12 ms·

New York's vanishing shops and storefronts: 'It's not Amazon, it's rent'

227 points by andrewlevine 9y ago

andrewlevine 9y ago
Can anyone explain the economics of being a NYC landlord and keeping a property vacant for months or years? I've experienced this in several different neighborhoods I've lived in, but it's worst in my current neighborhood (Upper West Side). This article gives some high-level reasons (institutional investors more willing to wait for higher rent, banks devaluing non-chain properties, real estate bubble). But it's hard for me to imagine the math works out for leaving a space vacant in NYC for years.
- brookside 9y ago
  I believe landlords try to get 10 year commercial leases which is the cause of holding out for the best price they can. This article doesn't answer the question directly but it came to mind: https://www.nytimes.com/2017/05/31/fashion/bleecker-street-shopping-empty-storefronts.html https://www.nytimes.com/2017/05/31/fashion/bleecker-street-s...
  - tnuc 9y ago
    10 year leases are mostly made by big companies with deep pockets, which puts the value of the property up.
- twobyfour 9y ago
  A standard storefront lease is for 10 years. If you believe you can get 12% higher rent by waiting for a year, it's worthwhile to leave the space empty. What I don't get is why there aren't more fun pop-up shops appearing in these spaces?
  - andrewlevine 9y ago
    I'm still skeptical (tell me what I'm missing) - are commercial real estate prices in NYC really going up 10% / year? Certainly as a residential renter for ~12 years (in the same areas that have high vacancies) I haven't seen a rent increase like that.
    - twobyfour 9y ago
      It's not necessarily a market price increase that they're waiting for, but rather a higher bidder. Why rent now to a (price-sensitive) local pizza parlor if you have a chance to land a national bank that can afford double the rent without a second thought?
      - saurik 9y ago
        That makes sense to me if I saw properties lying fallow for a year or two... but there are tons of properties that just sit unused for many many years. I honestly don't remember the last time there was something in the amazingly-located spot next door to the Apple store in downtown Santa Barbara. I frankly bet it was longer than ten years ago! What are they waiting for? Bankruptcy?! I just don't get it :(. There are also lots of businesses that would be willing to sign on for just a year or two instead of for ten years. Hell: the average life expectancy of many businesses isn't even ten years, so you are essentially just refusing to sell your wasting good (minutes of building) to people who would love to pay you for it due to "I guess this is how people normally do it", which is insane.
        bsder 9y ago
        > I honestly don't remember the last time there was something in the amazingly-located spot next door to the Apple store in downtown Santa Barbara. I frankly bet it was longer than ten years ago! What are they waiting for? The answer is probably that Apple has a clause in the contract that says that if you give another client a better price than you gave Apple, Apple gets to renegotiate. If you got a particularly good rent from Apple, it's probably better to leave the place beside completely empty.
        9y ago
  - jseliger 9y ago
    If you believe you can get 12% higher rent by waiting for a year, it's worthwhile to leave the space empty. An interesting comment that dovetails nicely with this: https://news.ycombinator.com/item?id=16002397 https://news.ycombinator.com/item?id=16002397 : Seems simple to fix. A building sitting vacant is depressing everything around it, pushing an external cost onto the city. Leave it vacant and your property taxes triple to offset this cost. Such a policy would probably need fine-tuning (e.g. what is the optimal number of months before taxes kick in, what is the optimal rate schedule, etc.), but it seems reasonable on its face.
  - czinck 9y ago
    I wish the popup shops were more frequent. 2 or 3 years ago there was a vacant store front on 39(?)th and Madison. Instead of just leaving it like that, the landlord turned it in to a private motorcycle museum. I got to walk by some very good looking classic bikes, he got to show off the shop.
- s0rce 9y ago
  Not sure about nyc but in other markets people claim that some are just speculating on the property value appreciating and it has been going up so much the extra money from renting isn't worth the hassle, especially for foreign investors. I don't know how true this is.
- acranox 9y ago
  We have this problem in Boston too. Let me know if you get a satisfactory answer. I’ve been wondering for years, and can’t understand it.
- greggman 9y ago
  I'd be curious too. Not NYC big there's was a medium sized retail space across from a Whole Foods in Noe Valley. It was vacant for 11 years. Maybe it's still vacant? The picture on Google Maps ©️ 2017 shows a still vacant space. https://sf.curbed.com/2015/1/26/9999036/11-years-after-closing-owner-of-noe-valleys-real-food-finally-ready https://sf.curbed.com/2015/1/26/9999036/11-years-after-closi...
  - refurb 9y ago
    Still vacant! I've heard rumbling that something will go in there, but nothing yet.
- andrewlevine 9y ago
  I found another interesting article on this question: https://citylimits.org/2017/12/05/diagnosing-nycs-vacant-storefront-problem/ https://citylimits.org/2017/12/05/diagnosing-nycs-vacant-sto... The additional reasons they give: * increasing prevalence of chain stores who move slower on real estate deals * willingness of national chains to pay high rents and lose money on a store in a famous neighborhood to boost their brand reputation * landlords "warehousing" properties, waiting for rezoning or new development * rezoning causing an oversupply of commercial property in an area * unrealistic expectations of landlords who have not adjusted to lower rents caused by online competition * sunk-cost fallacy - for properties bought in 2014-2015, landlords could face "losing" money by renting for less than their mortgage * increased prevalence of "demolition clauses" in leases - that allow for eviction of tenants if the landlord wants to demolish the building - making it harder to find a tenant
  - notatoad 9y ago
    Please don't use code blocks for bulleted lists, it makes you comment impossible to read on mobile.
- bogomipz 9y ago
