Tuesday, July 21, 2009

Put Down That Government Crutch

There is an article in the NY Times today detailing a problem that I've been observing for almost two years now - the proliferation of vacant retail space in NYC. Rents are still so high that it seems that every time a store's lease comes up for renewal, they have to close up shop. The Times article mentions storefront vacancy rates of roughly 6.5% citywide, with the rate expected to climb to 10%.

"And those numbers do not capture the full story. Some of the more desirable shopping districts are littered with empty storefronts. For example, Fifth Avenue between 42nd Street and 49th Street, the stretch just south of Saks Fifth Avenue, has a vacancy rate of 15.3 percent, according to the brokerage Cushman & Wakefield.

In SoHo, from West Houston Street to Grand Street and Broadway to West Broadway, among the high-end boutiques, art galleries and restaurants, 1 in 10 retail spaces are now empty or about to be.

“I’ve never seen such an across-the-board problem,” said Lorraine Nadel, a lawyer who has represented tenants and landlords for 18 years. “Store owners can’t pay their rent, and they can’t keep their businesses going.

It has long been difficult to run a small business in Manhattan, but a number of struggling store owners cite high rents and their landlords’ unwillingness to negotiate as the leading obstacles to their survival.”

What disturbed me was when I got to the line,
"But as jobs disappear and neighborhoods suffer, the tide of opinion is growing that the government may need to step in."

Ummm- the government may need to step in and do WHAT exactly? There is a problem with Manhattan retail spaces - the rents are too high. It's that simple. The best thing the government can do is to stand idly by and let the rents fall to levels where business owners can afford them again. This is exactly what they should be doing with residential real estate too, incidentally - instead of thinking of new ways to prop up home prices, keeping them UNaffordable.



StB said...

At some point these landlords will realize that some income generated from the property is better than no income from the property. Smart ones will take those steps now to lock in good tenants for the long term.

Kid Dynamite said...

you would think... strangely, that seemingly simple, rational decision doesn't quite work as you might expect.

there are places in my 'hood that have been vacant for FIVE years.. PRIME spaces... i just don't get it

Anonymous said...

As a commercial landlord (not in New York), I can tell you that the worst thing I see is when other landlords start fire-saling their properties for far below market rents. Obviously landlords must allow that the market has turned and maybe look at accepting $200 psf (which is still insane) as opposed to the $330 psf they were getting in 2006-2007. But the worst thing for the market as a whole is for some landlords to panic and start signing tenants up at $80 psf. The spin-off effects of such panic can and will cause other problems in terms of commercial foreclosures for healthy building owners as well as the building owners who are probably going down no matter what.

Kid Dynamite said...

wow - now i would LOVE to have more of a dialogue with you - thanks for commenting...

you have to realize that it sounds like you're saying you don't like it when someone breaks price with the cartel mandated minimum - even though they may need to in order to stay alive...

i'd disagree that healthy building owners ever get foreclosed on - if you get foreclosed because someone else is offering lower rent than you, you're not healthy

anyway - my point was - there are places in my neighborhood that are asking, say $10k/month for rent. How can it possibly make sense for that place to sit vacant for YEARS instead of the landlord signing on a new tenant for, say $7k/month?

Maybe it's all about the term of the lease - what is the shortest lease that renters will typically agree to? (note: commercial and retail are very different, i think)

Anonymous said...

No, no, no you don't understand if you lower the rents then the real estate holding properties would take a loss, and can't pay the mortgage. And if they can't pay the mortgage then the bank would actually take a loss.

And you see, if this were an actual capitalist system where "loss" was part of the equation, then yes -- your solution would be acceptable.

But in our utopian socialist system, it is only possible for banks to make money -- because if they were to lose it, then their leverage would start to seem risky, and since it can't be risky, they also can't lose money, and therefore rents are too high?


Anonymous said...

Reply to the comment above:
In other words, the rents are too high because => The mortgage payment is killing because => The real estate was bough at a price not supported by the cash flow from the current economy.

So if the rents were to go down this will lead to => Defaults among CRE owners => none performing loans and securitized CRE selling for too much below par => bleeding equity in the capital system for bad loans write downs => a cry to recapitalize => another bailout => government aka main street step in.
So why wait? Let the government step in right now and keep up the rent prices:)
Bottom line, we will never clear this mess unless the capital system is allowed to write down those bad loans, and not just shift them around from the corporate to the public balance sheet under different programs.
Wonder how many years it will take for people in high places to get that THEY have to solve the problem instead of pushing it ahead.
Dam, I wish I never studied economics, or maybe had some common sense. Ignorance is a bliss.

Anonymous said...

BTW Kid, really like your discussion on TBP blog on the HFT, keep it up :)
Your level headed approach and experience really brings great arguments both on your blog and in any discussion you participate.

Anonymous said...

I was the third poster here and while I don't necessarily disagree (nice double negative) with the fifth comment, the problem from the perspective of a healthy landlord is not with the current mortgage, but more with the refinancing. In that when the mortgage term comes up, the appraised value of the property will have sunk because of an OVER softening of rents to the point that the building owner cannot get a new mortgage for the amount needed even though the building owner has what should be sufficient equity in the property.

As for your comment KD, when I see someone "break price" in the market I'm in I do wish we had a pseudo-cartel when I can't sleep late at night.

What you're suggesting of 70% of asking price is not the problem as I see it. If I had a property and was asking say $50 psf and it had sat empty for some period, then yes I might drop it to $35 or $40. The problem comes when I've got that property and someone across the street leases their vacancy for $8. It is usually the mom and pop operations that panic and sign these ridiculous rents from my experience.

By the way, watch for commercial foreclosures going way up 8-20 months from now as the refinancing problems come up.

Kid Dynamite said...

along the point of more CRE doom pending, i read a comment on MISH's blog today:

it scares me, obviously, that Bernanke is talking about government intervention here. As was the point of my initial post - if prices (rents) are too high, they need to come down. simple.

Anonymous said...

The government/Fed's artificial and excessive lowering of the cost of capital is at fault. You can call it inflation in a monetarist sense, an inflation the economy can't survive.

The authorities' interventions on that front have had such an impact that owners can wait as long as they want and have no market based incentive to lower rents.

It's not that the government should do nothing and wait, it's that the government should stop interfering to protect asset holders at the expense of the rest of the economy.

If not it will be a very long wait before these neighbourhoods can get back to life again.

Anonymous said...

Reply to Anonymous/Commercial landlord:
"The spin-off effects of such panic can and will cause other problems in terms of commercial foreclosures for healthy building owners as well as the building owners who are probably going down no matter what"

A building owner that faces foreclosure when faced with market clearing rents is not a healthy owner. It's an owner that overpaid for his property. The best thing that can happen is for him to be foreclosed and the property to be auctioned off as quickly as possible at a price that will be compatible with market clearing rents.
Only then can the economy, and neighbourhoods, get back on their feet. The faster this happens the better.

Anonymous said...

Is it at all true that property owners can use their vacant retail spaces as tax write-offs?
If so, this might explain why spaces stay empty for so long.