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.
his miscalculation is everywhere, you e.g. see the same thing with banks opening locations every 5 blocks.
Not necessarily. One bank I worked at discovered that people are more likely to sign up for online banking if they had the reassurance of a physical presence. That's what those branches are really for. The lower overall servicing cost of an online customer makes up the difference in the rent. They aren't full of traditional lines of tellers doing everyday transactions, they are spacious inside and you go there for advice and big items like mortgages or pensions or life insurance, sitting on a sofa sipping a coffee.
How is it Amazon, when there's no shortage of people shopping in Manhattan? The streets are filled with people carrying shopping bags, every day of the week. Almost to the point of annoyance. Between locals and tourists people are never not out shopping.
>"NYC needs bodegas, bars, and coffee shops .."
There's absolutely no shortage of any of those three things. Those things are so incredibly abundant it seems very odd to say the city needs more of them.
NYC is a reflection of america. The old school Greek diner has been replaced by Starbucks and non luxury retail is largely homogenized.
It’s also a much les diversified economy than it was in the past. New development of fancy building that lay empty as speculative investments starve out the storefronts.
> NYC is a reflection of america. The old school Greek diner has been replaced by Starbucks and non luxury retail is largely homogenized.
Good. If the old school greek diner that has been in the neighbourhood since 1970s does not own the bricks is probably is a sucky diner that has not kept up with the times. It also probably means that it is way too large. Corner stores in Manhattan give you what a old school greek diner gave you food wise. The diner simply did not adapt.
> New development of fancy building that lay empty as speculative investments starve out the storefronts.
So? They collapse and new places go in there. That's why we have abundance of popup stores in such spaces in Manhattan and developed portions of Brooklyn ( think Williamsburg, Dumbo, Park Slope )
Most of the complains are coming from old timers, such as the ones that live in rent regulated or rent controlled apartments sometimes paying $250 a month for FOUR BEDROOM. I'm sure what they would really want is that the stores where they shop were also regulated so they could pay 3% of the prices those who showed up after them pay.
Retail isn’t growing, but it still accounts for 80-90% of sales in almost every industry. Online sales will probably overtake brick and mortar… in 5 to 10 years—in the US.
Amazon is big, but only
really in he US. And only certain verticals. And only typically among affluent urban households.
That’s why their stock has always been so high. Amazon has, and still has, massive growth potential. When you get everything from Amazon you assume everyone else does. But the reality is that you (and I) are an extreme minority.
You forget how many people pay cash in the US. And how many people international have shit or extremely poor/expensive mail service. And how >3 billion or so people live in countries with import tariffs that are 40% or more. And while internet access is prevalent, buying everyday items online is not. It’s really easy to lose sight of how the vast majority live when you live in an urban area and work at a technically progressive company.
I've actually become concerned enough about Amazon's utter unwillingness to address their counterfeit product problem that we've stopped buying food, makeup, sunblock, lotion, or anything that uses electricity on Amazon.
See also just this year their recall of eclipse glasses.
After four tries to get name brand and working batteries for my car remote on Amazon, I gave up and purchased them at a local hardware store. It wasn't as convenient as Amazon, but it was a lot more convenient than Amazon allowing scum to sell repackaged no-name crap instead of the particular batteries I needed over and over again...
When I ordered replacement batteries for my phone I bought them from LGs website at triple the price. Amazon had them cheaper but I had already gotten burned ordering replacements from them. The counterfeits were labeled as LG batteries for my phone. They would read fully charged but the phone wouldn't actually turn on with them installed. Also the date code on the battery didn't match what was printed on the packaging.
It's made me pretty leery of ordering anything from Amazon.
You will only have this problem if you buy from the amazon market place. If you restrict your search to seller=amazon I would expect you to be pretty safe.
We needed a refrigerator water filter a month back. So I head to amazon and look at different products available, including cheaper. Didnt like the reviews for the 3rd party and went the samsung filter. And I see what they offer is retail price.
I read the reviews and I see a trend on the comments "counterfeit", "counterfeit", and "not real product". And that was from Amazon, on a verified product's line.
So I went to Lowes. They had them in stock for the same price. Except with 0 chance of counterfeit.
Buying a water filter for my fridge from Amazon was a terrible experience. Everything was mislabeled, obviously counterfeit, or had terrible reviews. Buying from home depot was much easier.
