Small business storefronts are vital for a vibrant 15-minute city. How are we saving NYC’s?
We have been writing for months about the 15 minute city ideal, and how to ensure that each of our city’s residents can walk (or bike) to work, education, care, personal services, parks, recreation, and shopping that meet their daily needs. This framework is critical — if we’re going to revitalize NYC in an age where WORK can be more location-agnostic, we need to be a place that people come to LIVE. Unpolluted, safe, healthy, walkable, “complete” neighborhoods replete with high-quality, unique, local storefronts, dining, and services will provide the character, the amenities, and the workplaces needed to spur a 21st century recovery.
The pandemic, however, has gutted small businesses around the city, so the utopian vision of vibrant commercial streets feels like a distant dream. According to the Partnership for NYC’s Call for Action and Collaboration from July 2020, roughly 1/3 of the city’s 230,000 small businesses may never reopen post-vaccine. Retail vacancy rates in core NYC shopping districts have skyrocketed; in SoHo, e.g., one in three storefronts were vacant by the end of 2020, up from almost 20% pre-pandemic.
But NYC storefront businesses were struggling long before COVID, and — for reasons described below — we don’t anticipate a quick recovery without immediate action by the City. In this post, we review the underlying drivers of retail vacancy, and make policy recommendations for officials.
Comptroller Stringer released a report in September, 2019 that studied retail vacancies over ten years, from 2007–2017. Critically, it found that vacancy rates indeed rose during that time, from 4% to 5.8%, although they were not uniformly distributed by borough. Using regression analysis, it also found three key drivers of vacant retail square footage:
- Red tape: bureaucracy associated with retail turnover is a *significant* driver of vacancy. A 1% increase in the share of Department of Buildings alteration permits unapproved after 30 days is associated with a 3.28% increase in vacant retail square footage. Similarly, a 1% increase in the average number of days it takes to get a liquor license is associated with a 0.17% increase in retail vacancy.
- Ecommerce: the rise of online retail increased storefront vacancy by 1% over the decade.
- Rising rents: a 1% increase in average retail rents is associated with 0.33% increase in vacant retail square footage.
So what can policymakers do? Addressing each of these issues individually:
Red tape:
This was the most salient issue pre-pandemic, and the one over which policymakers have the most immediate control. The pandemic has only exacerbated the problem, as city agencies themselves slow operations. For small businesses that operate on a shoestring, arbitrary waiting periods of weeks or months for construction, Landmarks, and other operating permits can be lethal.
These delays can be eliminated with a citywide policy of ex-post audits, rather than ex-ante approvals for permits. This allows building and business owners to proceed quickly with construction using the city’s designs and guidelines, knowing that they will be subjected to spot-checks and rigorous audits as the city is able. If they are found to be in violation of any of the city’s codes, they will be required to fix the issue and pay a healthy fine. In this way, small businesses can get up and running quickly, and the city’s staffing shortfalls won’t hamper its own economic development.
Regarding liquor licenses, our (CEO’s) view is that they should be eliminated altogether. In 2021 AD, any restaurant or cafe that wants to serve alcohol should be able to, with their current duty of care to prevent dangerous levels of inebriation, excessive noise, or disorderly conduct. Of course, fines and revocations can proceed with repeated complaints about any of the above.
Ecommerce:
While competition from online shopping isn’t likely to go away, and retail may never come back as it once was, NYC has an opportunity — even a mandate — to allow for creative rethinking of vacant retail spaces. Many existing storefront-types are still highly relevant: restaurants, cafes, bars, food stores, fresh flower shops, grocery, showrooms, services, and community gathering and performance spaces should still be able to thrive in an ecommerce-dominated city. In addition, makerspaces, artists’ studios, ground-floor office/cafes, and artisanal manufacturing (chocolate, jewelry, hats) accompanied by retail may also be appropriate uses for storefronts.
Envelope strongly supports increased zoning flexibility (which we’ve written about here and here) and related changes to enable and encourage rapid adaptive reuse of existing spaces within the 15-minute city.
Rents:
Of the three, this is the trickiest issue. The pandemic has spurred a meaningful decrease in retail rents, but vacancies are only growing. In a healthy market that reverts quickly to equilibrium, new businesses would take the opportunity to snap up storefront bargains, sign long-term leases, and plan to open later in 2021.
This, however, is not happening, in part because real estate is a semi-permanent, highly illiquid market that reacts slowly to crises. Landlords, especially the larger ones with a portfolio of properties, may have the capacity to ride out multi-year drops in income, and are often incentivized to do so if they believe they eventually will be able to find a high-credit, maybe deep-pocketed tenant to lease their space for a better price. By way of example:
- In good economic times, Property X has a $1m Net Operating Income (NOI), and a 5% capitalization (cap) rate— representing the expected rate of return for that property for investors. The cap rate is calculated by (NOI/asset value), which means that Property X is worth $20m.
- In a downturn, a few key tenants leave, and Property X may have only a $500k NOI. It’s now valued at $10m. If the owner can go a year or two with $0 income, they may be able to ride out the cycle, and get back to $1m NOI, or more. If they do, they’ve given up $1–2m to increase their building’s value by $10m, which is a rational investment by any measure. A landlord would have to have a very negative outlook on the long-term prospects of the city indeed to accept lower rents during a downturn.
For their part, small business tenants often ask for expensive fit-outs, can take up a great deal of landlord time and legal expense, may be more likely to go bankrupt during the lease, and can damage or degrade property through wear and tear. They’re often not able to pay large security deposits upfront. From a landlord’s perspective, therefore, vacancy may be greatly preferable to the risks of leasing to an unproven small business.
With all that said, vacancies impact the public realm. They reduce next door neighbors’ property values, at scale, they make streets less vibrant and eventually less safe, they discourage other potential entrants to the street, they stymie future growth. Like pollution, they are the negative externalities of private enterprise on the public good, and therefore are fair game for policymakers — ideally armed with a mix of carrots and sticks.
Carrots: Tax credits are one way for the city to incentivize leasing to a local small business or a particular kind of establishment deemed to be needed in that neighborhood to enable the 15 minute city. Along with direct stimulus payments, these can also be offered to small business entrants to a vacant space. Fees for new entrants and landlords outfitting a space for a new use should be waived.
Financial intermediation: Through the EDC and organizations like the Partnership for NYC, the City can fund and support innovative new financial intermediaries to smooth the mismatches in the landlord-tenant relationship. For example, a NYC-based business called TheGuarantors works with businesses to pay and insure their often-hefty security deposits to landlords. This helps tenants preserve upfront dollars to get going, and helps landlords open their doors to riskier small enterprise.
Sticks: The city can implement a healthy and annually-escalating vacancy tax, with a reasonable (say, one year) grace period to allow good faith landlords to find and install a tenant — temporary or permanent. This would help create an incentive for landlords to quickly white box a vacant site and be flexible and creative on rent terms.
Ultimately, it’s critical for the success of our city that community organizers, elected officials, and other policymakers understand the very real contractual, regulatory, and financial incentives and obligations of real estate. It’s even more important that landlords are committed to working hand-in-hand with their neighborhoods to understand their requirements, and to be intentional about supporting the common good — for everyone’s sake, including their own. If all stakeholders were to listen, communicate, and truly understand each other, we have a better-than-fighting chance at becoming a stronger, kinder, more vibrant, and more livable city post-pandemic than we were pre-covid.
