He suggests there may be some regulatory problem, and I suspect that indeed, things like registration and inspections may mean that it isn't cost-effective below some minimal rent. I also suspect that some landlords, like some homeowners, just can't give up the dream of the way things used to be. But I mostly think that Felix Salmon and Justin Fox are right: the real issue is lease length. A landlord who locks in a multi-year lease in a down market does himself more harm than good.
So why not, as Fox and Salmon suggests, go to short term leases, at least until you find a better tenant?
Marcus Westbury has manged, in Newcastle, to implement the obvious solution to this problem: short-dated leases, often just 30 days long, which roll over so long as the landlord hasn't found a permanent tenant. That's good for the neighborhood, and helps drive up prevailing rents, so everybody wins -- except, of course, for the commercial real estate agents, who are disintermediated and who in any case are never going to make any money brokering 30-day deals. But many businesses are never going to find that kind of deal acceptable, even if they're already in the space in question -- remember that Kenny Shopsin, for instance, refused to extend his lease on the space he had occupied for years in the West Village by one year. "A one-year lease," explained Calvin Trillin with no further elucidation, "is obviously not practical for a restaurant". Yet somehow a brand-new teahouse in Newcastle manages to operate on a shorter lease yet.
I actually think Felix Salmon is rather answering his own question: most renters don't want short term leases, because they have to make capital investments in the space. A tea-house is a pretty low-intensity business, because the kinds of outfits that take 30-day leases truck in their baked goods and prepared foods, so they can get by with basically a fridge and a sort of souped up toaster oven. A restaurant requires major investment so that the nice inspectors from health and safety and the fire department don't shut you down.
The problem for the renter on a short term lease is that once they've made the capital improvements, the landlord has them over a barrel. If they have to move, they will have to do it all over again, plus lose business because some people won't follow them, and almost certainly have a delay while they get their inspections up to date. If their leases are short term, the landlord will hold them up for above-market rents.
This is what economists call the problem of co-specialized assets. In theory, you could get around it by having the landlord do the capital improvements. But the landlord does not want to rent a commercial space outfitted as a restaurant; he wants to rent a commercial space with which you can do anything you damn well please.
There are two further problems. First, the kind of tenant who can move in without doing much to the place is quite likely to fail, because probably seventeen other tea shops have had much the same idea. (They're also likely to pull up stakes and skip out on the rent, but presumably you've gotten that up front). They may not be overworried about taking care of the place. But most importantly, the place will not show particularly well to anyone who is envisioning something other than a tea shop. If you're trying to woo a high-end clothing store, you don't want your potential renter to be edging past tattered chairs and piles of crumbs. This is why residential real estate agents encourage sellers to vacate the house whenever possible, and (outside of New York, with its 2% vacancy rate) large landlords let the apartment go empty before they try to rent it again.
The more interesting question is what Matt Yglesias asks: why doesn't the same thing happen to strip malls? One possible answer is that it does, but we don't notice, because neither of us are very familiar with the world of malls. But I think his and my impression is likely correct: malls are less likely to have many empty storefronts than urban areas.
One guess is that malls are likely to be owned by professionals who are better managers of their retail yield than individual landlords. First, they are professional retail managers, not just owners of property, and second of all, malls place a very high value on having foot traffic. Stores in malls benefit greatly from spillover traffic, which is why anchor stores like Macys are big focuses of the industry. Urban stores do too, but there's no one landlord in charge of them. A building on Broadway and 86th Street is not going to lower the rent on its vacant space because the fish store on one block up will see an 8% rise in sales.
The other guess--or perhaps it's more of a corollary--is that because malls are not so dependant on casual foot traffic, there is less worry about lock-in. That is, a restaurant in the Paramus Park Mall is not getting any significant number of its customers from the area immediately surrounding the mall. Any other mall with decent foot traffic of the right demographic is a very good substitute for one they're already in, so they can leave if the landlord gets too frisky. Plus, the space they rent very likely is a space specifically designated for a restaurant, allowing them to demand some capital improvements from the landlord that an urban tenant can't. In the city, a pizza place that hates its landlord has to worry about finding and building out a new space, and then charming customers away from the 22 other restaurants within a ten block radius.