  >"Can anyone explain the economics of being a NYC landlord and keeping a property vacant for months or years?" Vacant for years is a bit unusual. But being vacant for months seems to be the norm now. I think this is mostly because the type of tenants that can afford these rents or the ones the landlord wants are big corporate chains. These are entities that don't move very quickly or don't need to move quickly. It seems that vacant stores fronts are invariably replaced by the same 5 banks(Citi, Wells Fargo, B of A, Chase, TD) and the and two drug stores Duane Reade and Rite Aid. These 7 companies have achieved absurd levels of density in Manhattan and it may even be that they are finally slowing these insane saturation campaigns they have undertaken.
- coredog64 9y ago
  It was only touched on in this article, but I've read elsewhere that part of the problem is the structure of loans. If the landlord takes a lower rent, then the value of the property decreases in the lender's eyes. If the owner doesn't have enough equity then they might have to renegotiate at less favorable terms.
  - Atheros 9y ago
    Do you have a source for that? I read the same thing a while ago but couldn't find a source more recently.
  - tomwilson 9y ago
    This happens in Australia all the time.
- Spooky23 9y ago
  Real estate is a den of crookery. There are all sorts of tax schemes that make it desirable for some properties to lose money.
  - tannhaeuser 9y ago
    Isn't it the extremely low interest rate set by the Fed though? With the lack of good investment opportunities and the danger of inflation, everyone puts their money on real estate, so last decade's housing crisis is imported into the next decade.
- iakh 9y ago
  This is a classic example of real option valuation[1]. As others have pointed out, holding out could mean that the owner could charge more later on. The right, but not the obligation, to lease or sell the property has an intrinsic value which can be modeled using different option pricing methods. So long as the value of the option is greater than the current leasing options, then the owner should keep the property vacant. [1] https://en.wikipedia.org/wiki/Real_options_valuation https://en.wikipedia.org/wiki/Real_options_valuation
  - JDiculous 9y ago
    It seems that landlords aren't paying enough in property tax if they'd prefer to keep the property vacant than rent it out. Sounds like we need to raise property taxes, implement some kind of vacant property tax, or introduce a land value tax.
- x0x0 9y ago
  SF too. Our awesome neighborhood coffee shop closed after the landlord increased the rent from $3300 to $6k. It then sat vacant for 4 years, and finally got filled with a $10/entree vietnamese restaurant. I dunno what the idiot of a landlord thought they were going to get in rent, but a less than 10 table restaurant with cheap entrees does not pay much rent money. Certainly not enough to cover the foregone $120k... In the meantime, I lost my coffee spot and my egg breakfast sandwiches.
rm999 9y ago
It's mostly the rent but it's also Amazon. I recently took part in a commercial real estate search in Soho, probably the biggest shopping district in NYC. The prices in this neighborhood have gone up insanely: one storefront (about the size of a large Banana Republic) recently sold for ~250M dollars, which is obviously absurd. The broker told me that a lot of these stores were taking losses on their commercial leases with the (mis)calculation that the exposure and presence were worth it. This miscalculation is everywhere, you e.g. see the same thing with banks opening locations every 5 blocks. Where the real bubble lies, IMO, is that a lot of the places are going to see competition from online and will no longer be able to justify the losses they've been taking. NYC needs bodegas, bars, and coffee shops - things we can't do online - not Bank of Americas and Banana Republics.
- bogomipz 9y ago
  >"It's mostly the rent but it's also Amazon." How is it Amazon, when there's no shortage of people shopping in Manhattan? The streets are filled with people carrying shopping bags, every day of the week. Almost to the point of annoyance. Between locals and tourists people are never not out shopping. >"NYC needs bodegas, bars, and coffee shops .." There's absolutely no shortage of any of those three things. Those things are so incredibly abundant it seems very odd to say the city needs more of them.
  - bluntfang 9y ago
    >The streets are filled with people carrying shopping bags, every day of the week. anecdotes are great, but why don't you search for the numbers of brick and motor retail sales vs online sales?
    - themagician 9y ago
      About 9-to-1 in just about every industry. Retail isn’t growing, but it still accounts for 80-90% of sales in almost every industry. Online sales will probably overtake brick and mortar… in 5 to 10 years—in the US. Amazon is big, but only really in he US. And only certain verticals. And only typically among affluent urban households. That’s why their stock has always been so high. Amazon has, and still has, massive growth potential. When you get everything from Amazon you assume everyone else does. But the reality is that you (and I) are an extreme minority. You forget how many people pay cash in the US. And how many people international have shit or extremely poor/expensive mail service. And how >3 billion or so people live in countries with import tariffs that are 40% or more. And while internet access is prevalent, buying everyday items online is not. It’s really easy to lose sight of how the vast majority live when you live in an urban area and work at a technically progressive company.
noonespecial 9y ago
Seems simple to fix. A building sitting vacant is depressing everything around it, pushing an external cost onto the city. Leave it vacant and your property taxes triple to offset this cost.
- 6t6t6t6 9y ago
  You are a Communist!! /ironic
- amenghra 9y ago
  Can’t upvote you enough. An empty commercial space is also not bringing in any sales tax. No employees implies no income tax. Etc.
  - TuringNYC 9y ago
    Not only that, but empty spaces attract bad things. Bustle and foot traffic are good things. This is one reason why it is nice to have a mix of commercial storefronts (banks, cafes, etc), especially things that are open in the evenings...it ensures a commercial area that doesnt turn into a ghosttown at night. Growing up in Brooklyn in the 80s, I remember snaking across busy side streets and back-and-forth across the main street to walk along the well-occupied areas. Stumble into a dark corner or and you could get jumped. Much of her writing is age-old and not directly relevant now, but the concepts life on. All these are well argued in Jane Jacobs' https://en.wikipedia.org/wiki/The_Death_and_Life_of_Great_American_Cities https://en.wikipedia.org/wiki/The_Death_and_Life_of_Great_Am...
