How do commercial real estate landlords make money if tenants can’t afford the lease?

Not all commercial real estate landlords are intelligent. Interest rates have gone up and that has hurt a lot of CE landlords since a lot of large CE loans are refi'd every 4/5 years. So they have to raise rents to cover their payments, but if tenants cant pay then they are screwed.

There’s been stories for years about empty storefronts in nice areas of NYC. It’s more profitable to keep inventory down and rent half your property at full price than all of it at a discount. There’s also other obscure business incentives if it’s held out of commerce.

So if you crunch the numbers based on a few assumptions:

$15,000 per month @ 12 months = $180,000 per yr

Space is roughly 5,400 SF which brings that to ~$34 psf.

I'm assuming its a triple net deal and CAM, insurance, and taxes are probably in the $8 per month range.

Their base rent with those assumptions is $26 psf which isn't to bad given that location and it being a corner in the development.

Those deals usually have a 3-5% bump in rent every five years so their rent probably started around $23 ish per sf.

Based on what I see for retail and restaurants in shopping centers of that quality that sounds about right.

Also remember that these tenants sign 10-15 yr leases that show the rent bumps so it does fall on the tenant to expect those rent bumps. Its not like its unexpected.

I don't know the details on the development but if its been traded a few times over the years who knows what kind of returns were promised to investors.

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I’m not even sure what that $15k covers or why it would need to be that expensive.

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Typically has to cover the building space, property taxes, exterior maintenance, insurance for the structure and landlord's liability.

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But if the landlord prices out a successful business, how does that make the landlord money? Just seems like a strange strategy to keep increasing rent until businesses can’t afford to be there. Apparently this is a common practice though.

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On the flip side, the reason for the rent hike probably has a lot to do with an increase in the landlord's expenses. Increased cost for insurance and property taxes. Higher cost for maintenance and repairs for the things the landlord is responsible for. Commercial real estate loans generally have to be refinanced every 5 years or so, so now you're having covid era CRE loans maturing and having to be refinanced at interest rates that are twice as high as they previously were.

Another factor could be that the area that the property is located in has seen a boom in value, so the rent hike on the lease renewal is just bringing it in line with the current market rate for the area.

Sometimes it may be to the landlord's benefit in the long run to let an existing tenant leave, even if the property has to sit vacant for a few months until he finds another tenant...if it means the new tenant will be paying full market rent compared to giving a discounted rate to try to keep the old tenant from leaving. CRE leases are usually multi-year, so if he gives a discount rate to keep the existing tenant, then the landlord is probably locked into that agreement for a while.

If a 30% rent hike breaks the biz then the biz was not successful in the first place.

I work walking distance from Post Office Pies. That monthly rent sounds about right for the area. Rich area and that certain spot is pretty busy. It’s a really nice building with a lot going on around it.

That being said, I have eaten there recently and the pizza was absolute dog shite. Floppy pizza and they go heavy on the garlic. Not many people in there too and I picked a pizza up around 6 PM when I would think it would be busy. And I’m no pizza snob, I’ll eat it all.

Davenports is not too far in the same area and is far better. Been around since the 80’s (someone correct me if I’m wrong, it could be older).