What’s in Store for Store Rents

Depending on where you live, you may have noticed that a rather large number of retail storefronts have been sitting empty for a rather long time. Long, as in years, in some cases.

Why is it that, at a time when unemployment is at an all-time low and the economy (in general) is doing very well, the real estate format used by small businesses – the street level storefront – remains seemingly moribund?

Retail in general is in a challenging period, and online sales have pulled the wind from the sails (and sales) of many small retail companies, including MI. But there’s another dynamic at work here, a form of the millennial malady known as FOMO – fear of missing out. Landlords have been purposely holding properties off the market with the expectation that a better deal, a higher-paying tenant, is always just around the corner. This kind of chronic hesitancy to take a deal on the table versus holding out for a purely speculative one had its clinical roots in basic human instinctual procrastination, but in some especially dynamic urban real estate markets, it might also make a lot of sense. Many landlords don’t want to offer short-term leases if they think a richer, longer-term deal is forthcoming from a tenant with money to burn, or they’re actively trolling for national brands that have been increasingly turning to pop-up and shorter-term storefront strategies to build brand awareness and launch new products.

No one’s sure where they’re going to be next, or how long they’ll be there, or what it’s going to cost

It’s a mindset, however, that works against the core principle of retail, and one that is especially salient for MI retail: the need to be in the same place for a long time in order to build relationships with customers and with other merchants who can refer customers to each other. That becomes impossible without the availability of a long-term lease. It’s a problem that’s a subset of the larger issue of residential rental affordability in cities like New York and San Francisco. No one’s sure where they’re going to be, or how long they’ll be there, or what it’s going to cost.

Space, The Final Frontier

In Manhattan, where the retail-space vacancy rate is 20 percent, compared with about seven percent in 2016, and where you’d think that the basic supply-and-demand dynamics would compel rents downward, the opposite is happening.

More storefronts are staying dark, their owners waiting for that retail unicorn to show up. And as this odd dynamic plays out, rents keep going up. An alliance of small-business owners are behind the Small Business Jobs Survival Act, a bill that proponents say could help stop the shuttering of small shops along the city’s streets and the by helping small businesses negotiate more equitable lease terms. The New York City Council has held hearings on the bill, which gives commercial tenants a right to a lease renewal, including a 10-year term for those in good standing, and also lets tenants demand arbitration if a rent hike is too high. (New York City currently has no restrictions on commercial rent increases.) The bill can’t compel landlords to rent, but it would provide some encouragement for landlords to sign some more long-term leases. It’s getting plenty of pushback from the city’s deeply entrenched real estate companies, most of which are decidedly not small businesses.

But in June the city also passed sweeping residential rent reform legislation, changing New York’s notoriously landlord-friendly rent stabilization laws substantially in tenants’ favor, so the winds are shifting.

The vacant-storefront problem is, in New York and elsewhere, part of a much larger equation, and though the momentum seems to be shifting away from the moneyed interests to a more grassroots level, the retail-space availability problem isn’t going to suddenly disappear. But it’s now been clearly identified as an issue for small businesses, and with 2020 a year away, things could shift even more.