    - cm2187 9y ago
      In London, it is quite common for real estate companies to own a whole neighborood. They are usually quite smart at preserving the character of the area by taking a lower rent from a local shop/coffee shop/pub, and reaping the reward from higher residential rents as more people want to live in this area. Marylebone is a prime example.
      - 9y ago
rectang 9y ago
Our markets are constructed, with rules and tax codes that favor some players over others. Perhaps now more than ever, it pays to own real estate and seek rent.
calvinbhai 9y ago
I don’t know why Amazon gets most of the blame for such outcomes. It is true that amazon’s efficiencies cannot be matched by most stores, but IMHO, I think it is the health insurance for employees that kills small businesses in the US. I believe the situation was bad but manageable before Obamacare and it became unbearable for many small businesses due the the ever rising costs of employees’ healthcare.
- mgkimsal 9y ago
  > "became unbearable for many small businesses due the the ever rising costs of employees’ healthcare." yet one more reason why "health insurance" should not be something remotely tied to your employer nor employment status. :/
  - chii 9y ago
    framing healthcare cost in terms of insurance is probably the wrong thing to do for a society, and because healthcare is framed as "insurance", it makes it easier to suggest that the employer pays (since they already pay other kinds of insurance). healthcare cost ought to be called what it is : levies on society, so that those who get sick can get care without paying. healthcare tax, or medical levy.
    - GirlsCanCode 9y ago
      What about people -- the majority of the U.S. population -- who eat themselves into having health problems by being overweight or obese? Why should non-gluttons pay for them?
    - mgkimsal 9y ago
      "since they already pay other kinds of insurance" what other types of insurance? social security / medicare? some employers might provide life insurance as well, but... that's it. oh... "unemployment insurance" I guess, in some states (all of this is assuming US for discussion, btw).
      - 9y ago
ufmace 9y ago
I've been wondering if this is actually a problem of over-regulation. When there are more and more regulations at the national, state, city, and neighborhood level, at some point, the little-guy landlords start to give up, out of fear that they'll never be able to comply with everything and ensure that they never get sued or fined. Maybe only the big companies, with the budgets to hire lots of lawyers and clerks to handle everything, and some political connections to smooth over any mistakes, are willing to touch real estate in this market. Now maybe these big companies don't care so much about a few months or years of being vacant, as long as the long-term numbers look good. I'm not completely sure how big of a problem that is. I have a feeling there is a larger trend of the big companies squeezing out the little guys more and more. I don't think over-regulation is the whole picture, but I'm pretty sure it's at least a small part, and maybe a pretty big one. That makes it feel rather odd that the usual recommended solution is yet more regulations. One more set of regulations that the big companies will find a way to document their way around or use political pull to get around, while the little guy can't keep up with it all or document compliance with everything, and gets their business destroyed if they mess up. I kind of hope somebody proves me wrong actually, since this makes me a little depressed about the future. Related: http://slatestarcodex.com/2017/02/09/considerations-on-cost-disease/ http://slatestarcodex.com/2017/02/09/considerations-on-cost-...
lkrubner 9y ago
$1,355,610,000,000 of consumer spending is missing from the demand side of USA spending, and that should be kept in mind whenever you read an article about retail going through hell. The big boom in retail in the mid-20th century was thanks a strong middle class. Conversely, the collapse of income of the middle quintiles of income must lead to a contraction of retail. Consider these charts: Table H-2. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html https://www.census.gov/data/tables/time-series/demo/income-p... Percent of income for the 3 middle quintiles in 1970: 10.8 17.4 24.5 total: 52.7% In 2016: 8.3 14.2 22.9 total: 45.4% The difference: 7.3% The GDP of the USA in 2016: 18.57 trillion https://www.google.com/search?q=usa+gdp+2016&oq=usa+gdp+2016&aqs=chrome..69i57j0l5.5605j0j7&sourceid=chrome&ie=UTF-8 https://www.google.com/search?q=usa+gdp+2016&oq=usa+gdp+2016... So if the middle classes still had the same share of national income as they had in 1970, they would have an additional $1,355,610,000,000 to spend or save. Retail spending in the USA in 2016 was around $5 trillion: https://www.emarketer.com/Article/US-Retail-Sales-Near-5-Trillion-2016/1013368 https://www.emarketer.com/Article/US-Retail-Sales-Near-5-Tri... Hold the spend/save ratio constant and we can say that retail spending would be 27% higher in 2016, if the middle quintiles still had the same percentage of national income as they had in 1970. You can make some adjustments for the increased spending in the top quintile, but most of the income has gone to the top 1% and most of that goes to savings rather than spending. Obviously, all of our current stories about retail would be different if the middle classes still had the same percentage of national income that they had in 1970. And please, please, please note, Amazon only had $131 billion in sales during 2016. It's impact is very small compared to that missing $1,355 trillion.
- refurb 9y ago
  Why would you measure it that way versus just looking at household income growth for the middle class? That would be a much more accurate driver of consumer spending.
anovikov 9y ago
Rent is just a symptom. Rent is guided with what the average renter can pay staying in business. If a retailer can't win that competition it only means that it is losing... to Amazon.
dba7dba 9y ago
My opinion is just of an amateur, but I think way too many wealthy people are learning that it is way safer AND lucrative to use their wealth to buy property to "rent" out or to flip. It IS VERY safe and lucrative than investing in some venture or a business. As more and more wealth flows into this type of venture, whoever wins the bidding war for a property has to charge higher rent to somehow recoup the investment they made to buy the property AND make profit on top of it. And of course there aren't THAT many small businesses that can pay that kind of rent.
