This behavior is very common and just baffling to me. In many markets right now, there is just no way they are going to rent that out.

The only explanation I have heard is that lenders allow a certain amount of vacancy increases in the terms without triggering a reevaluation of the property value. Whereas lowering the rent will more quickly trigger that new valuation.

And the way many commercial loans are setup, they may require immediate payment of the difference of the value of the property if it drops.

But this just seems short sided on the part of the banks. And why do seemingly so many of them have this policy? If I am assessing property value and vacancy sky-rockets, I'm going to be a lot more concerned than if rent has to drop a bit.

SFHs are assessed by looking at comparable properties because there isn’t a liquid market continually providing feedback of the current value of the asset. With rental property you get a pretty good signal on an ongoing basis - the rent! So investment real estate is based quite strongly on the Net Operating Income, and the value is the net operating income divided by the sale price which gives you what is called a capitalization rate (how much money you get coming in for how much you had to come up with to buy the place.) cap rate is impacted a bit by market and a bit by segment (upscale property vs housing for lower income folks) but it is mostly impacted by current interest rates. Cap rates can be like 4%, or where the sales price is like 25x NOI. So, at a 4% cap rate, differences in rent have a 25x impact on the value of the property (big expenses like property management costs tend to be proportional to rent, etc.)

So now that you know about how NOI is the thing that drives property value, some other practices make sense — “concessions” (free months of rent) are only sometimes valued as part of the rent roll, but usually ignored unless the property has a pattern of excessive turnover. This is why landlords are more likely to give you free months rent instead of lowering your rent!

Anyway, it’s all a game that serves to transfer wealth from workers to capital holders and our tax system incentivizes this in many ways. Used to be that people spent way less a portion of their income on housing, but the move to create an “ownership society” actually made it way more expensive relative to wages, to the benefit of land owners. This also explains a large part of the wealth gap between white people and Black people with redlining and refusal to loan for black neighborhoods, etc.

They’re able to slip this into agreements because conventional wisdom (even post 2009) still thinks real estate never drops in value. Momentum is the strongest inefficiency in most financial markets because humans have short memories.

If I’m a dumb real estate investor in SF pre-2020, I don’t care if the bank puts that kind of requirement on me, because rents in SF always go up!

There was a great comment on Reddit who is familiar with the commercial real estate industry. These loans are combined and split up among thousands of investors. Its basically the same thing that happened back in the last recession with residential loans.

In Seattle, I asked for them to fix the internet and run an ethernet cable to my unit instead of relying on their spotty wifi. They said they wouldn't and they're raising rent a few percent. I declined to renew my lease as well. Some landlords are ridiculous. Hope they enjoy their massive spiking vacancy rates.

It's still a better deal for them, sometimes. Decreasing the rent can decrease the implied value of the property, which can be problematic with financing of multi-family or commercial properties. Letting it sit, collecting no rent, won't hurt the property's value. Which is a strange loophole in the system.