I didn't follow the "chain reaction" argument. Why can't a landlord drop a price on an under-performing asset without it rippling through to the other assets? And even if it did happen, their current tenants are locked into contracts. only their vacant lots would go down. Surely if the concern is devaluing their other locations, but those locations are also empty, then that "value" only existed on paper in the first place.
Also why not just subdivide the vacant space into several stores at the same price per sq ft?
And, at some point, you would make the space too small for some businesses. A restaurant generally needs more space than a hole-in-wall souvenir shop. When I left New York almost ten years ago, there were many blocks where the storefronts were bank--cell phones--Starbucks--bank, over and over again.
I suspect this is worse in New York than in other places, because so much money is flowing through the city, but some version of this is probably playing out in every city.
If a landlord owns lots of retail properties in an area, then the constraint quickly becomes the finite number of retail dollars being spent in that area on a given retail category, especially given that retail rents are more or less a fraction on the takings of the retailer.
Lets say you own 20 stores in a concentrated area, with some restaurants, some newsagents, some hairdressers making up 15 tenants, and a 5 of them are empty. If you rent them out to a competitor to any of your existing tenants, then they're just dividing the existing business among more shops, so now you have 20 leases to administer, properties to maintain, etc. Better to just leave the 5 empty, and the business goes to the existing tenants. Those tenants are now more profitable due to better economies of scale (and less competition) than they would otherwise be, so you can raise their rent. The 15 tenants and the landlord win, customers and residents of that area lose.
The only solution is to penalize concentrated ownership somehow (which has its own problems, presumably reducing values), or find ways to attract new customers for new retail categories into the area. For example, http://renewnewcastle.org/property-owners/ is a scheme whereby property owners let tenants use empty premises for free if they're not competing with existing businesses in the area.
Hmm, it seems this would only be true of all residents within walking distance of the empty buildings already have all of their desires catered to by a storefront you own. I am really skeptical that this could be true in a place like Manhattan where the supply of commercial space is highly constrained.
Your model seems to involve people with no desire to save money, willing to spend every last cent if only the right shop would open on their block.
In the real world, people have a certain, finite amount of disposable income, which is constrained by their other expenses as well as their desire to save for the future (retirement, etc).
I edited my post to remove a clause like "already have all of their desires catered to [or they have no money left]". I want to make that clear so readers of you comment have full context.
My response would be that unless you have, say, a restaurant for every cuisine in your portfolio, you have an opportunity to get a bigger share of restaurant spending by opening a restaurant of a different cuisine (which will compete with restaurants in buildings other landlords own).
And this will probably have an ultimate effect of lowering prices and increasing consumption. But that doesn't have to be true for it to make sense to open a competitive restaurant.
Hey thanks for that note, I look like less of an idiot now :)
The thing is, neither the landlord nor the restaurant tenants care about market share (although it's true that it could be increased by opening a new restaurant of a novel cuisine). As for lowering prices, that would be something they're actively trying to avoid. As much as they'd probably like to increase consumption, the number of residents in the area is a constant, and they eat at most one dinner per day.
Remember, they're trying to maximize profit, not market share, meals served, resident happiness, etc. It's like asking why there are empty seats in business class on a plane, when the airline could lower the fare and attract more customers, market share, etc? It's true, they could, but they're not trying to maximize the number of passengers (with the associated extra weight, fuel costs, etc). They're trying to maximize profit, and if high fares for a few people and a bunch of empty seats do that better than lower fares, full seats, and a higher fuel bill, then that's great for them.
The empty stores are a documented phenomenon, the only question is why it's like that. If you don't like my theory, another explanation would be interesting to hear... speculating that the situation shouldn't exist, less so.
I feel that your argument only makes sense if one player controls a majority of the market, so that the majority of sales stolen by the new restaurant come from the same owner's existing restaurants. It's not enough to just own a handful of nearby buildings, you actually have to dominate several blocks. And decide to keep a bunch of that valuable real estate empty instead of converting it to condos.
Here are some possible explanations:
1) Deliberate price-fixing behavior from a majority cartel of owners. A lot of these buildings are owned by publicly-traded REITs. This would be a pretty big conspiracy.
2) Price stickiness. Prices have not caught up to reduced demand. Accepting a lower rent means losing. A version of this is the reason given in the article.
He doesn't need to, because real estate people have all sorts of ways to shift losses around, so the taxpayer effectively subsidizes a portion of the losses.