For items shipped from Amazon warehouses you basically need a brand only available through Amazon - AmazonBasics, Anker, etc. because there's really no room for counterfeiting there, though I think Anker products are now showing up elsewhere which may now mean they get hit with counterfeits from third party "FBA" as well.
These days I'll absolutely check elsewhere before making a purchase, and I'll pay a bit of a premium to either buy from a different store or to get items shipped from the seller instead of from Amazon.
Retail isn’t growing, but it still accounts for 80-90% of sales in almost every industry. Online sales will probably overtake brick and mortar… in 5 to 10 years—in the US.
Amazon is big, but only really in he US. And only certain verticals. And only typically among affluent urban households.
You’re describing why online will badly damage NYC retail, which is the context of this conversation.
> When you get everything from Amazon you assume everyone else does. But the reality is that you (and I) are an extreme minority.
Sounds about right.
For the rest of the world Amazon is at best a bookstore that is actually just a middlemen for other online retailers. This doesn't even register in any real estate decision.
Possibly. It was an incredibly stupid move. I was a manager at Borders during its mid-90s rise, and I told them at that time that Amazon was going to eat their lunch. They didn't believe it and didn't listen. While Amazon was focusing on developing their supply chain and getting consumers accustomed to buying online, Borders was building massive stores everywhere that couldn't turn a profit. They were also going into debt to do this. They were simultaneously not conservative enough (finances) and not innovative enough (the Internet).
Unless you know what you are buying and have a sense of what quality you are buying, its impossible to buy online.
There is a reason why most people get a touch and feel of things at places like Target and then buy it online.
In India where large retailers like Target are absent and people have no way of getting the 'look and feel', the trend is its getting very hard to sell things, unless you throw impossible discounts at customers.
Unless you know what you are buying and have a sense of what quality you are buying, its impossible to buy online
That's what Borders upper management said in the mid-90s and at the company's peak, and they were wrong. Showrooming didn't make people buy elsewhere when Amazon had the lower price, either.
Online retail in China has a 25% share of all sales, around 2.5x higher than the US, and still growing rapidly, and this in a country with 3x the population of the US.
Brick and mortar retail in China has also been pretty dysfunctional and never really developed completely like it did in the west (every mall having the same set of stores like every movie theater having the same set of movies). Then you have the state owned department stores that never really figured out what to do once their monopoly was broken.
Its not an anecdote. Have you spent any time in NYC?
Why do I need to search for numbers comparing brick and mortar vs online? Of course online retail is growing faster than brick and mortar but the topic here is New York City which is an outlier. NYC is a shopping destination for US, international and tri-state area tourists.
People come to NYC specifically so they can shop along the retail corridors of Broadway in Midtown, Soho, Nolita and the Meat Packing Districts, The Flatiron and many others. It's seen as an experience since you can walk, shop and see landmarks like Rockefeller Center, The Empire State building, Grand Central while you do so.
When I traveled to NYC I had a bunch of stuff from Amazon delivered to my AirBnB. I would've probably bought that in stores if Amazon didn't exist. The only stuff I bought in stores was pants and shoes, since US sizes tend to be different from EU sizes.
So rather than go out and explore New York City via a shopping experience, you stayed inside your AirBnB and interacted with your computer? Why even bother visiting?
I can assure there is nothing unique about the Amazon experience in NYC compared to somewhere else.
Shopping is probably the least interesting thing to do when in New York. There's virtually nothing in stores in New York that you cannot find elsewhere. The experiences though - the Metropolitan, Broadway etc are without peer
>"There's virtually nothing in stores in New York that you cannot find elsewhere"
This is patently untrue.
Walk down 9th Street between 1st Ave and 2nd Ave where small designers have their own retail shops and ateliers. You can't buy that stuff anywhere else.
Go up to B and H Camera in midtown that has 5 floors of camera equipment and incredibly knowledgeable staff.
Step in to the Gem Spa on 2nd avenue, a news stand in the East Village where the man behind the counters will hand make you an egg cream for a dollar.
Go to the Strand, a book store that has 15 miles of books and some great bargains on new hard cover books.
Walk into the Sunshine Mart where you feel like you've been magically transported into a grocery store in Tokyo.
Visit Old Good Things in Union Square which is basically an architectural salvage store. Many of the pieces are sourced locally.
Venture over to The Market on Mulberry where artists and designers sell their hand-made wares directly.
Step into Lobels Prime Meats on the Upper East Side and tell me its like any other butcher shop.