EGreg 9y ago
It's rent only because the next guy is willing to throw $ at running a brick and mortar retail business at that level of rent. If people get the message the rent will fall.
Idontknowmyuser 9y ago
we need more mechanisms to punish rent seeking.
- geezerjay 9y ago
  You do understand you're talking about the business of renting real estate,don't you?
  - Idontknowmyuser 9y ago
    yes
crazygringo 9y ago
I'm a New Yorker who's sad to see a lot of shops close, but at the same time can't help but think: efficient markets always correct themselves. Assuming markets are relatively efficient, it's a good thing that landlords leave lots vacant -- they're waiting for a future higher-paying tenant who can afford to pay the higher rent because they'll provide more value to their customers -- and these landlords are paying through the nose in lost rent while making that bet. This ensures there's space ready-to-go for the expensive wine bar customers would prefer over the cheap cafe that would otherwise already be occupying it, or the luxury bakery over the dollar store -- and just like anywhere in a capitalistic system, we assume that the store that produces the most profit (and therefore can afford the highest rent) deserves the storefront, because this is the best use/value for those potential customers. At the same time, I'm ready to rip my hair out over another favorite shop being replaced by yet another Duane Reade pharmacy or Bank of America branch. But you know who I blame? The customers, not the landlords. As depressing as it is, it's clear people in that neighborhood will now pay more for the convenience of banking and aisles of toilet paper than the old stores, and so be it. Which is why, for the first time, I'm moving from Manhattan to Brooklyn. Which is fine -- in my eyes, parts of Manhattan may be getting worse, but parts of Brooklyn are only getting better. Neighborhoods aren't supposed to stay the same. I'm not going to lament a lost New York, when a new one is always forming!
- leephillips 9y ago
  But the article points out that a major input into this system is the valuation of properties by banks, which prefer to see corporate renters. It seems possible, at least, that a corporate landlord may, because of this, prefer to push out an individually-owned renter in the hopes of securing a corporate renter, because the property valuation by the banks will then increase. This would be immune to the popularity of the individually owned shop, so immune to an actual demand signal. In other words, it's not the customers, it's the banks and the corporations who own the buildings.
  - nojvek 9y ago
    Also banks are big and take the losses. Small businesses can’t. You can never blame the customer. They can’t find it at the price they can afford, they’ll move elsewhere.
guuz 9y ago
I live in a famous third world city and the same thing is happening here. Sometimes stores with more than 100 years close because some hedge fund buys the entire street and, hoping to transform the place in a multi-million commercial condo for the ultra rich, raises the rent to impossible prices. E-commerce is a thing, but not as pervasive as in the US. The city culture is being put at risk simply by predatory capitalism
mikesickler 9y ago
Anecdotally, I've noticed that shopping mall rents have been increased sharply over the past 5-7 years for specialty food stores. Historically in specialty foods malls would target about 15% of sales for their rents. Lately that's ratcheted up to 20% of sales. It's getting harder and harder for independent (even franchised) operators to make money in the mall.
yuvalmer 9y ago
Same thing is happening in the greater Boston area. Many city centers have empty store fronts. Even some chains don't survive the high rent. Walgreens opened a huge space in the city center of Cambridge just across the street of a busy CVS. They closed it down about a year later. Just think how much money they wasted on this. For me the biggest problem is the independent restaurants and coffee shops that cannot afford the high rent. They have to increase prices to survive. Most people are not willing to pay $4 for coffee or $12 for a sandwich. When you go to a coffee place you're not thinking about the rent the place is paying and if their prices are justifiable or not. Many people find cheaper places to go to. These places are usually run by people that either lucked out with landlords who didn't increase their rent for many years, or ones who own the property and are not affected by increasing rents. Others mentioned banks that don't mind losing money because the physical presence helps their Online banking. I noticed this trend around where I live too. A new coffee shop was recently opened after the place was sitting empty for many months. The new place runs by a catering company. They probably don't mind if the place is losing money as long as it helps their catering business. It's a different way of doing marketing.
- clintonb 9y ago
  Minor point: Porter Square is not the city center of Cambridge. Central Square is. The Walgreens in Porter Square closed due to over-saturation, not necessarily high rent costs. They plopped a store in an area with staunch competition from others and themselves. Perhaps they thought they'd steal CVS' business. Clearly they could not after just shy of two years. This article has more details: http://www.cambridgeday.com/2015/07/16/walgreens-closing-porter-square-location-next-to-cvs-it-was-open-less-than-two-years/ http://www.cambridgeday.com/2015/07/16/walgreens-closing-por....
- fencepost 9y ago
  It's not so much that the storefront can lose money as that the caterer is going to need some of the facilities available in that location (e.g. commercial kitchen, client meeting facility) regardless of whether they have a storefront. If the increased cost of having those with an associated store is comparable to the added revenue from the store, then the store is reasonable, and if it helps with branding and marketing as well then it's a net positive.
chiefalchemist 9y ago
> "When they, too, fail, the stores lie vacant, and landlords, often institutional investors, are unwilling to drop rents." And later it's said losses can be written off. Point being, it sounds to me, like the tax code is such that it's a win if you lease, as well as a win if you don't. That obviously drives up demand (to own such properties). That obviously increases price / value. That obviously increases the owners expectation on what to charge for rent. So now we have owners who are subsidized (read: incentives with ill effects) and need not be mindful of the market. What could go wrong?

