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There Is No Crisis of Retail Vacancy in Manhattan

Photo: Spencer Platt/Getty Images

You may have heard that 20 percent of retail storefronts in Manhattan are vacant. But as Rebecca Baird-Remba reported for the Commercial Observer earlier this month, you heard wrong.

This is just one of those Numbers People Say, like that we only use 10 percent of our brains. It’s false, and you should not make policy based on it.

The 20 percent figure has been used to perpetuate the idea that Manhattan faces a crisis of vacant storefronts despite a strong economy, driven by greedy and/or unrealistic landlords holding out for tenants willing to pay ever higher rents. In response, there is a renewed push for commercial rent control, to ensure incumbent stores are offered lease renewal at a fixed rate. The hope, I suppose, is that our city’s neighborhoods can be preserved in amber and look forever as they did back when New York was “better.”

(I should note — when we talk about how New York “used to be better,” we mostly mean that we used to be younger. Unfortunately, this problem cannot be addressed through a rent-control policy or any other public policy. But I digress.)

Anyway: Comprehensive data about retail vacancy in Manhattan doesn’t exist. And nobody has actually promulgated a 20 percent estimate of the phenomenon people claim to be decrying: vacant, closed, unoccupied retail stores.

As far as I can tell, the 20 percent claim originated in two places. One is a September 7 story in the New York Times which said, “A survey conducted by Douglas Elliman found that about 20 percent of all retail space in Manhattan is currently vacant, she said, compared with roughly 7 percent in 2016.”

But the “she” in that story is Elliman broker Faith Hope Consolo, and this month Consolo told the Commercial Observer, a trade publication, that no such report exists. This might explain why Elliman’s PR office never responded last month when I contacted them to request the report. (Consolo says she was misquoted in the Times, though Times reporter Corey Kilgannon told the Observer he’s confident he quoted Consolo accurately.)

The other source for the 20 percent factoid is a 2017 equity research report from Morgan Stanley, which found the amount of available retail space in certain Manhattan submarkets had doubled since 2012, to 20 percent. But there are two issues with using this report to claim 20 percent retail vacancy in the borough.

One is that “available” is not the same as “vacant.” An available space might be occupied by an operating store that has declined to renew a lease that hasn’t yet expired, or by a pop-up store, or by store with a long lease that it would like to get out of by subleasing. To give an example: The JC Penney store at the Manhattan Mall in midtown is available, because it is on the market for sublease. But it’s not vacant; the store is open and, until Penney strikes a sublease deal, you can go there and buy whatever one buys at JC Penney.

Availability is the right metric to look at if you are a retailer looking to sign a lease or a landlord figuring out how to price; you want to know how much of the space in a neighborhood is available so you can compare supply to demand. But if you are a citizen concerned about the liveliness of a neighborhood or the breadth of the retail offerings, vacancy is what matters to you.

The other problem with relying on the Morgan Stanley report is that it covers only a tiny fraction of the retail space in Manhattan: High-profile, high-rent retail areas like Soho and Fifth Avenue. These corridors focus less on necessity and experiential retail like bodegas and pharmacies and restaurants and bars, and more on the sort of clothing and specialty retailers you might see in shopping malls.

This kind of retail is indeed struggling — nationally. (You may have heard something about the struggles of shopping malls; this is Manhattan’s version of that.)

Morgan Stanley notes landlords of this specific kind of retail space in Manhattan did get carried away with asking rents rising faster than sales and making retailers disinclined to sign new leases. There really is elevated availability (and vacancy) in some of these corridors. But they see that problem shaking itself out, with rents falling to meet true market conditions.

Broadening out beyond those mall-like corridors, New York’s 76 Business Improvement Districts estimated their retail vacancy rates at under 6 percent last year, according to the Commercial Observer. And Christopher Okada, who runs the Okada and Company retail brokerage, reports that just 4 percent of Manhattan’s retail space is currently listed for rent in the Multiple Listing System — though he notes this metric may omit “shadow inventory” not in the MLS.

If city leaders feel they must do something to alter (or prevent alteration to) the retail landscape in New York, they really ought to collect data first and determine exactly how much of our retail space is even vacant to begin with. But whatever the answer, they should not control retail rents.

I should note that it is possible to control rents in the legal sense of restricting how much a landlord can charge a tenant. But regulation that does not change the supply of a good (in this case, retail real estate) cannot control economic rents — that is, the economic returns to the control of scarce assets — it can only redistribute them.

In the case of residential rent control, that’s fine — a key objective of the policy is to redistribute economic rents away from landlords to tenants.

But in the case of commercial rent control, if you redistribute the economic rents away from landlords to stores, you only shift the windfall of rising land prices from one business to another. Because retail space remains quantity restricted, you should expect the lower rents to accrue to store owners as higher profits — not to customers as lower prices.

And as for non-price factors, such as selection or quality, retail rent control would help existing stores stay in business, but would make it harder and more expensive for new stores to open — both by restricting the supply of retail space available to rent and by discouraging developers from building new retail space.

This leads to a problem of what is seen and what is unseen: An old store you like might get to stay, but you’ll never know what new store you would have liked never got to open at all. In fact, to the extent bad stores have lower profit margins than good stores, retail rent control is likely to protect stores you don’t even like.

New York, for nearly 400 years, has operated on change. Ossifying our retail landscape isn’t in line with our spirit as a city. And we definitely shouldn’t do it in reaction to bad statistics.

There Is No Crisis of Retail Vacancy in Manhattan