Is Commercial Real Estate Under-Demolished?

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Recently I was involved in a panel discussion that covered, among other topics, the reuse of pandemic-affected commercial real estate. During this discussion, one panelist asserted that commercial real estate, currently, is under-demolished.

An aspect of what I do is to buy and sell properties, and to me, this seemed an odd statement. So, I looked deeper. It’s true that there is a lot of property that will likely just sit forever. Prospective tenants will be few and far between. Any bank would have the same trouble as another landlord would have when seeking tenants for an aged property during an economic calamity. A nonbank owner could walk away from a property and suffer whatever losses come, and the bank’s problems increase to the level of ownership. That means they will be responsible for the local and state property taxes and all other issues until the property has moved off their books. That is not a bright outlook for anyone.

We all have seen vacant properties that never get leased and become monument markers for directions and a bad look for any community. The issues preventing the property from leasing can range from bad traffic flow to bad parking to city policies and taxes. The property types vary from malls to offices in the sky. Without tenants for them, there’s no need to invest in such properties.

Should we demolish unused property?

First, we must consider that these properties are empty for a reason. The owner may be tax-advantaged by holding it as nonproductive or it could merely be that no one desires it.

But we are not talking about your usual demolition where someone wants to tear down and build something new. We are talking about removing potentially a great portion of unoccupied properties that have become obsolete in order to maintain a reasonable value for useful properties because their value could be diluted by the area’s useless properties in evaluations and searches.

Let’s look at it from a price-per-square-foot perspective. If you are seeking a property to purchase, you will look at the price per square foot. This includes lenders and others such as insurance companies. This is not set in stone but a rule of thumb. With properties that skew the results included in the stock, obtaining a fair view of a property’s value becomes more complex. Removing or demolishing some inventory would yield a clearer view.

Who would be advantaged or disadvantaged by demolished sites?

Certainly, demolishing unused properties for these reasons would create a stir. The fact is someone owns each piece of land, whether it’s the government or a private party.

The owners in well-located and sought-out areas who have treated their properties as an evolving asset will be better positioned if unleasable properties were demolished. An owner who has no hope of leasing their property and is burdened by taxes and insurance would certainly benefit. However, cities or states could potentially vie to keep the relic structures due to the captive taxes there. Even if the property is state-owned, the problems would be the same.

So how do you replace the taxes from a property being removed? Are the taxes for that parcel also extinguished? In a pre-pandemic discussion, this would be addressable, in some cases, by IRS code. From my perusal, this seems to indicate, “Not so fast to the wrecking ball. You still owe those property taxes.”

So if you can’t use it or rent it, should you just let it become a blight? What is the cost of that? The cost could become vacancy taxes. The idea here is that the taxes collected can be used to help establish tenants from the surrounding area who normally wouldn’t be considered, but because these taxes are not very common, outcomes are hard to fully predict.

The question of demolition is something to think about while we talk of all manner of resets in these rapidly changing times. A prospective owner’s time spent analyzing and touring will be cut down greatly if only usable and flexible properties are in the stock. Can the property’s usefulness and desirability be proved? If not, demolish it. There could be pushback by nonstakeholders longing for the magic to descend on an area or particular property, but who is willing to make the necessary payments while these properties sit empty? Cities may try to makeshift a tenant into existence to keep structures, but that won’t bring in tax dollars.

We are living in a time when the unlikely has become most likely and the viability of all properties is being brought into the light. Now is a time to review your bundle of rights and become aware of how the pandemic and the economic aftermath will affect you. If you have a hopeless situation with a property, perhaps demolition to grade is an option. A major out-of-the-box rethink by governments will be needed to remove the parcel, perhaps by increasing the taxes on remaining parcels, considering the stock of properties will have shrunken.

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Polk Properties offers over 30 yrs of Real Estate Vision and Expertise you can trust and depend on. We focus on long-range portfolio value. Read Michael J. Polk’s full

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