227 points by andrewlevine 9y ago

Can anyone explain the economics of being a NYC landlord and keeping a property vacant for months or years? I've experienced this in several different neighborhoods I've lived in, but it's worst in my current neighborhood (Upper West Side). This article gives some high-level reasons (institutional investors more willing to wait for higher rent, banks devaluing non-chain properties, real estate bubble). But it's hard for me to imagine the math works out for leaving a space vacant in NYC for years.

brookside 9y ago
I believe landlords try to get 10 year commercial leases which is the cause of holding out for the best price they can. This article doesn't answer the question directly but it came to mind: https://www.nytimes.com/2017/05/31/fashion/bleecker-street-shopping-empty-storefronts.html https://www.nytimes.com/2017/05/31/fashion/bleecker-street-s...
- tnuc 9y ago
  10 year leases are mostly made by big companies with deep pockets, which puts the value of the property up.
twobyfour 9y ago
A standard storefront lease is for 10 years. If you believe you can get 12% higher rent by waiting for a year, it's worthwhile to leave the space empty. What I don't get is why there aren't more fun pop-up shops appearing in these spaces?
- andrewlevine 9y ago
  I'm still skeptical (tell me what I'm missing) - are commercial real estate prices in NYC really going up 10% / year? Certainly as a residential renter for ~12 years (in the same areas that have high vacancies) I haven't seen a rent increase like that.
  - twobyfour 9y ago
    It's not necessarily a market price increase that they're waiting for, but rather a higher bidder. Why rent now to a (price-sensitive) local pizza parlor if you have a chance to land a national bank that can afford double the rent without a second thought?
    - saurik 9y ago
      That makes sense to me if I saw properties lying fallow for a year or two... but there are tons of properties that just sit unused for many many years. I honestly don't remember the last time there was something in the amazingly-located spot next door to the Apple store in downtown Santa Barbara. I frankly bet it was longer than ten years ago! What are they waiting for? Bankruptcy?! I just don't get it :(. There are also lots of businesses that would be willing to sign on for just a year or two instead of for ten years. Hell: the average life expectancy of many businesses isn't even ten years, so you are essentially just refusing to sell your wasting good (minutes of building) to people who would love to pay you for it due to "I guess this is how people normally do it", which is insane.
      - bsder 9y ago
        > I honestly don't remember the last time there was something in the amazingly-located spot next door to the Apple store in downtown Santa Barbara. I frankly bet it was longer than ten years ago! What are they waiting for? The answer is probably that Apple has a clause in the contract that says that if you give another client a better price than you gave Apple, Apple gets to renegotiate. If you got a particularly good rent from Apple, it's probably better to leave the place beside completely empty.
      - 9y ago
- jseliger 9y ago
  If you believe you can get 12% higher rent by waiting for a year, it's worthwhile to leave the space empty. An interesting comment that dovetails nicely with this: https://news.ycombinator.com/item?id=16002397 https://news.ycombinator.com/item?id=16002397 : Seems simple to fix. A building sitting vacant is depressing everything around it, pushing an external cost onto the city. Leave it vacant and your property taxes triple to offset this cost. Such a policy would probably need fine-tuning (e.g. what is the optimal number of months before taxes kick in, what is the optimal rate schedule, etc.), but it seems reasonable on its face.
- czinck 9y ago
  I wish the popup shops were more frequent. 2 or 3 years ago there was a vacant store front on 39(?)th and Madison. Instead of just leaving it like that, the landlord turned it in to a private motorcycle museum. I got to walk by some very good looking classic bikes, he got to show off the shop.
s0rce 9y ago
Not sure about nyc but in other markets people claim that some are just speculating on the property value appreciating and it has been going up so much the extra money from renting isn't worth the hassle, especially for foreign investors. I don't know how true this is.
acranox 9y ago
We have this problem in Boston too. Let me know if you get a satisfactory answer. I’ve been wondering for years, and can’t understand it.
greggman 9y ago
I'd be curious too. Not NYC big there's was a medium sized retail space across from a Whole Foods in Noe Valley. It was vacant for 11 years. Maybe it's still vacant? The picture on Google Maps ©️ 2017 shows a still vacant space. https://sf.curbed.com/2015/1/26/9999036/11-years-after-closing-owner-of-noe-valleys-real-food-finally-ready https://sf.curbed.com/2015/1/26/9999036/11-years-after-closi...
- refurb 9y ago
  Still vacant! I've heard rumbling that something will go in there, but nothing yet.
andrewlevine 9y ago
I found another interesting article on this question: https://citylimits.org/2017/12/05/diagnosing-nycs-vacant-storefront-problem/ https://citylimits.org/2017/12/05/diagnosing-nycs-vacant-sto... The additional reasons they give: * increasing prevalence of chain stores who move slower on real estate deals * willingness of national chains to pay high rents and lose money on a store in a famous neighborhood to boost their brand reputation * landlords "warehousing" properties, waiting for rezoning or new development * rezoning causing an oversupply of commercial property in an area * unrealistic expectations of landlords who have not adjusted to lower rents caused by online competition * sunk-cost fallacy - for properties bought in 2014-2015, landlords could face "losing" money by renting for less than their mortgage * increased prevalence of "demolition clauses" in leases - that allow for eviction of tenants if the landlord wants to demolish the building - making it harder to find a tenant
- notatoad 9y ago
  Please don't use code blocks for bulleted lists, it makes you comment impossible to read on mobile.
bogomipz 9y ago
>"Can anyone explain the economics of being a NYC landlord and keeping a property vacant for months or years?" Vacant for years is a bit unusual. But being vacant for months seems to be the norm now. I think this is mostly because the type of tenants that can afford these rents or the ones the landlord wants are big corporate chains. These are entities that don't move very quickly or don't need to move quickly. It seems that vacant stores fronts are invariably replaced by the same 5 banks(Citi, Wells Fargo, B of A, Chase, TD) and the and two drug stores Duane Reade and Rite Aid. These 7 companies have achieved absurd levels of density in Manhattan and it may even be that they are finally slowing these insane saturation campaigns they have undertaken.
coredog64 9y ago
It was only touched on in this article, but I've read elsewhere that part of the problem is the structure of loans. If the landlord takes a lower rent, then the value of the property decreases in the lender's eyes. If the owner doesn't have enough equity then they might have to renegotiate at less favorable terms.
- Atheros 9y ago
  Do you have a source for that? I read the same thing a while ago but couldn't find a source more recently.
- tomwilson 9y ago
  This happens in Australia all the time.
Spooky23 9y ago
Real estate is a den of crookery. There are all sorts of tax schemes that make it desirable for some properties to lose money.
- tannhaeuser 9y ago
  Isn't it the extremely low interest rate set by the Fed though? With the lack of good investment opportunities and the danger of inflation, everyone puts their money on real estate, so last decade's housing crisis is imported into the next decade.
iakh 9y ago
This is a classic example of real option valuation[1]. As others have pointed out, holding out could mean that the owner could charge more later on. The right, but not the obligation, to lease or sell the property has an intrinsic value which can be modeled using different option pricing methods. So long as the value of the option is greater than the current leasing options, then the owner should keep the property vacant. [1] https://en.wikipedia.org/wiki/Real_options_valuation https://en.wikipedia.org/wiki/Real_options_valuation
- JDiculous 9y ago
  It seems that landlords aren't paying enough in property tax if they'd prefer to keep the property vacant than rent it out. Sounds like we need to raise property taxes, implement some kind of vacant property tax, or introduce a land value tax.
x0x0 9y ago
SF too. Our awesome neighborhood coffee shop closed after the landlord increased the rent from $3300 to $6k. It then sat vacant for 4 years, and finally got filled with a $10/entree vietnamese restaurant. I dunno what the idiot of a landlord thought they were going to get in rent, but a less than 10 table restaurant with cheap entrees does not pay much rent money. Certainly not enough to cover the foregone $120k... In the meantime, I lost my coffee spot and my egg breakfast sandwiches.

