberry picker able to select and pick  ripe strawberries without damaging anything else.  Obviously dramatically reducing the  hand labor of harvesting crops plus the ability to grow strawberries etc near the customer base.  

dculberson said:

Believe me, property taxes already massively disincentivize having empty commercial property. Hell, they almost discourage having full and productive commercial property. Property taxes are our single largest bill by far and it's not even close. I think that coupled with strict enforcement of zoning / maintenance codes is enough to keep properties put to productive use if they can be. The problem you run into in a situation like Detroit of the 80s (I would argue strongly that the Detroit of today is very different) is that even the government didn't want the empty buildings in Detroit in the 80s. Even free an empty high rise in an undesirable area is a liability, not an asset. You could spend $100/sf just to rough shell a run down high rise, with no markup for the general contractor or project management. $100/sf on a SMALL highrise is $5 million. By the time a residential conversion would be done you'd easily be at $200 - $300/sf, or up to $15 million - again on a relatively small building - and nobody in the world is going to spend that to put an abandoned building to use in a rough area. There's a reason why they sit empty. Even taken for free - which eminent domain does not provide for - it would be a money sink that would only bankrupt anyone trying to use it.

But in a desirable area, it's worth 2-3x the sales money or 2-3x the rent as office space. So to have it half empty makes more sense than to have it full as residential. We get $20/sf for office space in Ohio. That's $2,000/mo for the equivalent of a small studio apartment, and we do not usually lease out spaces that small, and it costs way more money to take it from office to residential than it does to renovate it into totally modern high end office space. We're spending $200k to renovate 5,000sf into amazing space for an expanding tenant. Turning that space into residential would cost more like $1 to $1.5m and would, again, reduce the rent income by ~half.

That's not to say there aren't bad land owners sitting on what could be productive property. But it's not as common as you might think. I've seen plenty of cool buildings where I thought "oh man, I should..." then penciling it out is in an eye opening exercise in "wow, that will really never even cover its own costs." Most residential conversion require property tax abatements, grants, and government subsidies before they even begin to make sense.

I know there are large buildings now in the Twin Cites going completely to waste.   
 I drive by some every day.  
   But let's discuss the past. Packard had a great big assembly plant  used to build cars airplane engines etc. during WW2. 
   When Packard went bankrupt the building has stood empty ever since.  
Not only that building but the houses built for the workers at that plant.    The last time Detroit had a population growth was in the 1950's census.  Since then the population and value of Detroit has gone downhill to the point where it attracted the worst sort of citizens.  The poor. 
  Crime increased,  driving legitimate companies away.  Forcing others to close their doors and now instead of  being the heart of American Automobile  manufacturing. It's a near wasteland. With whole blocks torn down and replaced with empty lots. 
   Please don't tell me it's the employee's fault. Much of what was originally  made there is now made inFinland, Germany, Japan. Or other countries with labor costs as high or higher. Social, political, and economic. 
     
My point is society has a real interest in those sites. First that the company is profitable.  And if not that the site doesn't become someplace  that is a liability  to that society.  
    Yes you have a right to own cars. But not to create a mess 

dculberson said:

You can write off interest on a loan on the property, generally, and you can write off depreciation on the building but not the land. Commercial property is depreciated over 39.5 years which is silly because the usable life of an unrestored commercial building is much lower than that. They're like human cells: they're constantly renovated and remodeled, so while it looks similar from the outside, the inside has typically been redone many times in those 39.5 years. The expenses to maintain the building or property are all able to be written off, though anything that is considered as "extending the usable life of the property" has to be depreciated over those 39.5 years, within reason. IE, if you spend $500 to replace a leaking faucet you don't need to depreciate that, but if you spend $80,000 on a new roof, you need to write that off over 39.5 years.

My question here was: 

Can a company abandon a property, but speculate with it to make money, or simply hold it and write off depreciation, effectively allowing them to hold land without losing any money? That is if say, taxes are cheap. 

Or could an expensive under-utilized property bankrupt a company?

In reply to pheller :

Your question makes no sense. His answer was correct. 
 

Depreciation is the purchase price divided by 39.5. Taxes are whatever the community millage rate is. Expenses to maintain it are whatever they are. 
 

The money to buy the building came from somewhere. Usually borrowed, which means there is interest. 

(Edit- removed example which was confusing)

They can deduct a lot of it, but never more than they spend. 
 

So no. There is no model for companies to make a profit by just sitting on a property and depreciating it. 