There used to be a strange store on East Carson St. in Pittsburgh called "Drinkies". The store consisted of two coolers of refrigerated (non-alcoholic) drinks and a cash register.
I wondered how they stayed in business considered that there was a Rite-Aid with a better drink selection on the same block. I later found out that the "manager" was running an illegal gambling operation in the backroom.
That's the type of tenant you get when you only charge $900 a month in rent.
Couldn't landlords offer short-term low-rate rents to high capital required tenants by giving those tenants a right of first refusal on subsequent lease renewals? That way the tennant can do the rennos needed with assurance that they won't be tossed out without a chance to pay the rising market rate, and the land-lord can avoid being locked into a teeny-tiny rent when the economy comes roaring back.
This is addressed in McArdle's post. Now that the tenant has made substantial capital improvements, the landlord can overcharge with above-market rent. The tenant's only option is to leave and go somewhere else, where they would have to make their capital investments all over again.
Except that their capital investment means the landlord has them over a barrel and can extract above-market rents.
If the tenant has right of first refusal, and the landlord demands an above market rent and they leave: then when the landlord rents the property out at market rate to someone, the tenant can sue for breach of contract. This would include for damages for all their losses due to the breach (i.e. the lost capital).
It just does not happen. Most landlords are fairly savvy while small businesses have little bargaining room and less expertise.
In many cases taxes on commercial properties can also be based on rent rolls. When rents go down, the landlord's taxes can decrease, making it more logical to try to hold out for better times.
The tenant may have hundreds of thousands in improvements. Payments to make. The location and sweat has generated a cash flow. They are bankrupt if there is a disruption in traffic. The location is the only thing of value that they have.
The landlord really has them over a barrel.
Derek
Devil, the more the tenant has invested and loses because of the LL's harsh measures, the more the tenant will be able to sue the LL for. This creates a nice disincentive to LL to do this type of thing.
Ed, you seem to misunderstand the utility of clauses like a RoFR. Right now there are empty properties, generating $0. Presumably, landlords would like to change that situation. One of the barriers to this is a diverging interest between the LL and a potential high-value tenant, namely:
A) the LL does not want to get locked into a long term lease at today's low market rental rates; and
B) the tenant does not want to sink a whole bunch of capital into a property that the LL can kick him/her/it out of (and can use that fact to bleed the tenant dry).
Now if landlords are as 'savvy' as you say; they'll look for a way to solve this divergence of interest rather than have their properties sit there earning: $0.
A RoFR clause in the lease allows this: they can rent the property out now while maintaining the ability to raise rents as the market gets better: while at the same time they are restricted from becoming predatory once their tenant does a bunch of rennos, because they can't kick the tenant out if they can't find another tenant to take up the lease at the rate the first tenant could not afford.
The key to this is that by legally binding themselves, they are acting in their own best interest.
Kind of like the way the mob solves the prisoner's dilema by credibly guaranteeing to kill any rat. If both prisoners in the dilema know that they are dead if they talk; they'll both keep their mouths shut and will both be better off for it. Their interests are helped by having their immediate ability to act freely restricted.
nevertaken: If the lease comes up for renewal and the landlord says "I'm raising your rent by 50%," and the tenant says "F U, I'm leaving" how can then tenant then turn around and sue for breach of contract?
Are you saying that the right of first refusal exists in perpetuity, even after the landlord/tenant relationship has been dissolved by mutual agreement?
In any case, that wouldn't matter. 6 months from now, the landlord rents out the property, but the tenant has already been tossed out on their ass. Entering several years of expensive litigation may not be feasible.
Peter,
if the contract is properly drafted, the tenant can say 'show me the other guy you have lined up at that rate' or the tenant can formally protest under a clause in the contract and the additional rent can be held in trust until a previously agreed upon arbitrator decides if it's a reasonable hike ( and award a hefty costs penalty against the unreasonable party)
No one here seems to understand the purpose of the law of contract. It's to allow parties to bind themselves into agreements in order to solve exactly these types of problems. Any 'but the LL could screw the tenant by doing this' scenario can be dealt with beforehand with proper contractual provisions. As I explained before, it is in the interest of LLs to bind themselves this way to fill their vacant properties.