rm999 9y ago

It's mostly the rent but it's also Amazon. I recently took part in a commercial real estate search in Soho, probably the biggest shopping district in NYC. The prices in this neighborhood have gone up insanely: one storefront (about the size of a large Banana Republic) recently sold for ~250M dollars, which is obviously absurd. The broker told me that a lot of these stores were taking losses on their commercial leases with the (mis)calculation that the exposure and presence were worth it. This miscalculation is everywhere, you e.g. see the same thing with banks opening locations every 5 blocks. Where the real bubble lies, IMO, is that a lot of the places are going to see competition from online and will no longer be able to justify the losses they've been taking. NYC needs bodegas, bars, and coffee shops - things we can't do online - not Bank of Americas and Banana Republics.

bogomipz 9y ago
>"It's mostly the rent but it's also Amazon." How is it Amazon, when there's no shortage of people shopping in Manhattan? The streets are filled with people carrying shopping bags, every day of the week. Almost to the point of annoyance. Between locals and tourists people are never not out shopping. >"NYC needs bodegas, bars, and coffee shops .." There's absolutely no shortage of any of those three things. Those things are so incredibly abundant it seems very odd to say the city needs more of them.
- bluntfang 9y ago
  >The streets are filled with people carrying shopping bags, every day of the week. anecdotes are great, but why don't you search for the numbers of brick and motor retail sales vs online sales?
  - themagician 9y ago
    About 9-to-1 in just about every industry. Retail isn’t growing, but it still accounts for 80-90% of sales in almost every industry. Online sales will probably overtake brick and mortar… in 5 to 10 years—in the US. Amazon is big, but only really in he US. And only certain verticals. And only typically among affluent urban households. That’s why their stock has always been so high. Amazon has, and still has, massive growth potential. When you get everything from Amazon you assume everyone else does. But the reality is that you (and I) are an extreme minority. You forget how many people pay cash in the US. And how many people international have shit or extremely poor/expensive mail service. And how >3 billion or so people live in countries with import tariffs that are 40% or more. And while internet access is prevalent, buying everyday items online is not. It’s really easy to lose sight of how the vast majority live when you live in an urban area and work at a technically progressive company.

noonespecial 9y ago

Seems simple to fix. A building sitting vacant is depressing everything around it, pushing an external cost onto the city. Leave it vacant and your property taxes triple to offset this cost.