Visit Rough Trade in Williamsburg that is perhaps one of the best records stores anywhere, specializing in new and special release vinyl.
And the list goes on. There so many of these places. But you won't discover them spending time on Amazon.com. That was point.
You know, books, records, imported Japanese food, and camera equipment are all mass-market products. There is no argument to be made that New York City offers a unique, irreplaceable "shopping for Japanese products" experience.
You know each of the places I listed was because it is a unique shopping "experience" beyond the goods sold. From the layouts, history, locations and the people that work there.
I'm sorry you are not impressed. I'm sure nobody will mind if you don't visit.
Interesting that none of these except maybe the Market on Mulberry would interest me sufficiently for a visit. Different strokes for different folks I guess.
So many assumptions... Like the common mistake in assuming that everybody on the internet is from the US. I'm not. There's plenty of stuff that I can get from Amazon.com much cheaper than I can get it here. Also, there's stuff that I can't even get here (or hardly). So I ordered that stuff from the comfort of my own home before even arriving in the states.
Then, when I did arrive, I got to spend the time I had visiting interesting locations and enjoying the scenery in stead of shopping in big chain stores for stuff I knew I wanted anyway.
You don't have to spend money to wander in and out of stores and window shop on your way to other tourists attractions though. Unless you are in a rush that's kind of an organic thing in a walking city.
And if you have disposable income to use on Amazon.com while you are visiting NYC then presumably you could also spend a similar amount locally.
But you might have more money than you have time, in which case it makes sense to ship stuff from Amazon, and use the time you'd spend buying power adapters or extra socks or whatever to go and see the Math Museum or something.
You said it's also Amazon, but then you went on to talk about something totally different. It was a nice story... But how is Amazon contributing to greedy NYC landlords charging unsubstainable rents?
Landlords would rather have empty buildings than lower rents, that fact has nothing to do with Amazon.
The other posters aren't correct. The actual reasoning is that the banks, as tenants, impart a top-flight credit score to a substantial portion of the building's finances if the leases are designed the right way. In return for the slightly more demanding leases which allow the credit-score to functionally pass through, they receive a substantial rebate on the market rate of their leased locations over long periods, affording them cheap arbitrage opportunities - if real estate prices and rents soar, they're still locked in below market rate at the pre-boom rates. If they don't, and rates go down, they have a substantial buffer before the market value of their leasehold is negative.
A friend bought franchisee location for Rocky Mountain Chocolate Factory at a strip mall. Previous owners were from the baby boomer generation and had no idea how to run an effective "online" campaign. or so he thought.
8 months down the line, the sales are bad and rents are too high. He says, one of the reasons this is happening because the mall is mostly empty. People are shopping online and the foot fall is decreasing year on year.
So, while I agree on Amazon or online shopping in general. I disagree on the 2nd point. Bars, coffee shops etc. will also face the same dilemma, especially if they are not in the right location. In which case, rents still play a large role.
80.7% of the US population lives in cities. We need to decentralized this problem by making either making more "cities" or way better suburbs so businesses like the bodegas, bars, and coffee shops you mentioned can disrupt monopolies.
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.
It’s also a prestige thing. Our NYC office is a blackhole of money our other locations subsidize. Then again the partners hold game changing meetings in those offices so maybe that wouldn’t be true if i had access to the whole picture.
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.
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.
Yeah this has been the answer for me. Although my online only credit union has partnerships with local credit unions that have physical branches I can visit, it is much more convenient for me to visit a grocery store. I get charged a nominal fee - ~20 cents per roll - but in the end the convenience wins out.
Not only that, but empty spaces attract bad things. Bustle and foot traffic are good things. This is one reason why it is nice to have a mix of commercial storefronts (banks, cafes, etc), especially things that are open in the evenings...it ensures a commercial area that doesnt turn into a ghosttown at night.
Growing up in Brooklyn in the 80s, I remember snaking across busy side streets and back-and-forth across the main street to walk along the well-occupied areas. Stumble into a dark corner or and you could get jumped.
In London, it is quite common for real estate companies to own a whole neighborood. They are usually quite smart at preserving the character of the area by taking a lower rent from a local shop/coffee shop/pub, and reaping the reward from higher residential rents as more people want to live in this area. Marylebone is a prime example.