My wife works in exactly this area.
She has a shop that can be set up in one (hard) night's work. Her products are the sort of thing that quickly saturates a market, so after being in one mall for a month or so, her sales rapidly decline.
Hence, she travels around from mall to mall, taking one month to 6 week leases on these empty shops. After a while she realized that there is a whole industry of people who do just that. At every mall you see the same people again and again. They float from mall to mall, taking short leases, and helping the mall keep everything full and busy.
Mall management actively goes looking for such tenants. After you've taken one lease, you get phone calls from all the other malls offering you deals. They have spys who go around to other malls and record the details of individual retailers.
She would NEVER take a high street shop. The foot traffic is minimal, there is no parking for customers, and the mall management does half the work for you that a separate shop would leave all to you.
Avon Lady? Hahahahhaaa
Not necessarily. Every Halloween and Christmas you'll see store pop up for that and promptly close after. They usually show up in strip malls. I've seen some of those stores packed with shoppers.
It's a little odd, but it is a business model.
Or calender stores. I usually buy my calender at such temporary stores at either of the two local malls.
Calenders, infomercial style "health" products, car cleaning products, leather goods, gutters and other roofing...
My wife sells fishtanks.
Avon is exactly the WRONG sort of thing. That's a consumable: your customers will come back a month later and buy more. You want a permanent lease for that sort of thing. Or a permanent territory, as Avon does it.
I guess it depends on how Matt and Megan are using "urban" in this context (I haven't checked Matt's original post, as I have been adhering to an Yglesias-free info diet for the last few months). If by "urban" they mean in a city, that's one thing; but if they mean in a poor, sketchy neighborhood, that's another. If the mean the ghetto neighborhood, I'm guessing Dr. Pat's wife wouldn't set up her fish tank store there even if she could get a short lease.
It may be that there are a lot of empty store fronts in these neighborhoods because there are only so many different types of (legal) establishments residents will patronize? Beyond the bodega, liquor store, pawn shop, check-cashing place, barber shop, hair salon, fast food restaurant, etc., how much demand is there for retail in these neighborhoods?
There's also the security issue. A few weeks ago, four armed men attempted to rob a store in Harlem in broad daylight. Unfortunately for them, the proprietor was armed with a shotgun, and he shot all four, killing two almost immediately. Nevertheless, the prospect of engaging in firefights in broad daylight probably discourages some vendors.
Doctorpat touches upon several issues here that clearly explain why conventional storefronts are staying unoccupied.
Notice how Mall Management "handles" so much? That's a big differentiator. In a mall the landlord is always there. If the roof starts leaking, they'll be there in hours (at most). Public restrooms? Not your problem. You have one for the employees, but that's as far as it goes. Shoplifting? Still a problem, but less so - particularly if you're not immediately adjacent to an exit.
Etc.
Megan and others mention the capital required, known as "build out." That's a huge reason why people are averse to signing a short term lease. Unless, like Dr. Pat's wife, you have something that requires almost nothing in the way of capital, you simply aren't a candidate for a short term storefront.
An issue that doesn't seem to be mentioned here is blight. As consumption patterns change, and consumers lean more and more on highly-centralized, climate controlled malls (and similar), the independent store front faces a real head-wind.
You might drive to a mega-store, like a Barnes and Noble, but will you make the same effort to visit a 500 square foot clothing store that's not convenient to other stores?
This becomes a cycle, and we start to see "old fashioned" shopping areas fall into blight - particularly if the surrounding neighborhood isn't overly safe.
Given that short-term leases are impractical for most businesses, I think of an empty storefront as a call option on a local recovery in the commercial real estate market.
Check out older malls (strip or enclosed) in non-affluent areas, and you will see a ton of vacant stores.
