Escalating N.Y. Rents Drive Away Business (August 27, 1989)

August 27, 1989|By Russell W. Baker, The Christian Science Monitor.

The National Association for the Advancement of Colored People, the American Cancer Society and Family Service America have at least one thing in common: All have moved out of New York City, citing rapidly escalating rents as a primary factor.

These groups are just the most visible nib on a problem that has reached serious proportions. Throughout the city, all types of organizations-retail, wholesale, manufacturing and nonprofit-are moving or shutting their doors forever, unable to compete on the open market for rental space.

As many as 800 operations shut down each month in New York City because of rent, according to surveys conducted by a group of merchants associations. City officials said it has none of its own statistics on the problem. But whatever the correct figures, a stroll down virtually any commercial strip is illustrative. “For Lease,“ “Lost Our Lease-Everything Must Go.“ The signs are everywhere.

For ordinary New Yorkers, it can be a jarring experience-the sudden disappearance of businesses that they had come to count on as friendly, reliable anchors in a fast-changing, often impersonal town. Stories abound of residents returning from trips only to find their favorite grocery, shoe repair shop or florist gone.

According to a 1986 study by local chambers of commerce in upper Manhattan, just 17 percent of businesses believed that their new leases left them room to earn a reasonable profit. Average new rents, it said, had increased 117 percent for those who were able to remain in business. Since then, most observers agree, matters have worsened. Rent increases of 400 percent to 500 percent are not uncommon.

Stanley Michels, a city councilman who represents northern Manhattan, said that one street in his district has lost 60 businesses. Smoke shops and illegal betting parlors have moved in. Some holdover retailers have installed slot machines to increase revenue.

The shifting fortunes of long-viable operations are apparent throughout New York City, in all five boroughs and in neighborhoods ranging from the poorest to the priciest. Many of the butcher shops, drug stores and bookstores that leave are replaced by purveyors of ice cream, cookies and other fast foods, or by trendy boutiques and restaurants. Merchants say that the older the business, the less likely it is to survive, that landlords want newcomers who make large capital improvements. Often that means heavily capitalized recent immigrants or deep-pocket national franchises.

Commercial real estate represents one of the surest ways of making large profits here, experts said. Investors frequently buy buildings, hold them for just a few years, then sell at big profits. The high prices paid by new owners are passed on to tenants in the form of rent increases. The owner must

“churn“ businesses: get as much money as possible from a tenant, then bounce him or her out for someone able to afford a higher rent.

Steve Null, director of the Coalition for Fair Business Rents, a tenant group, said he frequently receives alarmed calls from residents or merchants reporting that speculators have bought up a great deal of property.

“Nobody is shocked today if you go from $3,000 a month to $9,000,“ Mr. Null said. “Anywhere else your jaw would drop open. But not in New York. Under gentrification, even the new guys get booted out.“

Several local lawmakers have been trying to pass legislation that would stabilize commercial rents. For the last eight years, City Council member Ruth Messinger has introduced a variety of legislation on the subject, none of which has passed.

The most recent bill would give commercial tenants the right to challenge rent increases that exceed 45 percent over five years. Under the measure, the matter would revert to a mutually acceptable arbitrator, who would consider factors including inflation, rising costs and a fair profit margin, to determine if such an increase were warranted.

The bill, originally co-sponsored by a large number of council members, failed to get out of committee recently when the majority leader opposed it.

That`s just as well, said Clifford Chanin, a spokesman for Mayor Edward Koch, a vehement opponent of commercial controls. Chanin said that since there is no shortage of commercial space, “there is no need to impose restraints on the market.“

But advocates said that is why limits are necessary. They contend that many owners willingly hold a store empty and wait for a tenant who can pay the asking price rather than bargain down to a level the old tenant can afford.

Null, who lobbied the council for Messinger`s bill, said the problem affects nearly all businesses.

“With the exception of real estate and finance, every industry in New York City is in trouble,“ he said. He said the city is losing manufacturers at five times the national average.

At a series of 11 public hearings, 106 associations, representing groups ranging from artists to dentists to jewelers, said their members no longer could afford to do business in New York City.

Messinger said her bill is needed not just to preserve retail stores but because the city is losing other institutions that make it a renowned world center.

“What I`ve been hearing for years is: `Yes, we recognize the problem that they are going out at record rates, but we don`t want to interfere in the marketplace,“ Null said. “But if so many are going out, maybe you need to interfere in the marketplace.“

Commercial rent arbitration is not a concept new to New York City. It had such a system, put together by Mayor Fiorello La Guardia and Gov. Thomas Dewey, which lasted from 1945 to 1963. The program was phased out when evidence suggested that the market had stabilized.

Although no American city is believed to have commercial rent stabilization, it is found in many other countries, including England, France and the Netherlands, as well as in Tokyo.

Still, experts pointed out, comparisons may be of limited value, since each nation has a different set of regulatory circumstances.

John Gilbert, president of the Rent Stabilization Association, a landlord group that in spite of its name opposes stabilizing rents, said Messinger`s bill “would be preserving businesses that may not be the healthiest businesses for that block or neighborhood.“

He asked whether it is fair that one business subsidize another, which he said is the result of limiting a landlord`s income.

New York City currently regulates rents on most residential units, and Gilbert argued that landlords of mixed residential-commercial buildings need higher profits from the commercial space.

Null disagreed.

“Less than 18 percent of the buildings have commercial property,“ he said. “If they need (the additional profits from high commercial rents), how do the other 82 percent survive?“

Outside Manhattan, 99 percent of the commercial buildings have no residential units, yet still are raising rents dramatically, he said.

Gilbert claimed that commercial rent restrictions would be unconstitutional, violating property rights. Null asserted that the Messinger bill has been approved by legal experts as a legitimate exercise of good civic judgment.

Dick Riley, a spokesman for the New York Chamber of Commerce and Industry, said his group opposes the controls.

He said the measure would remove the incentive for the private sector to expand the supply of retail space and hurt areas of the city most in need of revitalization.

Investors, he contended, won`t be confident of recovering their investment. And, he said, binding arbitration would create a bureaucratic nightmare.

Gale Brewer, an aide to council member Messinger, said that although 98 percent of the businesses in New York City employ fewer than 100 persons, they are given none of the assistance, such as tax abatements, that large companies often receive.

Surveys show a sizable majority of New Yorkers favors some controls.

But with real estate developers, investors and landlords a key source of contributions to elected officials, observers said passage of a stabilization law is unlikely.

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