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Design Talk by MV no. 016 - When the Concept of Supply and Demand Fails: Exploring Commercial Rent Increases Amidst a Struggling Brick and Mortar Sector Pt. 01

Image Credit: Walker Evans Archive, 1994

Retail, as we know it, is stressed.

That’s obvious. It’s anxious, exhausted, on edge, and there’s no quick fix in sight.

What’s happening is also notably paradoxical. Amidst the many challenges of maintaining a successful brick and mortar – including online retail, exorbitant urban rent costs, changing industry and civic regulation, and the powerhouse of a millennial culture with an itty-bitty attention span – there’s a curious disconnect alive in the fact that commercial retail rent is escalating sharply precisely in a moment when brick and mortar retail influence and presence are shrinking.

What I really want to know is why retail rents, especially in metropolitan and high-traffic areas, are going up at the same time that retail, in its traditional form, is becoming less and less profitable. Are developers, landlords, and realtors blind to the realities before them? Do they simply not care for their tenants, industries, cities, and long-term/bigger pictures?

With these questions as my guide, I’m embarking on a three-week exploration, to seek out reporting, civic and bureaucratic moving and shaking, and other awesome information resources to help explain – to me and to you! – why and how this paradox is occurring and what’s being done about it.

 

Supply and Demand

One of the things most confusing about high retail rents at the same time as retail, as an industry in and of itself, is struggling, is that it’s completely counterintuitive to traditional economic understandings of supply and demand. We’re witnessing the Internet compromising brick and mortar retail revenue, as well as a fundamental shift in shopping and lifestyle habits. So, according to these age-old principles, the rents should now adjust and decrease.

There’s always a caveat, and in this case it may be something that actually augurs progress. As the New York Times, The Real Deal, and others have reported, annual retail rents have actually gone down marginally between 2016 and 2017 in NYC. But does it mean good things for the near future? Will they continue adjusting downwards quickly enough to save existing stressed brick and mortar lease holders? And if not, what gives? What’s really complicating the logic of supply and demand in this particular case study?

 

Why is this happening?!

Back in 2015, the ever-prophetic New Yorker profiled the vacancies popping up like crazy in the West Village, getting to the root of what was affecting the neighborhood so noticeably. Here’s an excerpt that put one aspect of the explanation concisely:

“There are potentially some tax benefits for the owners of empty storefronts. But the more likely explanation is that landlords are willing to lose a tenant and leave a storefront empty as a form of speculation. They’ll trade a short-term loss for the chance eventually to land a much richer tenant, like a bank branch or national retail chain, which might pay a different magnitude of rent.”

As the New Yorker describes, owners are playing a waiting game, with the expectation the grass is always gonna be greener on the other $ide. Like I addressed back in article no. 08, the image of the empty storefront can then be deliberately misrepresented by commercial agencies: they show the properties with these high rentals, propagating a false idea that every property has such high rent when, in fact, the businesses who’d been there more than a few years are paying reasonable rents; existing businesses’ operational costs, despite what CRE (commercial real estate) leasers are saying and showing, are completely incongruous with these exorbitant new asking prices. Additionally, as I called out above, costs have actually begun decreasing now, but via obscured practices – free months, build out, or short term leases in order to keep the same externally high asking rents!

The point is that behind-the-scenes the CRE market has begun to adjust, but that hasn’t stopped the intentional obscurity propagated by owners, develops, and realtors to artificially keep the “market rate” as high as possible, for as long as possible.

 

The Wrap-up

Next week, in the second installment of this three-part series, I’ll dig a little deeper into legislation, zoning, and small biz debt. Stay tuned!

I also wanted to introduce the upcoming launch of Design Talk Roundtable, a live extension of Design Talk by MV. I’ve invited some incredible contributors to join the conversation with me, and will co-host it with the founder of Guesst, the real estate sharing platform on which I’m chief retail strategist. Stay tuned for details here, and save the date for the first Roundtable on the evening of February 6!

Till next week, 

MV

As told to Emily R. Pellerin

 

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