Also, if the owner is looking for capital appreciation, leaving vacant storefronts lowers the taxable value and carrying costs, and makes transactions easier because there are no tenants to buy out.
Landlords are by definition rent-seeking, and by keeping prevailing rents high, they end up extracting more net value with less work. It's a big reason why landlords are historically unpopular people.
Off-topic question but I'm curious about this: In my five years in NYC I've seen many stores closing, some that were great but just couldn't afford rent. This article shows a lot of storefronts that closed and haven't been rented.
Why then, are there so many bad, generic souvenir shops and massage parlors? I used to work in midtown and Chelsea, and there were at least two or three of these in every block. In Chinatown, there's a block that is just souvenir shops. Never been to a massage parlor, but all the souvenir shops looked the same and sold the same (overpriced) stuff.
What's weirder is that most of them (the souvenir shops) are pretty empty most of the time.
I understand the relationship between massage places and fronts for prostitution and that money laundering exists but I just can't believe all of these are able to exist for years and years without either being busted or going out of business, yet many other businesses come and go.
With Chinese businesses like that usually the owner of the building is Chinese and often they operate the business or know the operator. They don't sell their properties much and rent to people they know. That's why Chinatown is still pretty much the same amidst all the surrounding gentrification.
As someone who lives in Sunset Park (Brooklyn Chinatown) I am well aware and sorta happy gentrification will never happen here—realtors in the area willing to rent to non-Chinese still keep prices low :-)
I don't dislike it. I like cleaner streets, more cafés, more stores that take cards, amenities, etc.
I do dislike my rent doubling in price. In NYC, both go hand in hand. For now since I just finished college, I'll take my super low rent. There's nothing "wrong" with where I live anyway.
For a non-selfish response, Sunset Park is one of the few neighborhoods where most people people are working class. Indeed, most of the cooks, dishwashers, etc in Manhattan live here, sometimes many in one apartment (to be able to afford it). I can't imagine where they'd go if the area gentrified.
The Chinatown souvenir shops are presumably fronts for counterfeit luxury goods markets in the basement/back room, e.g. fake Louis Vuitton bags etc.
And as you say, the massage places are fronts for cat houses.
The reason both exist is the same as all grey market businesses, always and everywhere: Either the NYPD has better things to do or the precinct chief is getting paid off well enough to look the other way most of the time, except for a few theatrical raids here and there.
Why is this response given no matter the situation? Every problem is a nail and the free market is the hammer? Being expertly operated by the invisible hand!
It's not clear that there's a failure. The overall retail vacancy rate in the US is around 11% [0]. The article didn't give an overall statistic, but it's not clear the average NYC high-end vacancy rate is any higher.
A 0% vacancy rate is impossible: nobody could move. To have liquidity and stabilize economic cycles, you want to average somewhere around 10% vacancy. So the system is working fine.
Or, to the extent there is a market failure (indeed, this is unclear) it's just because the landlords don't pay the cost of the externalities - reduced neighborhood amenity, low competition / higher prices.
These fall on the residents, and if they felt strongly enough about it they could stop it from being an externality by instituting a vacancy tax, buying the properties and renting then to artist at a loss, whatever.
Isn't this a zoning thing though? I assume I can't rent a storefront and live there, even though it probably has running water and protects one from the cold, rain, and small meteors.
They are bad because the neighborhood is empty. The free-market, in many locations, is inflating property prices beyond their value as housing/offices/storefronts, because they are being used to absorb capital "value". Imagine if everybody decided to use food as a store of financial value. You're going to learn that the only reason your bread cost $50 is because some oversea investor will pay for it. He won't sell it you, because he knows in a few months the prices will go up. It would suck if you wanted to eat something.
27 comments
[ 1.6 ms ] story [ 61.6 ms ] threadAlso why not just subdivide the vacant space into several stores at the same price per sq ft?
Zoning, frontage, accessibility.
I suspect this is worse in New York than in other places, because so much money is flowing through the city, but some version of this is probably playing out in every city.
Lets say you own 20 stores in a concentrated area, with some restaurants, some newsagents, some hairdressers making up 15 tenants, and a 5 of them are empty. If you rent them out to a competitor to any of your existing tenants, then they're just dividing the existing business among more shops, so now you have 20 leases to administer, properties to maintain, etc. Better to just leave the 5 empty, and the business goes to the existing tenants. Those tenants are now more profitable due to better economies of scale (and less competition) than they would otherwise be, so you can raise their rent. The 15 tenants and the landlord win, customers and residents of that area lose.