If the tenant has right of first refusal, and the landlord demands an above market rent and they leave: then when the landlord rents the property out at market rate to someone, the tenant can sue for breach of contract.
Except that what would really happen if the tenant left and a new one showed up offering a lower rent is that the landlord would offer the old tenant a chance to move back at the newly offered rent, which the old tenant would refuse (having now put in money at the new location), so that the landlord would then have the necessary refusal to go ahead and rent damages-free.
It doesn't work, I'm afraid.
A proper ROFR clause would preclude the LL from renting the place at a lower rent than what was offered to the tenant for long enough to make it not attractive to the LL to play those strong-arm games.
Maybe, but in all probability the landlord is better positioned to play strong-arm games (or simply tolerate a temporary vacancy to run out the clock) than a potential short-term tenant (who almost by definition is poorly capitalized, or they'd be talking about longer leases) is position to fight them.
I guess I see this as a solution for land-lords. Now their properties sit empty because they don't want to get locked into long term leases at today's rents and the 'good' tenants don't want short term leases because it exposes them to the risk of getting screwed by LLs once they sink capital.
This way, they can alleviate that risk for the 'good' tenants, so their properties don't sit empty now (and they keep their good tenants). Which is what Megan's post was about; I think the problems of both the land-lords and the tenants in the scenario she describes could be dealt with by properly written RoFR lease contracts.
Maybe there is some tax or regulatory reason why this does not make sense, but from a market/contract point of view the current "Empty Storefront" problem could be dealt with this way.
Which is I guess my round about way of saying that I don't think the short-term-capital-sinking-risk observation is adequate to explain the 'Paradox' the main post is talking about.
I think a contract that prevents this would actually be simple:
disallow price changes at all. It would be a monthlong contract that may be renewed if both parties agree; the rent could be increased at the landlord's option by inflation only. If the contract is ended, there must be at least a month period before the renter may reoccupy the space.
That means that the landlord can't hold the renter over a barrel, because if he wants to increase his rent beyond inflation, he has to find a new renter. No negotiation would be possible - he either keeps that renter or doesn't.
JoelP: What's the upside of that plan over a long term lease (for the landlord)? Now they have the worst of both worlds: 1) they're insulated against a market recovery, and 2) they don't have the stability of a long-term tenant.
I don't know if its the economy, or the management of the mall next door, but they have half a dozen empty spaces. Several have been empty for a year, since I moved here. The coffee shop went out of business in the spring and hasn't been replaced. The pizza place just went out of business a couple of weeks ago.
This mall is anchored by a Bel Air supermarket. It has a LOT of traffic, since the mall is surrounded by blocks of apartments. It's mind boggling that a pizza place cannot survive here. It's also amazing that the mall would let prime space go empty that long.
Something is wrong with this picture!
Probably not as odd as it seems.
For many small retailers rent is their biggest expense and even a small dropoff in business can spell disaster. The simple fact is that most of those small retailers are not getting rich by any means and have little wiggle room. Small retailers close up all the time, in good times and bad.
Even in a bad economy their rents can increase because leases often have escalator clauses. If taxes on the property go up, so do the rents. The same can happen with costs like heating oil or gas. The rent goes up.
Large retailers have entire departments and layers of lawyers to negotiate long term leases with landlords. Small businesses don't have that luxury.
There are quite a few empty spaces in the local mall.
I've encountered this too, and in every case (about 3 cases) the cause was the same: STUPID management.
It was always smaller properties, and in at least one case I know they DID have a good manager, who was always out actively drumming up clients and actively managing the property owners to get them to accept lower rents if that's what the market was. (Note: In this case, individual shops within the mall were separately owned by different investors). This manager did such a good job that she was offered a much better job controlling three larger malls. The original mall went on to hire someone who did nothing much except hit on all the female shop staff and that mall went slowly downhill.
It could be that, in this economy, there just aren't that many people who want to risk it all to start a pizza place or coffee shop. Obviously, with a landlord facing foreclosure you could get a great deal that could ensure the longterm success of your business for years. But, that's not how it works.