Because next it will be, "the wrong business is using the space" and not generating enough revenue. This is how we ended up with condemnations of private property. Someone decided that it could be put to better use, as in generate more taxes. Kelo vs New London ring any bells?
Simply put. Once a foot in the door of abusing the rights of private property owner's is there, there is no end in sight of justifications to come
And lest people think you're exaggerating about how the administration thinks, this recent gem from our current mayor:
"What’s been hardest is the way our legal system is structured to favor private property. I think people all over this city, of every background, would like to have the city government be able to determine which building goes where, how high it will be, who gets to live in it, what the rent will be. I think there’s a socialistic impulse, which I hear every day, in every kind of community, that they would like things to be planned in accordance to their needs. And I would, too. Unfortunately, what stands in the way of that is hundreds of years of history that have elevated property rights and wealth to the point that that’s the reality that calls the tune on a lot of development."[0]
Call me cynical, but it doesn't sound like socialism to me. It sounds like an oligarchy anointing themselves the rule makers for a new segment of the population. Because it won't be "the people" making the decisions, it will be "these particular people."
No, if this really is a failure for the street-level commercial real estate market to clear due to low price elasticity, which vacant shop fronts seem to announce quite loudly, then a political solution increasing the costs of intransigence should at least cause some landlords to shit or get off the pot. They can ratchet the penalty up a notch every few years to force more of them to come to Jesus.
It is, after all, a purely pecuniary concern on the part of the landlords.
More generally speaking, real estate market failure is very much a problem that local policy can solve. Global investors are looking for safe havens for their wealth. As much of the attractiveness has to come from the local legal environs, which can be more or less friendly to those types of investors.
It just takes the political will, which admittedly, can be quite thin.
You do it as a 18 month rolling window - if the property has been empty for 9 months out of the 18 month rolling window, the penalty should apply, in addition there could be relief triggers based on both local, citywide and regional occupancy, if local occupancy was below a certain level (business close because of prolonged construction, or a crime issue, of if there was a city wide vacant windows problem the penalty could be waived by the city.
I'm not sure if such a policy would help, it could act as something tantamount to rent control - but its not hard to make a policy in such a way that it wouldnt have a negative feedback loop.
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?
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.
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.
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?
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.
Agreed with everything except the last sentence. Pure capitalism will let some buildings sit idle. But I think many people believe that pure capitalism optimized for things other than human well-being.
And what exactly is the problem with depressing commercial real estate value? Personally I only see upsides for the economy. Incentive for people to try to do productive stuff instead of holding to their precious real estate and collecting rents, possibility for entrepeneurs and companies other than megacorporations to actually open stores in cities...
What's the problem with abandoning ACA health insurance mandates? Plenty of economic upsides there, too. You really can't see any possible unintended consequences with sudden punitive tax conditions on commercial real estate investments?
Well part of the problem is that real estate provides a large return without occupancy, if you reduce that return then landlords will seek tenants in order to make a return that beats other investment options.
I fully agree with this, but maybe a little tweak.
When the commercial space goes vacant, increase property tax by the monthly average of the rent charged over the past 7 years (excluding months with zero rent).
If rented to a commercial entity with more than 100 employees (including part-time and temp) the property tax does not decrease, otherwise if to a mom/pop type business the tax will drop.
That sounds like an utter nightmare from the administrative side, and likely ripe for massive gaming and corruption. Among other things, who now will have the authority to notify taxing bodies of new tax rates on a per unit/property basis and what kind of oversight is there?
Yeah, I'm curious about this. This thread has me thinking that it may be in a city's best interest to enact taxes on empty commercial zoned spaces. Something that increases more the longer a space is empty. I'm not sure how you'd avoid malicious compliance with crappy temp phony store fronts, but it otherwise seems like the type of things cities want.
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.
This is a classic example of real option valuation[1]. As others have pointed out, holding out could mean that the owner could charge more later on. The right, but not the obligation, to lease or sell the property has an intrinsic value which can be modeled using different option pricing methods. So long as the value of the option is greater than the current leasing options, then the owner should keep the property vacant.
It seems that landlords aren't paying enough in property tax if they'd prefer to keep the property vacant than rent it out. Sounds like we need to raise property taxes, implement some kind of vacant property tax, or introduce a land value tax.
