Retail and rents

I love to come back to NYC after our winter sojourn in LA and see what has happened since we have been gone.  What is loud and clear since we left is the countless empty stores that are leaving entire blocks vacant.  That does not bode well for vibrant communities.

There has always been a disconnect between landlords and market value when things begin to shift.  Who wouldn’t want to believe that their space is still worth what the last tenant paid?  Unfortunately, much of the prime real estate around the city is owned by families that own countless properties and they are willing to just let those storefronts remain empty.

Mayor DeBlasio has proposed fining landlords who keep their spaces empty for an extended period of time essentially forcing them to figure out market value sooner than later.  Who knows how much capital has been leveraged on these properties but the point is vacant blocks is not good for any city.

We can bemoan about the closings of the big stores like JCPenney, Sears, ToysRUs, JCrew, Gap, and others but they aren’t coming back.  The question is what is coming?  Brick and mortar stores are not going away.  97% of Generation Z still shops in brick and mortar stores.  How about that?  People might be more inclined to push a button and buy their clothes or buy the basics for their homes but it appears that the young still like to get out and experience the world.

I can imagine a store or open mall where it looks and feels different.  Think Fred Segal meets a wine and beer tasting meets a coffee shop meets a book reading meets a cooking class meets an apartment where everything is for sale but you don’t want out the door with it in your hand but it shows up at your door at a later time.  Above that new Main street store is places of residence.  Or how about indoor farms where the community comes together?  Lots of concepts are out there but just like the cost of entry has dramatically been reduced for starting a business online, we need to do the same in brick and mortar.  Landlords need to find the price where they still make money but allows for a new generation of creativity to become the next wave of local stores that eventually will become chains and the cycle will continue.

Comments (Archived):

  1. awaldstein

    Yup–and it seriously is changing our city.I heard about the idea of charging landlords for keeping stores empty and in concept at a general level, at least it is an idea worth pursuing.Real estate as an asset class is seriously hurting innovation due to its crazy cost basis.

    1. Gotham Gal

      To see so many empty stores is a reflection on the city and a direct reflection on DeBlasios economy

      1. awaldstein

        Good summation.Though sobering.

      2. Guest

        Don’t you support De Blasio and his never ending tax hikes and regulations?Those sorts of policies will always lead to a weaker economy — no way around it.

        1. Gotham Gal

          No I do not.

    2. mplsvbhvr

      At the risk of sounding like a broken record blockchain tech can help here.Bringing costs down (contracts, brokerage, loans, etc) New platforms for raising capitalThis should shake things up.

      1. awaldstein

        It could help and it should happen but i don’t know if that is enough to solve the larger problem.

        1. mplsvbhvr

          Well I’ll hope for the best, prepare for the worst as I generally do 🙂

      2. LE

        The costs that you are referring to are such a minor portion of this situation it defies common sense that it would have any impact at all on a landlord’s decision as to who to rent to and for how much.

        1. mplsvbhvr

          I guess it depends how much you think the costs I’m referring to can be lowered – or are you arguing that even if they were non-existent landlords would continue to refuse to lower rents?

          1. LE

            The landlord will try to profit as much as they can. The costs that you are referencing that you think could be lowered aren’t a major factor in a decision to rent.Here are the things that I consider when setting rent for commercial properties (not in NYC btw)purchased for cash that I own.a) What the market will bear.b) Property taxes (if not nnn)c) Condo fees, if anyd) Maintenance costse) What I paid for the property.f) Lease particulars and how much of a pain in the ass the tenant might be.g) How credit worthy the tenant is.h) How much I like the tenant (seriously this is linked a bit to ‘f’)i) Realtor commission, if any.j) Length of leasek) How long will I wait until the next tenant comes alongbut this is combined with the other things that I mentionin making a decision.That’s off the top. Let’s say you get rid of ‘I’. So that’s a 5% reductionin costs. That is not major and earth shattering.In no particular order. ‘a’ is probably the major consideration.non-existent landlordsWhat is a ‘non-existent’ landlord?

          2. mplsvbhvr

            Sorry – I should rephrase. A clearer wording would be: “If the cost of writing contracts, hiring lawyers, brokerage fees and others I listed were all reduced to zero, would this still have no impact an acceptable rent level for a property?” – the answer might be yes, it’s not a rhetorical question, I’m genuinely curious. Or maybe it’s just not enough impact to get you excited?I guess I’m also taking a wider view here though (I tend to get lost in the clouds so forgive me for that). Hypothetically, fundraising on chain and having the governance sit there alongside non-fungible shares of a property makes for some very interesting use case. I like the idea of people being able to have a hand in what is in their neighborhoods. Maybe it’s pie in the sky, but if I could, along with my neighbors, invest in a coffee shop which I preferred to Starbucks and not take on the full risk of opening and operating a business by myself that’s an interesting proposition. Especially if Amazon Go ends up licensing their technology or building out a smart contract system that allows users to access it for a fee…..