It's amazing that the people here that do not own commercial buildings, and never have, know all the stuff that those who do own them are doing  in order to somehow screw them out of something. What they're getting screwed out of? No clue. 

I still contend that there is only so much land for which the average American can be financially successful living on or near. 

You can live someplace cheap, but you may never make enough money to retire. Or you have to have already made your fortune. 

Yes, there are certainly better places to live than those with high costs of living, high priced rents, etc. 

Ultimately however, there is always some balance - close enough to good jobs, but far enough away to not spend all your money on housing. 

It's not that I believe anyone is stealing from me, it's that I believe our current housing system in the USA, whether it be taxes, rental rates, lack of affordable housing relative to good paying jobs, whatever, is negatively impacting our economy from productivity standpoint. 

When employers nationwide complain they can't find workers despite offering what they believe are good wages, it's either because housing is too expensive relative to the local job market, or wages aren't high enough. If when wages increase, so does the average rent, then that tells me there isn't competition in the housing market. 

My interest is how do get more competition? How do we get the people who own vacant land, or underutilized land, to sell that land at a price that makes a builder or developer have a competitive product to offer the public? 

Pheller:   Just a thought...

I'm a builder.   Land cost is not a big issue in most cases.   Raw land in most cases is pretty cheap.  Adding all the infrastructure to make it legal to build a home on is a whole other story.     Water supply, sewage, drainage plans, necessary roads, power supply, natural gas supply, pile on the costs before a lot is ever ready to build a home on.

In the 70's we could take a piece of land, run a 16' wide road down the middle, and sell the lots.   Now that road cannot be over 1500 feet without having another paved access.  The culdesac has to be paved large enough for the city to be able to turn around their largest fire truck (hook and ladder).  The right of ways are much wider, and OBTW sidewalks must be installed, and the roads drained into proper holding ponds.   

Many times the required infrastructure eats up well over a third of the raw land you start with.

A few years ago I ran into a case where a piece of land that we used to place 28 homes on, now with required infrastructure only fits 21.

In reply to pheller :

So, basically, you want people who own potentially valuable land to sell it at a loss (or at least reduced profit) under the assumption that they should be compelled somehow to do so in order to make them "productive" to "society"?

There already is a way that happens: when rents and/or housing prices get high enough to make it profitable to develop it.  But that isn't what you want either.

I guess I'm really not understanding, because to me, your argument keeps boiling down to your wish that supply and demand don't exist and that everything should just be cheaper because nice thoughts or something.

In reply to pheller :

I think if you interview the families that have a dream home almost none of them is in some high rise city that people are moving out of.  
   It's the Walmart factor.  A lot of states particularly southern states the biggest employer is Walmart ( who isn't know for their high pay).   Homes in those states are in the $200,000 range. And it only takes a combined wage of about $33/ hr.  For a couple to afford to buy that house. 
  If you look the really high paying jobs like in places in California, New York, Connecticut,   the houses sell for around 1 million. And a family that earns $80-90,000 can't afford them.  
    There are plenty of affordable homes in America. It's just that the jobs there are often minimum Federal wage  without benefits.  In other words large corporations geared to low pay wages want middle class workers to subsidize those making minimum wages. They are the ones on food stamps and government assisted housing.  Using mass transportation and the emergency room for health care. 

pheller said:

When employers nationwide complain they can't find workers despite offering what they believe are good wages, it's either because housing is too expensive relative to the local job market, or wages aren't high enough. 

I think you are missing a few other options.  You are assuming the only factor is money, and the only solution is that the business fix the problem by taking a loss. 
 

My company would happily take a loss to get a few decent people. It truly has nothing to do with money, housing costs, or wages. 
 

One factor is the employees. I'm not blaming employees, but there truly is an attitude right now among a large percentage of people who truly don't want to work. Getting people back to work after COVID is proving to be a monumental task, and money can't fix it.  
 

Education... The quality of the education level of people coming into the workforce is truly pathetic. The majority of grown adult men I deal with can't read a tape measure. Many can't read at all. Most who speak more than one language weren't raised in this country. The absolute WORST candidates for skilled well paying construction positions are those that come out of trade schools with Construction Management training. They can't do basic things (like calculating the area if a wall) without a software tool they used in school which is not used in the industry. 
 

Government- More and more and more costly regulations make the cost of doing business harder every day, while charging both employees and employers more tax dollars for poorer services. 
 

