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Seth Zeren's avatar

As for "things we might do about it" -- I agree that punitive measures will only further distort this market. Essentially we've a) forgotten how to do urban retail by and large, b) goods and service delivery has changed a lot since the glory days of main streets, c) "financialization" of real estate into financial products instead of family businesses has fundamentally changed real estate. (honestly, I wish I better understood specifically how main street commercial buildings were financed back in the day).

To attack these problems, is about changing the way the whole real estate ecosystem works. I suspect you will need: many more smaller and medium sized developers who are based in the cities, towns, and neighborhoods where they work. They will still be profit driven entrepreneurs, but they will be more responsive to real buildings, streets, and people, than spreadsheet crunchers. Those developers will need to be trained in the arts of good place making. Not because it's hippy-shit, but because it will make them wealthier--"location" is just where people want to be. You can create that.

I think there's a durable demand for commercial space in cities and towns. We run about 350,000 square feet of it in Providence and we're 95%+ full. Everything from bars and restaurants, to shops, gyms, professional offices and corporate offices, warehouse and flex space, recording studios, and nonprofits, artist studios to indoor minigolf and breweries and distilleries. But this requires creativity and a hands on approach. It can't be outsourced from corporate to brokers. We work with nearly all non-credit tenants. In the end, grit and gumption and quality product will make a business successful. And those that fail can be re-tenanted in buildings that are well cared for.

Lastly, we will need to change the structure of real estate capital. Right now it's particularly hard to finance these kinds of deals. They are too small to interest the big pools of capital sloshing around than need to write $100+ million checks, but they are too weird for a lot of smaller investors and lenders (as compared to flipping houses or building townhouses or whatever). I have some ideas on what might work, but that's a longer story for another time.

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Seth Zeren's avatar

Well done Andrew.

If i could amend anything it would be to point out that this situation mostly pertains to professionally managed and financed buildings—which are the type of large urban infill with annoying vacancies that make people crazy, of vacant storefronts in very high price areas (where the deals are fully leveraged, etc)

I think the situation will prove to have different causes and effects in the probably larger world of mom and pop managed mixed use and storefront buildings. I alluded to this in a note, but a big cause here is properties that are fully depreciated with little or no debt, non professional owners typically want the cash flow and do not invest improvements or upgrades or frankly market their spaces very hard. They are already getting checks doing very little!

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