6t6t6t6 9y ago
You are a Communist!! /ironic
amenghra 9y ago
Can’t upvote you enough. An empty commercial space is also not bringing in any sales tax. No employees implies no income tax. Etc.
- TuringNYC 9y ago
  Not only that, but empty spaces attract bad things. Bustle and foot traffic are good things. This is one reason why it is nice to have a mix of commercial storefronts (banks, cafes, etc), especially things that are open in the evenings...it ensures a commercial area that doesnt turn into a ghosttown at night. Growing up in Brooklyn in the 80s, I remember snaking across busy side streets and back-and-forth across the main street to walk along the well-occupied areas. Stumble into a dark corner or and you could get jumped. Much of her writing is age-old and not directly relevant now, but the concepts life on. All these are well argued in Jane Jacobs' https://en.wikipedia.org/wiki/The_Death_and_Life_of_Great_American_Cities https://en.wikipedia.org/wiki/The_Death_and_Life_of_Great_Am...
  - cm2187 9y ago
    In London, it is quite common for real estate companies to own a whole neighborood. They are usually quite smart at preserving the character of the area by taking a lower rent from a local shop/coffee shop/pub, and reaping the reward from higher residential rents as more people want to live in this area. Marylebone is a prime example.
    - 9y ago

rectang 9y ago

Our markets are constructed, with rules and tax codes that favor some players over others. Perhaps now more than ever, it pays to own real estate and seek rent.

calvinbhai 9y ago

I don’t know why Amazon gets most of the blame for such outcomes. It is true that amazon’s efficiencies cannot be matched by most stores, but IMHO, I think it is the health insurance for employees that kills small businesses in the US. I believe the situation was bad but manageable before Obamacare and it became unbearable for many small businesses due the the ever rising costs of employees’ healthcare.

mgkimsal 9y ago
> "became unbearable for many small businesses due the the ever rising costs of employees’ healthcare." yet one more reason why "health insurance" should not be something remotely tied to your employer nor employment status. :/
- chii 9y ago
  framing healthcare cost in terms of insurance is probably the wrong thing to do for a society, and because healthcare is framed as "insurance", it makes it easier to suggest that the employer pays (since they already pay other kinds of insurance). healthcare cost ought to be called what it is : levies on society, so that those who get sick can get care without paying. healthcare tax, or medical levy.
  - GirlsCanCode 9y ago
    What about people -- the majority of the U.S. population -- who eat themselves into having health problems by being overweight or obese? Why should non-gluttons pay for them?
  - mgkimsal 9y ago
    "since they already pay other kinds of insurance" what other types of insurance? social security / medicare? some employers might provide life insurance as well, but... that's it. oh... "unemployment insurance" I guess, in some states (all of this is assuming US for discussion, btw).
    - 9y ago

ufmace 9y ago

I've been wondering if this is actually a problem of over-regulation. When there are more and more regulations at the national, state, city, and neighborhood level, at some point, the little-guy landlords start to give up, out of fear that they'll never be able to comply with everything and ensure that they never get sued or fined. Maybe only the big companies, with the budgets to hire lots of lawyers and clerks to handle everything, and some political connections to smooth over any mistakes, are willing to touch real estate in this market. Now maybe these big companies don't care so much about a few months or years of being vacant, as long as the long-term numbers look good. I'm not completely sure how big of a problem that is. I have a feeling there is a larger trend of the big companies squeezing out the little guys more and more. I don't think over-regulation is the whole picture, but I'm pretty sure it's at least a small part, and maybe a pretty big one. That makes it feel rather odd that the usual recommended solution is yet more regulations. One more set of regulations that the big companies will find a way to document their way around or use political pull to get around, while the little guy can't keep up with it all or document compliance with everything, and gets their business destroyed if they mess up. I kind of hope somebody proves me wrong actually, since this makes me a little depressed about the future. Related: http://slatestarcodex.com/2017/02/09/considerations-on-cost-disease/ http://slatestarcodex.com/2017/02/09/considerations-on-cost-...

lkrubner 9y ago

$1,355,610,000,000 of consumer spending is missing from the demand side of USA spending, and that should be kept in mind whenever you read an article about retail going through hell. The big boom in retail in the mid-20th century was thanks a strong middle class. Conversely, the collapse of income of the middle quintiles of income must lead to a contraction of retail. Consider these charts: Table H-2. Share of Aggregate Income Received by Each Fifth and Top 5 Percent of Households https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html https://www.census.gov/data/tables/time-series/demo/income-p... Percent of income for the 3 middle quintiles in 1970: 10.8 17.4 24.5 total: 52.7% In 2016: 8.3 14.2 22.9 total: 45.4% The difference: 7.3% The GDP of the USA in 2016: 18.57 trillion https://www.google.com/search?q=usa+gdp+2016&oq=usa+gdp+2016&aqs=chrome..69i57j0l5.5605j0j7&sourceid=chrome&ie=UTF-8 https://www.google.com/search?q=usa+gdp+2016&oq=usa+gdp+2016... So if the middle classes still had the same share of national income as they had in 1970, they would have an additional $1,355,610,000,000 to spend or save. Retail spending in the USA in 2016 was around $5 trillion: https://www.emarketer.com/Article/US-Retail-Sales-Near-5-Trillion-2016/1013368 https://www.emarketer.com/Article/US-Retail-Sales-Near-5-Tri... Hold the spend/save ratio constant and we can say that retail spending would be 27% higher in 2016, if the middle quintiles still had the same percentage of national income as they had in 1970. You can make some adjustments for the increased spending in the top quintile, but most of the income has gone to the top 1% and most of that goes to savings rather than spending. Obviously, all of our current stories about retail would be different if the middle classes still had the same percentage of national income that they had in 1970. And please, please, please note, Amazon only had $131 billion in sales during 2016. It's impact is very small compared to that missing $1,355 trillion.

refurb 9y ago
Why would you measure it that way versus just looking at household income growth for the middle class? That would be a much more accurate driver of consumer spending.

anovikov 9y ago

Rent is just a symptom. Rent is guided with what the average renter can pay staying in business. If a retailer can't win that competition it only means that it is losing... to Amazon.

dba7dba 9y ago

My opinion is just of an amateur, but I think way too many wealthy people are learning that it is way safer AND lucrative to use their wealth to buy property to "rent" out or to flip. It IS VERY safe and lucrative than investing in some venture or a business. As more and more wealth flows into this type of venture, whoever wins the bidding war for a property has to charge higher rent to somehow recoup the investment they made to buy the property AND make profit on top of it. And of course there aren't THAT many small businesses that can pay that kind of rent.