People start businesses when things are going great and get poor deals rather than starting something at the hight of the crisis thus ensuring a great long term deal. It's the nature of business.
I don't know about retail specifically, but, interestingly, the number of Americans who start small businesses doesn't vary much between periods of expansion and recession -- it's pretty steady.
People start businesses when things are going great and get poor deals rather than starting something at the hight of the crisis thus ensuring a great long term deal.
I'm seeing a big uptick in dubious entrepreneurial activity right now, driven mostly by the fact that people who lose their jobs either can't find new ones (lots of time with zero opportunity cost) or they read some dumb magazine article about how a layoff can be a great opportunity to take your life in a new direction, etc. If I got laid off, I'd definitely open up at least two new businesses.
I guess I don't encounter too many pizza/coffee shop type people though.
Coffee shops are a problem business. Many people (for some reason I don't get) DREAM of owning a coffee shop, and spending their days relaxing in some hip, cool, corner sipping expressos while their staff rake in the money. I could speculate that they spent too many hours having a wonderful time in coffee shops as a student and want to go back.
This is exacerbated by the fact that if your shop does become popular you can make a lot of money. So it's a lottery ticket.
The result is they will start the coffee shop when they really shouldn't, and will keep it going when they should walk away. So the competition can be fierce.
Fashion shops are worse. It seems every second woman in the country dreams of being in the fashion industry. A lot of shops are basically a hobby. Husband has a real job so the wife can sit in her fashion shop all day, being "in the fashion industry" and making no profit at all. Every other shop has to compete with this.
I thought of opening a coffee shop. Worse, I thought of doing in a place that, in hindsight, would have been awful. It's one of three businesses I though of but I'm glad I didn't start. Now I'm working on a couple of online businesses, with several other business ideas in queue (including a couple of tangible ones).
Megan has made one mistake when talking about Yglesias's point on malls.
He referred to strip malls, while Megan has referred to all malls. There's a big difference between a strip mall and a giant shopping mall. Strip malls try to rely on something like a supermarket as an anchor with numerous smaller retailers taking up the rest. Large malls usually cater to chains.
Strip malls actually go down the tubes a lot. All they need is for that supermarket to go bye bye. The smaller stores fold do to lack of traffic.
While large malls have been more resistant to this, they too have gone downhill in many cases.
Large malls rely on anchor tenants too.
One local example of the difference a new anchor can make: we've got a mall nearby that had been the ugly stepchild of malls for years. In addition to extensive renovations, it just got a Whole Foods recently as an anchor tenant. Huge difference in traffic now.
How on earth can it be capital investment when it happens "even if they're already in the space in question"?
Obviously the capital has gone bye-bye already by that point.
driven mostly by the fact that people who lose their jobs either can't find new ones
This also causes a lot of income inequality. There is a class of people who only change jobs as a result of being laid off. They will work 10 years at company X, get laid off , take the first offer they get for $Y. They then work at their for job for 10 more years making crazy short money. Person B leaves for a new role at the height of the job market at make significantly more for doing essentially the same job.
Malls may simply be underbuilt in NYC due to space constraints and land values. In cities I've lived in I can think of plenty of mid-range enclosed malls that have gone bust or sat more than 50% vacant, I can think of a few that have been torn down and turned into something else. More common with mid-range, mid-size malls (with something like JC Penney as anchor, not Nordstrom). But there is a big mall in downtown Boston, next to Macy's (former Jordan Marsh) that has just been empty for 15? 20? years, taking up a couple of square blocks of downtown real estate.
Also from the landlords perspective there are negative externalities to consider. If I have some vacant spaces near, say, the Coach and Victoria Secret stores I probably want to add a similar tenant appealing to a similar shopper, say a Lucky Brand Jeans or Guess store. If, however, I add a temporary tenant that is Payless Shoes or "All for A Dollar" while I collect some rent, that may drive away the Coach/Guess/Victoria Secret shopper to another mall as these stores may not attract the same tenants.
Malls go bad too; one of the reasons they're willing to rent cheaply is that once the percentage of shuttered storefronts goes too high, the place gets creepy. Check out Deadmalls.com for quite a bit of reportage on this subject.