Healthcare- terrible coverage is now a gigantic cost to employers trying to bring in new employees

Culture- we have culturally driven expectations (how we should live, what we should drive, what technology we should have) which define the price points employees are willing to work which are much too high. 
 

Housing costs are a factor, but quite minimal in the overall scheme of things. And people that really want to work in higher wage areas are solving some of those housing costs themselves (like co-habitating, telecommuting, etc)

One more thing...

Don't assume every empty building or seemingly unused piece of land is being underutilized. Most are not. There are factors you are unaware of that dictate the vast majority of those situations. 

I spent 10 years of my life as a full time volunteer with Habitat for Humanity at various locations in this and other countries. I was directly involved in enabling solutions to low cost housing. 
 

They have built over 800,000 homes.  As far as I know, they have never converted a high rise. Because it's not a formula that works. 
 

Solutions to low cost housing are the domain of non profits, not government or for-profit businesses. When government offers solutions, we end up with project urban neighborhoods and a cultural abyss that people can't climb out if for generations. When for-profit business offers solutions, we end up with empty high rises or over priced units, because it turns out that for-profit businesses are actually FOR profit. 
 

I recommend you spend some time volunteering with them. You will learn a lot about the issues that seem to concern you. 

frenchyd said:

In reply to Purple Frog (Forum Supporter) :

I think that's what Pheller is trying to say.  In metropolitan areas all of that work is already done. It's ready to be occupied.

What we are seeing in the cities that have been built out for decades is now the old infrastructure needs replacing.   Look at all the "lead pipe" issues around the country.   Replacing infrastructure in built up areas is actually more expensive than installing it new on vacant land.  

Not trying to argue, just admitting each possible solution has its hills to climb.

In reply to SV reX :

The take-away I get from reading your list is we are watching the slow decline of the US economic system.  There are no simple or easy fixes to any of those issues and even discussing them gets into patio territory. 

One area I have some theories about is your comment about workers. I get them impression much of that attitude started with the "great recession" of 2008.  The workers of today were coming of age around that time. They watched their parents work their tails off for years only to get thrown to the curb.  Many of them still haven't entirely recovered. So their children entered the working world with a different outlook: "Why?  Why should I kill myself for a company that will toss me aside with nary a thought?" 

Is that viewpoint entirely accurate? No, probably not.  As in most things, the truth lies somewhere in the middle, but we live in a world of extremes these days.

SV reX said:

pheller said:

When employers nationwide complain they can't find workers despite offering what they believe are good wages, it's either because housing is too expensive relative to the local job market, or wages aren't high enough. 

I think you are missing a few other options.  You are assuming the only factor is money, and the only solution is that the business fix the problem by taking a loss. 
 

My company would happily take a loss to get a few decent people. It truly has nothing to do with money, housing costs, or wages. 
 

One factor is the employees. I'm not blaming employees, but there truly is an attitude right now among a large percentage of people who truly don't want to work. Getting people back to work after COVID is proving to be a monumental task, and money can't fix it.  
 

Education... The quality of the education level of people coming into the workforce is truly pathetic. The majority of grown adult men I deal with can't read a tape measure. Many can't read at all. Most who speak more than one language weren't raised in this country. The absolute WORST candidates for skilled well paying construction positions are those that come out of trade schools with Construction Management training. They can't do basic things (like calculating the area if a wall) without a software tool they used in school which is not used in the industry. 
 

Government- More and more and more costly regulations make the cost of doing business harder every day, while charging both employees and employers more tax dollars for poorer services. 
 

Healthcare- terrible coverage is now a gigantic cost to employers trying to bring in new employees

Culture- we have culturally driven expectations (how we should live, what we should drive, what technology we should have) which define the price points employees are willing to work which are much too high. 
 

Housing costs are a factor, but quite minimal in the overall scheme of things. And people that really want to work in higher wage areas are solving some of those housing costs themselves (like co-habitating, telecommuting, etc)

 

