by Neil A. Dolgin
In my last post, Factors Shaping the Future of Commercial Real Estate in NY, I made the point that commercial real estate throughout the city is at risk as the climate for doing business is becoming increasingly difficult. While landlords are trying to recover from mounting losses due to the pandemic and recent weather events, they now face new costs in retrofitting buildings to meet the requirements of Local Law 97. Now the New York City Council wants to regulate retail commercial rents.
A bill to set up commercial rent control around New York City, first introduced by city Councilmember Stephen Levin in 2019, was recently discussed by the New York City Council’s Committee on Small Business. The proposed bill, which reportedly has 20 co-sponsors, would establish rent controls for storefronts and offices of 10,000 square feet or less as well as manufacturing spaces up to 25,000 square feet.
Members of the NY City Council are moving this bill forward at a time when the retail landscape of the city has been dramatically altered by the pandemic. International tourism has virtually disappeared, domestic tourism is below pre-pandemic numbers, and New York City office workers have yet to return to the workplace. Many of our clients who are small business owners continue to face an uphill climb toward profitability. Covid-19 has changed the office building and retail landscapes dramatically … perhaps forever.
Over 1,000 chain stores across New York City (about 1 in 7) have left the city over the past twelve months, underscoring the hardships facing retail businesses during the pandemic, according to NYCFuture.org. In New York City the numbers of chain stores have declined by 12.8 percent. This represents the largest year-over-year decline in chain stores since they began analyzing the city’s national retailers thirteen years ago, says The Center for an Urban Future.
Opposing this legislation is a coalition of organizations who are proposing smarter alternatives for helping small businesses, including the Queens Chamber of Commerce, New Bronx Chamber of Commerce, Grand Central Partnership, East Midtown Partnership, Council of New York Cooperatives and Condominiums (CNYC), Real Estate Board of New York (REBNY), Community Housing Improvement Program (CHIP) and Building Owners & Managers Association of Greater New York (BOMA NY).
We fear that misguided laws by the NYC Council will help drive a migration of commercial tenants leaving the City for less expensive buildings that are available on Long Island, Westchester, New Jersey and Connecticut.
“Here, in 2021, in the wake of Covid, in the wake of shutdowns, in the wake of every expanding reach of online retail, which is ravaging so many brick-and-mortar retailers, the rationale for enacting commercial rent regulation now is completely backwards.” said Alexander Lycoyannis, a real estate attorney with Rosenberg & Estis.
According to The Gothamist, the Real Estate Board of New York called the proposed law illegal because the city cannot regulate commercial rents without state authorization. Small Business Services Commissioner Jonnel Doris has asked for further study; he was “very concerned” that limits on annual rent increases could “hinder other entrepreneurs from entering the market.” Mark Gjonaj, chairman of the council’s small business committee, said the city could help both landlords and tenants by lowering real estate taxes and reducing water and sewer rates.
When I came into this business in 1975, the price of an industrial/commercial space was 75 cents a square foot. And there were rare increases of maybe a nickel a year per square foot. Things were a little bit different then.
Throughout our 117 year history, Kalmon Dolgin Affiliates has been an advocate for mom and pop store owners who occupy retail spaces across our properties. Our clients are business people trying to create a great life for themselves and their families. So are landlords. And through this pandemic, we and other landlords were able to work successfully with clients on ways to weather the pandemic. It is our experience that many landlords have successfully helped clients weather the financial challenges of the pandemic by negotiating leases with modified rents and terms.
Our client, Amy’s Bread – the nationally renowned bakery and bread retailer whose KDA-owned headquarters are located in Long Island City – has actually experienced a resurgence since the beginning of the year, part of which founder and president Amy Scherber attributes to an adjustment in rent we gave them during the height of the pandemic. “We have been working with Kalmon Dolgin since 2011 and they were one of the ways that we really survived after demand plunged and sales were 30% of what they had been the year before. Especially in the beginning, Kalmon Dolgin was really helpful to us so that we could get through the roughest period and make a comeback,” she said.
Enacting commercial rent controls, even as taxes and other costs continue to rise, will lead to more vacant storefronts by owners to avoid deals with small businesses and pop-up tenants as they wait for larger, more established tenants. We will also see more mortgage defaults because of the vacancies that will ensue.
This law will be detrimental to landlords and tenants in multiple ways. It could make it very difficult for landlords to absorb upfront the costs of renovations for new clients. And there could be a domino effect as it will hurt the banking institution and secondary financing institutions that give landlords money for tenant improvement work and construction loans.