* increasing prevalence of chain stores who move slower on real estate deals
* willingness of national chains to pay high rents and lose money on a store
in a famous neighborhood to boost their brand reputation
* landlords "warehousing" properties, waiting for rezoning or new development
* rezoning causing an oversupply of commercial property in an area
* unrealistic expectations of landlords who have not adjusted to lower
rents caused by online competition
* sunk-cost fallacy - for properties bought in 2014-2015, landlords could
face "losing" money by renting for less than their mortgage
* increased prevalence of "demolition clauses" in leases - that allow
for eviction of tenants if the landlord wants to demolish the building -
making it harder to find a tenant
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?
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.
Such a policy would probably need fine-tuning (e.g. what is the optimal number of months before taxes kick in, what is the optimal rate schedule, etc.), but it seems reasonable on its face.
I wish the popup shops were more frequent. 2 or 3 years ago there was a vacant store front on 39(?)th and Madison. Instead of just leaving it like that, the landlord turned it in to a private motorcycle museum. I got to walk by some very good looking classic bikes, he got to show off the shop.
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?
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.
> 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.
SF too. Our awesome neighborhood coffee shop closed after the landlord increased the rent from $3300 to $6k. It then sat vacant for 4 years, and finally got filled with a $10/entree vietnamese restaurant. I dunno what the idiot of a landlord thought they were going to get in rent, but a less than 10 table restaurant with cheap entrees does not pay much rent money. Certainly not enough to cover the foregone $120k...
In the meantime, I lost my coffee spot and my egg breakfast sandwiches.
>"Can anyone explain the economics of being a NYC landlord and keeping a property vacant for months or years?"
Vacant for years is a bit unusual. But being vacant for months seems to be the norm now. I think this is mostly because the type of tenants that can afford these rents or the ones the landlord wants are big corporate chains. These are entities that don't move very quickly or don't need to move quickly. It seems that vacant stores fronts are invariably replaced by the same 5 banks(Citi, Wells Fargo, B of A, Chase, TD) and the and two drug stores Duane Reade and Rite Aid.
These 7 companies have achieved absurd levels of density in Manhattan and it may even be that they are finally slowing these insane saturation campaigns they have undertaken.
Not sure about nyc but in other markets people claim that some are just speculating on the property value appreciating and it has been going up so much the extra money from renting isn't worth the hassle, especially for foreign investors. I don't know how true this is.
It was only touched on in this article, but I've read elsewhere that part of the problem is the structure of loans. If the landlord takes a lower rent, then the value of the property decreases in the lender's eyes. If the owner doesn't have enough equity then they might have to renegotiate at less favorable terms.
Isn't it the extremely low interest rate set by the Fed though? With the lack of good investment opportunities and the danger of inflation, everyone puts their money on real estate, so last decade's housing crisis is imported into the next decade.
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.
$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
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:
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.
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.
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
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.
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....
It's not so much that the storefront can lose money as that the caterer is going to need some of the facilities available in that location (e.g. commercial kitchen, client meeting facility) regardless of whether they have a storefront. If the increased cost of having those with an associated store is comparable to the added revenue from the store, then the store is reasonable, and if it helps with branding and marketing as well then it's a net positive.
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!
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.
Markets do correct themselves, usually at the expense of the poorest or least powerful.
A hypothetical scenario where this market could self-regulate is 1980s NYC happens again in 2020. Blight and crime everywhere, but wow! Look at how that commerical real estate became more affordable.
The point of government regulation on these sorts of things is to reduce how far the pendulum of capitalism swings. When it moves too far in either direction, it only benefits a few people.
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.
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.
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.
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.
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).
True. I was blissfully unaware of such requirements for employers until I spoke with a few small biz owners who downsized because they couldn’t sustain the full work force.
With the current healthcare costs structure, I wouldn’t mind if the quality of healthcare received was amazing (at very little cost). But employees end up paying a lot even with a good insurance, every year.
So in a sense, the health insurance industry is incentivizing big businesses by shuttering small ones (and those employees will go work for a big biz).
If small businesses (I guess less than 200 employees were exempt from providing healthcare, Amazon would have a much tougher time to cope with such competition.
Right now it is a cake walk. Amazon’s robots in the warehouses don’t need health insurance.
No companies have to provide health insurance, IIRC. It would be great if most/all companies stopped doing it, and moved the decisions back to the actual consumers. Or hey - just provide a basic health insurance safety net for the whole society.
> 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.
Business under 50 employees are exempt from the ACA rule requiring them to provide healthcare. I doubt many small retail stores have that many employees.
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.
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.
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.