          3. JLM

            .Developers use standard lease forms.Brokers are incentivized to bring tenants through brokerage commissions. That cost is folded into the rent of the tenant. It is typically 4% of gross revenue, not including NNNs.These are not significant costs.JLMwww.themusingsofthebigredca…

          4. mplsvbhvr

            Good to know, thanks for taking the time to educate. I’ll be thinking about this more it’s clear I’ve got to dig deeper if there’s going to be anything worth discovering (as usual…)

      3. JLM

        .Approximately 25% of all the world’s wealth is in real estate. It is the most gloriously, well-documented security industry in the world.The market is easy to access and price.It is almost dead money because nobody can drive the value of land or a building to zero — like cryptocurrency can.Its allure is the ability to create financially leveraged returns by a clever mix of equity and debt.JLMwww.themusingsofthebigredca…

        1. mplsvbhvr

          No disagreement here – my best guess is initial adoption is done through a lowering of cost to enhance those leveraged returns.Then, much later, we’ll see new methods of ownership (i.e. ERC-721 deeds) take hold, everything will be expressed on chain and friction will be reduced to near naught. Queue the financial wizards at tech gurus of the world (not sure if it will be Goldman or Facebook running the world at that time… I hope it’s Vitalik and Joseph Poon but that seems unlikely) will get their hands on the assets and find a way to wring even more juice from the fruit.

  2. LIAD

    Ditto London.Super prime still doing well but most local high streets (our equivalent to Main St) not great and outlook is dire .Stores here pay considerable business rates so leaving stores empty long-term is unusual.What’s happening now is landlords are exploiting a legal loophole that charities don’t pay business rates. So they are leasing their properties rent free to charities. As that way, at least they save on the expense of business rates.Charities can take the store, add a couple of pieces of clothing or 2nd hand furniture to sell, in order for them to be classified as trading and effectively leave the store to rot.Personally, I don’t think the High St or out of town strip malls are ever coming back .

    1. Gotham Gal

      They might not be ever coming back but in order to create new concepts with those pieces of real estate there has to be creativity and smart pricing

  3. Walker

    How about an equity kicker for the Landlord in exchange for reduced rent for the tenant? Kind of like rent overage provisions (common in retail and groceries). Sales overage rent provisions are almost after thoughts – maybe something more robust to make the implicit ” partnership” between landlord and tenant thoughtfully and meaningfully explicit?

    1. Gotham Gal


    2. JLM

      .That has been around for half a century. Most retail leases quote a basic rent v a “percentage” rent.Say, Walgreens is your tenant. They are a good tenant.You quote them $20/SF v 7% of gross revenue.The tenant also pays their share – NNN – of property taxes, insurance, maintenance. The landlord pays for the vacant space’s share.I was doing this 30 years ago and somebody was doing it 30 years before me.Your generation did not invent sex or business. [BTW, I have never met a tenant who did not cheat on their gross revenue reporting.]JLMwww.themusingsofthebigredca…

      1. Walker

        I wrote “Kind of like overage provisions (common in retail and groceries)”. I was suggesting something more robust than the conventional $20/SF and 7% of the gross. I may not have invented sex but I own four large commercial office single tenant NNN office buildings (leased to credit tenants) in Fla, TN, NJ, and MA (over 1,000,000 sq ft in total) and a grocery store leased to a national chain in NY (acquired in the 80’s (and yes it has an overage provision and yes no doubt the gross revenues they report are suspect). BTW, I am older than you so have a little respect for your elders you young whippersnapper.WALKER

        1. JLM

          .Didn’t mean to piss in your Wheaties, friend.I used to be a high rise office building developer in Austin By God Texas. I remember when 1MM SF was a good year. Probably developed, renovated 10MM SF of office in my time. Tens of thousands of apartments. Hundreds of warehouses. Lots of mixed use land.Go look at my website and you can see some of the buildings I developed.Unfortunately, I am probably older than you, you old fart. Haha. I hope you are, but I sort of doubt it. JKI do have very big hands cause I’m 6’4″.JLMwww.themusingsofthebigredca…

  4. CCjudy

    Its exactly same situation here in San Francisco…

  5. JLM

    .Small retail has a life cycle which is literally tied to the vitality of its ownership and management.In food, a concept probably has a 5-7 year life cycle.Let’s get gov’t involved in real estate because they are so good at ………………….. everything.JLMwww.themusingsofthebigredca…

  6. Guest

    Fining landlords for empty storefronts is absolutely idiotic. NYC is already hostile enough to business — there is a reason these storefronts are empty in the first place! My understanding is the landlords are forced to charge a very high amount b/c the commercial real estate taxes are insane. If this is true, then reducing the commercial real estate tax burden would be a viable solution. This would never happen, though, as that takes away money from the public sector unions who run that city and state with an iron fist. In my opinion, Right to Work would go a long way but that will never happen.