I was just thinking about this today. In the summer, NYC has a handful of little "pop-up" restaurants and coffee shops temporarily set up in parks, as well as lots and lots of public markets with small low-capital vendors ranging from cheese-makers to artisan jewelry-crafters. Short term leases would be perfect for exactly the same people, who usually already have a place where they made/craft their product. They just need a place to hawk it.
Prosperous malls in good times still have occasional vacancies. They cover the storefront with ads for the other stores, and leave the covering there until the new tenant is found and ready to open.
The axiom that "markets clear" is pure ideological fantasy to begin with. There are many ways to "make money" or churn fees from an urban property or any other asset, and fewer and fewer of these revenue options have anything to do with useful products, services, or real social needs. As with all capital investments, actual "use value" is entirely secondary. It would be very interesting to know how many storefronts here in Manhattan actually pay the landlord on their revenues. Flagship properties, tax write-offs, money laundering, speculative holdings, foreign currency hedges, vanity businesses, bad deals, and, of course, the 40 percent of small retailers at any given time that are simply failing, account for a very large share of the streetfront. Why, we even have loads of storefront palm readers still. Now how do you suppose supply/demand curves account for them? In Manhattan, the small, useful, popular neighborhood business only exists where landlords are quirky or negligent and markets do NOT operate "efficiently." Market "efficiency" usually means over-scaled speculative investments and evictions, followed by eventual blight. And, by the by, the American landscape is littered with half empty strip malls. You should check it out. If Greenspan had occasionally stepped out of his private jets, power suites, and ideological bubbles he might have noticed that and thought twice about a few of his ideological certainties.
The number of confused premises in that paragraph is astounding.
Tax writeoffs and money laundering fronts are usually the result of government action(absurdist tax codes, drug prohibition), so those can;t be pinned on the market. Speculation and hedging are normal market acts, and are perfectly useful. Bad deals and failing businesses are normal churn - as long as there are about as many going in as coming out, long-term vacancy will be minimal, as it is in good neighbourhoods during good economies. And money-losing flagships exist, but they're so rare to be pretty much meaningless in any conversation about retail vacancy on a large scale.
Storefront palm readers are a business that makes me lose respect for all involved like few others, but there is a demand for them, so the fact that they exist seems natural. And if a business is genuinely useful and popular, presumably it can make rent even for a normal, competent landlord. And market efficiency means giving people maximal happiness using a minimal amount of resources. Yeah, there's speculation gone bad, there's hubris and folly, but just about all of them are based in an attempt to make people's lives better. Yeah, it doesn't always work, but you seem to be attacking them for trying.
True. For the Jesuits of libertarian orthodoxy, my "premises" will indeed appear confused. But you "astonish" rather easily. That is a trait of those immersed in faith. It reminds me of that old priest of libertarianism, Doctor Greenspan who expressed "shock and disbelief" that markets failed to "discipline themselves." Most of us assumed, wrongly it seems, that HE was supposed to do some disciplining.
I especially love your doctrine that crime is created by governments because they pass laws. I have travelled in a number of "lawless" countries and neighborhoods where truly "free markets" thrive unimpeded by government constraints on the natural liberties of physical force. You should go and look, but you probably wouldn't like it there. Most "libertarians" aren't against government laws and regulations. They just want the rules that are best for ME, the constitutional ME-OCRACY, which they rationalize as the natural and universal laws best for all humankind.
I don't claim that government creates all crime. I claim that most big-money crime consists of pandering to illegal vices(prostitution, gambling, marijuana, etc), and not of actual harm-to-others crimes, and thus the existence of money laundering is largely a function of bad laws. Murderers generally don't need to launder dirty money.
And what's wrong with a system where laws help the individuals living under those laws?
"They just want the rules that are best for ME, the constitutional ME-OCRACY, which they rationalize as the natural and universal laws best for all humankind."
As opposed to guys like you who *don't* claim to know what laws are best for all mankind?
Please - All politicians make their money off of fear and claiming to know what laws are best for all mankind.