EGreg 9y ago

It's rent only because the next guy is willing to throw $ at running a brick and mortar retail business at that level of rent. If people get the message the rent will fall.

Idontknowmyuser 9y ago

we need more mechanisms to punish rent seeking.

geezerjay 9y ago
You do understand you're talking about the business of renting real estate,don't you?
- Idontknowmyuser 9y ago
  yes

crazygringo 9y ago

I'm a New Yorker who's sad to see a lot of shops close, but at the same time can't help but think: efficient markets always correct themselves. Assuming markets are relatively efficient, it's a good thing that landlords leave lots vacant -- they're waiting for a future higher-paying tenant who can afford to pay the higher rent because they'll provide more value to their customers -- and these landlords are paying through the nose in lost rent while making that bet. This ensures there's space ready-to-go for the expensive wine bar customers would prefer over the cheap cafe that would otherwise already be occupying it, or the luxury bakery over the dollar store -- and just like anywhere in a capitalistic system, we assume that the store that produces the most profit (and therefore can afford the highest rent) deserves the storefront, because this is the best use/value for those potential customers. At the same time, I'm ready to rip my hair out over another favorite shop being replaced by yet another Duane Reade pharmacy or Bank of America branch. But you know who I blame? The customers, not the landlords. As depressing as it is, it's clear people in that neighborhood will now pay more for the convenience of banking and aisles of toilet paper than the old stores, and so be it. Which is why, for the first time, I'm moving from Manhattan to Brooklyn. Which is fine -- in my eyes, parts of Manhattan may be getting worse, but parts of Brooklyn are only getting better. Neighborhoods aren't supposed to stay the same. I'm not going to lament a lost New York, when a new one is always forming!

leephillips 9y ago
But the article points out that a major input into this system is the valuation of properties by banks, which prefer to see corporate renters. It seems possible, at least, that a corporate landlord may, because of this, prefer to push out an individually-owned renter in the hopes of securing a corporate renter, because the property valuation by the banks will then increase. This would be immune to the popularity of the individually owned shop, so immune to an actual demand signal. In other words, it's not the customers, it's the banks and the corporations who own the buildings.
- nojvek 9y ago
  Also banks are big and take the losses. Small businesses can’t. You can never blame the customer. They can’t find it at the price they can afford, they’ll move elsewhere.

guuz 9y ago

I live in a famous third world city and the same thing is happening here. Sometimes stores with more than 100 years close because some hedge fund buys the entire street and, hoping to transform the place in a multi-million commercial condo for the ultra rich, raises the rent to impossible prices. E-commerce is a thing, but not as pervasive as in the US. The city culture is being put at risk simply by predatory capitalism

mikesickler 9y ago

Anecdotally, I've noticed that shopping mall rents have been increased sharply over the past 5-7 years for specialty food stores. Historically in specialty foods malls would target about 15% of sales for their rents. Lately that's ratcheted up to 20% of sales. It's getting harder and harder for independent (even franchised) operators to make money in the mall.

yuvalmer 9y ago

Same thing is happening in the greater Boston area. Many city centers have empty store fronts. Even some chains don't survive the high rent. Walgreens opened a huge space in the city center of Cambridge just across the street of a busy CVS. They closed it down about a year later. Just think how much money they wasted on this. For me the biggest problem is the independent restaurants and coffee shops that cannot afford the high rent. They have to increase prices to survive. Most people are not willing to pay $4 for coffee or $12 for a sandwich. When you go to a coffee place you're not thinking about the rent the place is paying and if their prices are justifiable or not. Many people find cheaper places to go to. These places are usually run by people that either lucked out with landlords who didn't increase their rent for many years, or ones who own the property and are not affected by increasing rents. Others mentioned banks that don't mind losing money because the physical presence helps their Online banking. I noticed this trend around where I live too. A new coffee shop was recently opened after the place was sitting empty for many months. The new place runs by a catering company. They probably don't mind if the place is losing money as long as it helps their catering business. It's a different way of doing marketing.

clintonb 9y ago
Minor point: Porter Square is not the city center of Cambridge. Central Square is. The Walgreens in Porter Square closed due to over-saturation, not necessarily high rent costs. They plopped a store in an area with staunch competition from others and themselves. Perhaps they thought they'd steal CVS' business. Clearly they could not after just shy of two years. This article has more details: http://www.cambridgeday.com/2015/07/16/walgreens-closing-porter-square-location-next-to-cvs-it-was-open-less-than-two-years/ http://www.cambridgeday.com/2015/07/16/walgreens-closing-por....
fencepost 9y ago
It's not so much that the storefront can lose money as that the caterer is going to need some of the facilities available in that location (e.g. commercial kitchen, client meeting facility) regardless of whether they have a storefront. If the increased cost of having those with an associated store is comparable to the added revenue from the store, then the store is reasonable, and if it helps with branding and marketing as well then it's a net positive.

chiefalchemist 9y ago

> "When they, too, fail, the stores lie vacant, and landlords, often institutional investors, are unwilling to drop rents." And later it's said losses can be written off. Point being, it sounds to me, like the tax code is such that it's a win if you lease, as well as a win if you don't. That obviously drives up demand (to own such properties). That obviously increases price / value. That obviously increases the owners expectation on what to charge for rent. So now we have owners who are subsidized (read: incentives with ill effects) and need not be mindful of the market. What could go wrong?