
New York's vanishing shops and storefronts: 'It's not Amazon, it's rent' - andrewlevine
https://www.theguardian.com/business/2017/dec/24/new-york-retail-shops-amazon-rent
======
rm999
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.

~~~
Feniks
Wait, banks OPEN branches in Manhattan?! Isn't internet banking a thing in
NYC? Like, what would you even DO in a bank these days. They don't even carry
money anymore.

~~~
vonmoltke
> They don't even carry money anymore.

I have yet to go to a branch that does not "carry money". In fact, I
occasionally use human tellers when I want specific denominations of bills for
some reason.

> Like, what would you even DO in a bank these days.

* Loan origination paperwork

* Cashier's checks

* Notarization (I get it free for being a customer)

* Needing more than $400 cash

* Depositing coins

These are not things I need to do often, but each has come up at least once in
the past couple years. I have also noticed that in Manhattan it is common for
banks to have ATM lobbies in place of full branches. I hit one of those at
least once ever couple weeks.

~~~
greenyoda
And that's just consumer banking. There's also commercial banking. Most
businesses still take in lots of cash, and need to send an employee to their
bank to deposit it on a daily basis, since having lots of cash in the store
encourages robberies. (If you're a large store, you'll use an armored truck
service to move cash, but a pizza shop probably doesn't.) This requires teller
services, since depositing thousands of dollars in cash via an ATM would be
cumbersome.

Thus, neighborhoods with lots of retail businesses also need enough bank
branches to support these businesses.

------
noonespecial
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.

~~~
c3534l
You seem to have created a system with a runaway negative feedback loop.

~~~
b4lancesh33t
I'm not seeing it. It may not be overall good policy, but it seems like this
would induce rental, if perhaps at a lower price. Where is the negative
feedback? Care to elaborate?

~~~
c3534l
Suppose I my tenant leaves. I make the calculation that it'd be cheaper to
sell the building. No one wants to buy it because it's missing a tenant. It
stays unused, depressing the area around it. That depression, in turn, makes
companies much more likely to fold if a tenant leaves. This makes more
companies fold, which increases the likelihood that more companies will fold.
Eventually, the entire area will be poison and not even under the most
generous of rent agreements will either tenants or companies want to do
business there.

~~~
onion2k
_No one wants to buy it because it 's missing a tenant._

At some price someone will decide that the building is a worth while risk. You
might not like that price, but there _will_ be a price you like more than
getting hit with high taxes for owning an empty building. The point here
though is not to keep you, the landlord, rich; it's to make a city full of
shops with happy customers, taxable sales, etc. If you can't make your
building work for you then your business has failed and you need to move aside
to let someone else use that real estate asset. _That 's how capitalism
works._

~~~
lr4444lr
That just begs the question: why can't we leave the system as is, because at
some price, the tax assessment on a vacant building without any tenant revenue
will push the landlord to offer a lease price for which there is demand?

~~~
lotsofpulp
Because the timeframe of the system's feedback loop is too long. By the time
the landlord reacts and accepts a lower price point, the customers might have
had to move on to a different location, or the business operators too.

The whole reason we even have cycles of growth and contraction is because
feedback loops are too slow so we always react too slowly, and when we do we
over correct. But that might be an unsolvable problem and just a fact of
nature.

------
andrewlevine
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.

~~~
twobyfour
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
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
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
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
> 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.

------
dba7dba
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.

------
lkrubner
$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-p...](https://www.census.gov/data/tables/time-
series/demo/income-poverty/historical-income-households.html)

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...](https://www.google.com/search?q=usa+gdp+2016&oq=usa+gdp+2016&aqs=chrome..69i57j0l5.5605j0j7&sourceid=chrome&ie=UTF-8)

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-Tri...](https://www.emarketer.com/Article/US-Retail-Sales-
Near-5-Trillion-2016/1013368)

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
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.

------
guuz
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

------
yuvalmer
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
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-
por...](http://www.cambridgeday.com/2015/07/16/walgreens-closing-porter-
square-location-next-to-cvs-it-was-open-less-than-two-years/).

------
crazygringo
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
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
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.

------
mikesickler
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.

------
chiefalchemist
> "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?

------
rectang
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
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
> "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
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.

~~~
mgkimsal
"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).

~~~
chii
Usually, workplace insurance (something like life/continuance insurance).

Some employers provides vehicles, which also has insurance associated with it.

------
EGreg
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
we need more mechanisms to punish rent seeking.

~~~
geezerjay
You do understand you're talking about the business of renting real
estate,don't you?

~~~
Idontknowmyuser
yes

------
ufmace
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-...](http://slatestarcodex.com/2017/02/09/considerations-on-cost-
disease/)

------
anovikov
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.

