Rethinking retail solutions

New York City retail has seen better days, and lately there’s a lot of talk about what can be done to help it. The City Council approved a bill in late 2017 to exempt some 2,000 businesses below 96th Street in Manhattan from the commercial rent tax, which forced them to pay a 3.9 percent surcharge on base rents above $250,000. The measure is expected to save those businesses at least $10,000 a year, an amount lawmakers hope will aid independent storeowners struggling to pay high rents. Corey Johnson, who the Council voted in as its new speaker in January, was one of six out of eight candidates who said they support some form of commercial rent control — a far more controversial proposal for the real estate industry. Johnson, who represents a large chunk of Manhattan’s West Side from the West Village to Central Park, said during a Crain’s forum in November that “we’ve seen enough Duane Reades” and that the city needs more mom-and-pop retailers. He derided the fact that at the end of a lease, a landlord can “jack up rent three, four, five times what it was, and [then] the property sits vacant for a long time.” (Johnson declined to participate in this Q&A due to a scheduling conflict.)

Commercial rent control has periodically been proposed in the Council since the 1980s, but a bill has never made it to a floor vote. Critics contend that such a law could be unconstitutional and would never survive a legal challenge. But support from neighborhood groups around the city has kept it a perennial topic at City Hall. There has also been talk of penalizing building owners for neglecting to fill their empty retail spaces. That includes a “vacancy tax” that would hit landlords who let their stores sit vacant for years — an initiative Manhattan Borough President Gale Brewer has voiced support for. While most New York real estate players agree that the city’s retail market is in need of a fix, opinions greatly differ when it comes to potential solutions. The Real Deal spoke to three industry insiders about the latest policies and proposals and what they think would best address the city’s retail woes.

Abraham Kassin

Abraham Kassin
Co-founder and CEO, Kassin Sabbagh Realty

What percentage of your tenants are mom-and-pop stores? I would say 60 to 70 percent. They’re really the bread and butter of New York City real estate, and we could see a lot of mom-and-pops re-entering the market and reversing the trend of a decade or so ago, when all these national retailers were taking over.

Do you think the changes to the commercial rent tax will encourage more independent stores to rent? While the savings are not significant enough, they can help offset some of the retailers’ growing expenses. And hopefully they can tip the scales by some measure for tenants on the fence about staying in their spaces — thereby stabilizing occupancy to some extent.

Do you think landlords would be able to get the margins they need if commercial rent control were put in place? Given where cap rates are and what properties are selling for, any added control to a market would severely hurt both landlords and tenants in dealmaking and would be an overall negative for the real estate market.

But you don’t think it would help more retailers stay open? It may benefit them somewhat, but the landlords would find other measures to compensate. They may overcompensate, so it could end up hurting tenants in the long run.

If rent control isn’t the answer, what do you think would help cut down on retail vacancies? I think the commercial rent tax reform is a step in the right direction. The tax was established [in 1963] and with rents increasing the way they have, I don’t think it was intended to be such an arduous expense on the retailer.

Some pols have floated the idea of a vacancy tax to discourage landlords from holding out for high-paying tenants. Would this help or hurt the overall market? I think it would hurt landlords who are already struggling to find retailers for their spaces. It’s in everyone’s best interest to lease their space; they don’t need an added measure to help them. Nor do I think it’s legal. While someone may be waiting out for rents, they’re also waiting for the right tenant.

What policies would you like to see implemented in the city? If they could give businesses a tax break that would add to their profitability, I think that would go a long way.

Ronald Dickerman

Ronald Dickerman
Founder and president, Madison International Realty

What do you see as the best way to strengthen the city’s retail market? Reaching equilibrium. That equilibrium has to include the resetting of rental rates that had hit levels that were not sustainable given the secular shift — e-commerce, millennial shoppers and the limited supply of retail that has been delivered. There are still lots of opportunities for landlords and tenants in a changing retail world.

Do you think the changes to the commercial rent tax will have an effect on the market’s overall health? I think it’s a shot in the arm, and I think every little bit helps. I think it also shows that the City Council and municipal government understand the plight of the smaller tenants. It’s not going to get us to the equilibrium I’m describing, but it’s a step in the right direction.

How would something like commercial rent control affect the way you do business? It would be a pretty big disruptor to the industry. I think it would be very, very negative. No one is really complaining right now of skyrocketing rents. I would say it’s quite the opposite — rents have stabilized and are falling in some areas.

What do you think would help keep some of these smaller retailers in business? I think it’s really up to the landlords and the tenants to come to rental rates that are sustainable.

Would a vacancy tax be an effective way to boost occupancy rates? No, I think it’s another mistake. More financial burden is not the answer, and I’m not even sure there are tenants who could fill those spaces if they had to. Forcing landlords to fill a space with tenants who aren’t viable will only exacerbate the situation. What’s going on with pop-up stores and licensing agreements, I think that’s terrific.

Eric D. Sherman

Eric D. Sherman
Partner, Pryor Cashman

How will the new commercial rent tax exemption bill impact the retail market? I think the City Council’s new bill — which, among other things, raises the exemption to $500,000 for businesses with income of $5 million or less — is long overdue and will provide some much-needed relief for Manhattan’s small businesses and retailers.

There are questions about whether a commercial rent control law would be constitutional. What potential legal snags do you see? Any law or regulation that forces people or business to enter or remain in contractual relationships with one another is bound to be subject to constitutional criticism.

How might commercial rent control affect New York City landlords? If these measures became law, they would have the same effect as residential rent regulations: They would benefit insiders at the expense of outsiders. Tenants in place today would benefit from the protections in these laws. But those seeking to enter the market in the future would be penalized, as rents would escalate due to the diminished supply of [available] space. Landlords would also be more likely to lease only to the most creditworthy, least troublesome and substantial of tenants if they feel as though they might be “stuck” with a tenant.

Some elected officials have floated the idea of a vacancy tax. What would that do to the market? A vacancy tax might have the effect of inducing landlords to reduce rents or otherwise take measures to more quickly lease vacant properties. But the other side of that coin is that such a tax likely would also discourage landlords from investing in their properties, which could suppress values and increase blight.

What do you think would be the most crucial legislative change that could help boost the city’s retail market? Enhancing the streetscape in NYC could drive more traffic into stores. If the retail experience is made more pleasant, because our main shopping arteries are furnished with attractive street furniture, expansive sidewalks, bike-docking stations and other amenities, they could better compete with e-commerce.