The only solution is to penalize concentrated ownership somehow (which has its own problems, presumably reducing values), or find ways to attract new customers for new retail categories into the area. For example, http://renewnewcastle.org/property-owners/ is a scheme whereby property owners let tenants use empty premises for free if they're not competing with existing businesses in the area.
This seems more like a price stickiness issue.
In the real world, people have a certain, finite amount of disposable income, which is constrained by their other expenses as well as their desire to save for the future (retirement, etc).
My response would be that unless you have, say, a restaurant for every cuisine in your portfolio, you have an opportunity to get a bigger share of restaurant spending by opening a restaurant of a different cuisine (which will compete with restaurants in buildings other landlords own).
And this will probably have an ultimate effect of lowering prices and increasing consumption. But that doesn't have to be true for it to make sense to open a competitive restaurant.
The thing is, neither the landlord nor the restaurant tenants care about market share (although it's true that it could be increased by opening a new restaurant of a novel cuisine). As for lowering prices, that would be something they're actively trying to avoid. As much as they'd probably like to increase consumption, the number of residents in the area is a constant, and they eat at most one dinner per day.
Remember, they're trying to maximize profit, not market share, meals served, resident happiness, etc. It's like asking why there are empty seats in business class on a plane, when the airline could lower the fare and attract more customers, market share, etc? It's true, they could, but they're not trying to maximize the number of passengers (with the associated extra weight, fuel costs, etc). They're trying to maximize profit, and if high fares for a few people and a bunch of empty seats do that better than lower fares, full seats, and a higher fuel bill, then that's great for them.
The empty stores are a documented phenomenon, the only question is why it's like that. If you don't like my theory, another explanation would be interesting to hear... speculating that the situation shouldn't exist, less so.
Here are some possible explanations:
1) Deliberate price-fixing behavior from a majority cartel of owners. A lot of these buildings are owned by publicly-traded REITs. This would be a pretty big conspiracy.
2) Price stickiness. Prices have not caught up to reduced demand. Accepting a lower rent means losing. A version of this is the reason given in the article.
So, sounds like the model should work well for Manhattan then? ;-)
Also, if the owner is looking for capital appreciation, leaving vacant storefronts lowers the taxable value and carrying costs, and makes transactions easier because there are no tenants to buy out.
Landlords are by definition rent-seeking, and by keeping prevailing rents high, they end up extracting more net value with less work. It's a big reason why landlords are historically unpopular people.
Why then, are there so many bad, generic souvenir shops and massage parlors? I used to work in midtown and Chelsea, and there were at least two or three of these in every block. In Chinatown, there's a block that is just souvenir shops. Never been to a massage parlor, but all the souvenir shops looked the same and sold the same (overpriced) stuff.
What's weirder is that most of them (the souvenir shops) are pretty empty most of the time.
I understand the relationship between massage places and fronts for prostitution and that money laundering exists but I just can't believe all of these are able to exist for years and years without either being busted or going out of business, yet many other businesses come and go.
I do dislike my rent doubling in price. In NYC, both go hand in hand. For now since I just finished college, I'll take my super low rent. There's nothing "wrong" with where I live anyway.
For a non-selfish response, Sunset Park is one of the few neighborhoods where most people people are working class. Indeed, most of the cooks, dishwashers, etc in Manhattan live here, sometimes many in one apartment (to be able to afford it). I can't imagine where they'd go if the area gentrified.
And as you say, the massage places are fronts for cat houses.
The reason both exist is the same as all grey market businesses, always and everywhere: Either the NYPD has better things to do or the precinct chief is getting paid off well enough to look the other way most of the time, except for a few theatrical raids here and there.
A 0% vacancy rate is impossible: nobody could move. To have liquidity and stabilize economic cycles, you want to average somewhere around 10% vacancy. So the system is working fine.
[0] http://www.statista.com/statistics/194102/us-retail-vacancy-...
These fall on the residents, and if they felt strongly enough about it they could stop it from being an externality by instituting a vacancy tax, buying the properties and renting then to artist at a loss, whatever.
Isn't this a zoning thing though? I assume I can't rent a storefront and live there, even though it probably has running water and protects one from the cold, rain, and small meteors.