How To Save Retail In NYC

David Goldsmith

All Powerful Moderator
Staff member
We have had issues with vacancies in retail spaces in New York City for a few years now. Both State Senator Brad Hoylman https://www.nysenate.gov/newsroom/press-releases/brad-hoylman/its-bleaker-bleecker-street-new-report-examines-high-rent and Manhattan Borough President Gale Brewer https://nypost.com/2020/09/11/broadway-has-335-vacant-storefronts-amid-rising-rents-covid-19/ have produced reports on the issue. Retail rents have come down substantially as a result of these vacancies in several retail corridors https://therealdeal.com/2020/10/15/manhattan-retail-asking-rents-fall-to-nine-year-low/ but all across the city the crisis continues to deepen under the current pandemic. https://www.forbes.com/sites/shimonshkury/2020/07/13/how-retail-can-redefine-the-tenant-landlord-relationship-after-covid-19/?sh=671cfc726c61
While many have identified aspects of the problem very few have presented viable solutions. The Small Business Jobs Survival Act has languished in the City Council for decades https://www.politico.com/states/new-york/albany/story/2019/10/31/small-business-fix-in-limbo-as-local-shops-struggle-to-stay-afloat-1226171#:~:text=The bill — known as the,with a proposed rent increase. Even though it finally got its long delayed hearing 2 years ago nothing has happened since. I while I am sympathetic with its goals, for reasons I won’tgo into here I just don’t think it can accomplish its goals.

So how can we save retail? I think both advocates for small businesses and retail leasing brokers agree that one path to success is vastly expanding the number of leases utilizing “Percentage Rent.” https://rew-online.com/profit-sharing-model-could-save-mom-and-pop-shops-from-covid-closure/
But retail landlords can be loathe to take on the uncertainly of this non-guaranteed income stream. So we need to provide incentives to get the result we want and here is a proposal to that end:
Every year commercial building owners submit an Income & Expense statement to NYC Department of Finance which is used to calculate the Assessed Value of the building based on a Capitalization Rate and other formulas https://www1.nyc.gov/site/finance/taxes/property-rpie.page
To incentivize building owners to enter into Percentage Rent leases, rather than requiring them to use the entire rent collected they can be allowed to only list the Base Rent for these types of leases on their annual I&E Statements to DOF. This will substantially lower the listed income, which will result in a lower Assessed Value and result in lower annual Real Estate Taxes. This will offset the perceived added risk of Percentage Rent leases to the building owners, possibly to the tune of hundreds of thousands of dollars per year.

So you will probably ask “How will the city make up for this shortfall?” The answer lies in the arcane system the city currently utilizes to calculate property taxes. The way this works is that Department of Finance adds up all of the Assessed Values of the properties in each Tac Class, the city simply decides how much it desires to collect in Real Estate Taxes, and the annual tax rates are “backed into” by dividing those numbers. Therefore this proposed scheme won’t lower the overall taxes collected – because that number is simply chosen by the city in its budgeting process. All it will do is shift the tax Biden away from innovators and towards non-innovators.

My second leg is changing zoning and usage for certain retail corridors where you have mainly small mixed use residential corridors which are dominated by small buildings with their incomes dominated by the retail space with a couple of floors of residential above. My proposal is that any second floor units which are currently residential upon vacancy get converted to retail use (existing tenants, especially Statutory Tenants will not be evicted). This will expand the supply of retail square footage which is substantially pricier than residential in any given area allowing building owners to collect higher rents at the same time as making less costly retail spaces available to neighborhood businesses which have been priced out of ground floor retail in these neighborhoods. It will also provide potential benefits for certain retail like restaurants. Adding second floor dining rooms will substantially lower average per square foot costs for restaurants in these areas which are typically constrained by small floorplates, with kitchens and other necessary “back of house” functions crowding out dining space. This has become increasingly problematic under the current pandemic with restrictions on seating spacing/occupancy and probably will be a recurring issue in the future.

An added bonus is that having a full 2nd floor dining room will allow for air flow by having large/full wall windows on both ends of the space which allow it to be converted to a kind of “indoor out space” which can be relatively easily heated while retaining many of the benefits of outdoor dining.

I will try and add to this but in the meantime invite feedback.
 

David Goldsmith

All Powerful Moderator
Staff member
There has been talk about institution of some form of retail vacancy tax. One way of implementation would be to assess buildings with vacancies as if the were collecting the asking rent.
 

John Walkup

Talking Manhattan on UrbanDigs.com
I'm not sure about the vacancy tax. The first thing that comes to mind is retail corridors filled with variations on the Halloween costume pop store variety.

My feeling is the future of retail in NYC is much more experiential vs stuff. Amazon is already handling the stuff part - not much you can only find in NYC that's not available to be shipped to Oklahoma City - but it's lousy for the experience part. Dining is a big component of that, and I like the idea of second floor storefronts being converted to seating. I remember the craziness of shopping at B&H with their overhead inventory trolley - same stuff as amazon, but a lot more fun. While that's not really worth the trek now, I have a feeling there will be some new twist on 'getting stuff in the company of other people' that will make retail worth the trip again.
 

David Goldsmith

All Powerful Moderator
Staff member
For many people those pop-up stores would be far preferable to vacant storefronts, and in fact we have seen a huge increase in pop-ups in recent years as landlords have had difficulty finding long term tenants.

The major complaint we're hearing is that retail vacancies have reached enough critical mass that they are making whole neighborhoods look downtrodden. They even came up with a new term for it ("High Rent Blight").
 
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