You make several good points and A couple I'd like to discuss. 
   Particularly new employees.   Most Gen Z and even some  millennials  have seen previous generations be treated poorly.  
     Say what you will but in my whole working life I've attended one retirement party.  Someone who actually worked for a company to their retirement. One in nearly 35 years.   
    A lot of women are used and abused. Forced to choose between a paycheck and taking proper care of her children. Or worse a married manager.  
Men once they start to show signs of aging are often let go and replaced with younger men.   Forgetting that those big paychecks we earned came from hard earned relationships.  
  I was ambitious and willing to work harder to succeed.   My income always reflected that. Yet time after time new management came in and I was among the first to go.  Not for performance or even doing anything wrong but sales managers need people loyal to them.  Within a year all of us at the top of the performance board would be replaced. 
      Promotions were often handed to friends or school buddies rather than merit or suitability. 
7 years in the Navy made me appreciate their unbiased approach to promotions based on merit rather than relationships.     
     I've seen far too many companies destroyed by nepotism.  Clark equipment is a textbook one still taught in Ivy League schools like Harvard. 
 We all know the numbers. Less than 50% of new start ups make to the 5 year mark. 
      While there is no such numbers for family run businesses,  I've personally seen owners who pass their well run business to their sons turn to mush under the well schooled sons hands. 

Anecdotal:  My perspective is twenty years out of date, but working in the commercial construction industry, it was almost always cheaper to demolish an existing building and build new from scratch than it was to retrofit an existing building to a new tenant's specification.

In reply to Ian F (Forum Supporter) :

I think that's an interesting viewpoint, with some validity. 
 

Bottom line for me is that there is a massive cultural shift. The United States used to have the greatest work ethic in the world, and no longer does. 
 

To clarify, I think "greatest" used to mean most productive financially. Profits drove and defined the work ethic. It was "the American way". I'm not convinced it was right, or is right any more. But our cultural attitude shift about how we need to work will also accompany a shift in what profits look like, and what companies are able to pay employees. We are gonna have to change our cultural expectations of how we want to live if we want to produce less, because like you said, the US economic system is in decline and can't support unlimited expectations without unlimited money in the system. 

In reply to SV reX :

Imho, the slowing of desire to work more is the easy view of who really benefits the most when you work over what you are paid. 
 

It was incredibly demoralizing to see bonus measures cut from others bad decisions, and then those same people got big bonuses. What's the point to work hard when the people who make poor decisions always get the money?

In reply to frenchyd :

Do you REALLY think poor people moved in when the market took a dive???  Nice to blame the poor for their problems. 
 

People moved to places like Detroit because of jobs. Once those left, they were the ones who didn't have the means to move, and were stuck. And people will do what they have to so that they can survive. If you can't earn dinner, you get forced into bad situations. 

SV reX said:

In reply to Ian F (Forum Supporter) :

To clarify, I think "greatest" used to mean most productive financially. Profits drove and defined the work ethic. It was "the American way". I'm not convinced it was right, or is right any more. But our cultural attitude shift about how we need to work will also accompany a shift in what profits look like, and what companies are able to pay employees. We are gonna have to change our cultural expectations of how we want to live if we want to produce less, because like you said, the US economic system is in decline and can't support unlimited expectations without unlimited money in the system. 

Profits are higher than ever, with the steepest increase ever coming after the pandemic:

Worker productivity has dipped a bit in 2022, but remains near all time highs:

Weekly median earnings are also on the rise:

If we compare all of this data from Q1 1980 to now, we see that:

Profits are up 1263%

Productivity is up 113%

Weekly earnings are up 12%

Seems to me like a raw deal for the average worker

In reply to STM317 :

I can't speak for other industries. I can only tell you that is completely incorrect for MY industry. 
 

And my industry is the one that builds the commercial buildings, and retrofits when they change tenants or uses. 
 

I suspect those numbers are heavily influenced by changes in the tech and finance sectors. That's a completely different animal. 

In reply to STM317 :

And that data is making its way to workers. Thanks for doing that research. 
 

BTW, is that adjusted for inflation?  Seems that the average worker is getting less in spite of the profits and productivity. 

We are talking about repurposing existing vacant buildings. 
 

Vacant buildings don't have employees, and don't produce anything. The companies that own them may be posting profits, but it's not from the vacant buildings. 
 

I don't find those statistics very relevant. Certainly important, but not relevant to this subject. 

In reply to SV reX :

I was more commenting on the society wide change that you and IanF were discussing. Your post that I quoted talked a lot about "The American Way", "cultural attitude shifts" and "the US Economic system" without specifically mentioning commercial construction or real estate. I think that data potentially reflects why many younger workers may not seem as motivated, ambitious or profit driven. Sorry if I misinterpreted.

I'll defer to your expertise in the trades as it relates to the subject of this thread. I know that there's an ongoing shortage of tradespeople. That means you have to pay the workers that are there more per hr, and fewer workers may mean longer project timelines as well. Both would increase costs for retrofits as well as building new. It also means that a motivated person could make a good life for themselves by capitalizing on said situation.