  7. LE

    Look everything about NYC is different. Elsewhere? Below is a vacant property (1488 sf) for sale on the ‘famed’ Atlantic City Boardwalk.The price is $395,000 ($265sf). And that’s the asking price. You can probably buy it at .75 of that number for cash.In NYC the average retail rent is 3 times that amount PER YEAR. Here you own the property. Sure you have to pay high NJ property taxes but you own it.By the way notice how lame the realtor is. They didn’t even get a picture during the season showing activity. And that’s not an aberration either. That’s the typical level of quality and effort you get outside of Manhattan.…How bad is it in some places that are not NYC with real estate? I just bought a place from my mom that she bought with my dad in the 1970’s. The cost was exactly market value and less than what they paid in the 70’s. That’s right. No appreciation. And this is right next to Stockton where they are building a brand new University and building and the market is upbeat. Nobody wants to be there. Everyone wants to be in NYC. [1] … https://uploads.disquscdn.c…[1] An exactly identical property they owned in Miami Beach and bought literally for the same amount at the same time was sold 2 years ago to a developer who tore down the entire condo complex and paid all the owners about 15x what they paid in the 70′.s And he (Dezer and Related) is building multi million dollar condos in it’s place.

  8. mplsvbhvr

    The mall angle is interesting – I’ve seen Daniel Hurwitz quoted a number of times regarding the sector: “I don’t think we’re overbuilt, I think we’re under-demolished.”Basically there are a handful of well performing malls that are running away with the vast majority of the market share and 50%+ of the malls in America are failing. This is somewhat sad but most likely necessary.There’s a number of beautifully designed malls already popping up around the world (https://www.architecturaldi… and I suspect we’ll see the mega-mall trend continue with transportation becoming increasingly inexpensive (hyperloop, self-driving fleets) so that you can build them further away, on cheaper land, and still be accessible to multiple major metropolitan areas.

  9. Julie Lerner

    There seems to be something happening specific to the West Village. I was just in a Via last week coming down Columbus Avenue. I saw only a couple empty storefronts. The whole span seemed vibrant and full of stores. When I walk around the neighborhood, I feel like I am in a depressed upstate town. Who are these landlords who own these properties. Is it pure greed, a tax write-off, or is there something else going on? Obviously a much smaller population in the Village, yet areas in Brooklyn with similar size communities do not look like ghost towns as it does here.

  10. Jonathan Butler

    Another force at work is that owners who acquired their properties at the peak of the market cannot afford to rent them at lower rents for an extended period of time because their carrying costs (including mortage) are so high, so they are left having no choice but to swing for the fences because taking the lower rent will mean losing the property ultimately anyway. Similarly, if the value of the building is essentially a multiple on its cashflow, locking in a long-term rent at the wrong time can crush the exit value of their investment. So taking $500,000 a year in rent instead of $750,000 is not as simple as foregoing $250,000 a year–it’s coming to terms with the fact that your investment property is worth $5 million (20 x $250k) less at that rent level.

    1. Gotham Gal

      Totally but here is the thing they are never going to get those rents again

    2. JLM

      .What experienced landlords do is to write leases at market and escalate them over the course of the term. I would charge you $0 if I can charge you $50/SF in six years. It’s just simple time value of money.Investment grade properties trade on low cap rates — the rate at which predictable cash flow is converted into asset value. Some are as low as 5% (as you backed into above).If you can get a tenant now and escalate them to market rates in 5-10 years while having an escalation available for the next guy at year 15, you can make a lot of money.Nobody likes to see the value of anything going down. But, the pros never take it personally and rent their space with escalations.I have been in markets in which the legacy rents were so low and the current market rates so high I was buying tenants out of their leases. It kicks as hard as it shoots.JLMwww.themusingsofthebigredca…

  11. Kirsten Lambertsen

    If landlords are essentially investors, maybe they should think about renting to businesses in which they’d like to invest. They could rent the space at a reduced rate for the first ~5 years in exchange for a piece of the company or % participation in the profits after that. It seems like it could be good to have the landlord’s interests aligned with the success of the tenant business.I dunno anything about this stuff, of course 🙂 There may be a million reasons why no one does this — or maybe they already do it?

    1. Gotham Gal

      Very smart idea

  12. Anne-Marie Kovacs

    Here is Chicago, landlords are incentivized to keep their stores vacant ( Their definition of passive income maybe?Some stretches, even in high-end areas, have rows of unoccupied shops. It’s a blight that is omnipresent no matter the rental rates or the state of the local economy. The empty, neglected storefronts are demoralizing for neighbors.Not a good look for any community.

  13. Pointsandfigures

    check out some sites like, They are changing the game in commercial real estate As to vacancies-a lot of that is due to the high costs cities put on landowners who pass it down to renters, who pass it on to customers. Combine that with what’s going on in retail and it’s a hurricane

    1. Gotham Gal

      This is great to hear!

      1. Julie Lerner

        Yep, a new way of thinking. Recreating local retail streets. Looking forward to see how it plays out.

        1. Gotham Gal