My point, to Alsadius and Col Sanders, is not about who knows best. It is about abuses of a the highly popular, reductive, and ideological use of libertarian anti-government rhetoric. I assume, of hope, that both you intelligent gentlemen are fully aware that "markets" are quite different in different legal structures around the world. They all rest of vast complex of property laws, regulations, and enforcement agencies. No "government, no "market," in the sense that you mean it. What you advocate is the "minimum" amount of regulation needed to secure property, court systems, and exchanges, which is still a very considerable amount of government, plus the funding to operate it. But what is the "minimum"? In reality this "minimum" constantly changes depending on the advocates and circumstances. The "libertarian" creed of the less government the better is utterly utopia and never adhered to in reality. Take the ISDA, who fervently advocated free markets and the "self-discipline" of markets for derivatives, with their director quoting Hayek every step of the way. Why does "market discipline" work in theory? Because unlike the wasteful "government" private businesses can fail! They can't just tax people. Such dogma and millions in lobbying succeeded in lowering reverse requirements for derivatives and expanding levels of risk. All under the self-regulating "discipline of the market." Then, as the market collapsed and banks faced annihilation--low and behold. Suddenly they want billions in tax funds. Notably, most in financial markets they did NOT want tax assistance to support auto companies, union pensions, or foreclosed homeowners. For those groups, the "free market" still sufficed. A case of the old, "socialism for the rich." That's ME-ism And this is only one example out of thousands, as you well know. Since libertarian creeds rarely specify which laws are the "minimum" the whole thing simply becomes an emotion-driven propaganda that constantly shifts its principles. Obviously, the richer you are, the less you need government services of any kind. If public schools, public transportation or airline infrastructures, public parks, public universities, public hospitals, or social security all collapse, the upper class is not personally affected. Thus, as far as they are concerned the bold libertarian cry to "reduce government" and "let the market regulate itself" is just fine. The absence or reduction of laws is not neutral, not evenly distributed, and not necessarily meritorious. In money matters it is hugely favorable to those who can hire full time accountants, investors, and lawyers. Deregulation makes it far easier to take money away from those who do not have "private banking" services. In general, libertarianism is a vague, incoherent form of romanticism that in actual practice favors the powerful and helps to destabilize markets and societies. The ISDA "deregulated" its industry into collapse, spouting "Hayek all the way, and then appropriated more tax money than any Senator could ever hope to. It was a very good example of "libertarian" boosterism in action. But for any libertarian, of course, it was not "the market" it was "the government" that caused it all, which is as convenient as any "devil theory" in any superstitious creed.
There are many ways to "make money"...and fewer and fewer of these revenue options have anything to do with useful products, services, or real social needs.
Oh lord. Translated into plain English: "I'm horrified that people spend money on goods and services that I'd never be interested in. I am going to write a blog comment about how awful this is and how people should be forced to have the same preferences and utility function as I do. For their own good, of course."
Why, we even have loads of storefront palm readers still.
Full disclosure -- I think palm readers are a bunch of hooey and I'd never pay for one. But there are a fair number of people who either believe in this kind of thing or don't believe but enjoy it regardless. It ain't up to me to tell people how to spend their money and if someone wants to pay their own dollars to have their fortune read, who am I to say otherwise? Unless of course I'm a liberty-despising collectivist like Nelson Alexander, who figures there oughtta be a law that makes people not spend money on things unless he approves of them. Don't liberty and freedom suck? They do if you're a collectivist. People who have liberty and freedom just don't *behave* the right way, darn it!
Market "efficiency" usually means over-scaled speculative investments and evictions, followed by eventual blight. And, by the by, the American landscape is littered with half empty strip malls.
An efficient market is not one where all businesses succeed. An efficient market is one where bad businesses fail because they aren't offering the consumer what they want. In an efficient market, businesses would and should fail all the time because it can be hard to predict the desires of the public. In fact, in an efficient market, a business could have fifty years of success, then fail in year 51 because the taste of the public changed and the business was too slow to respond.
*Inefficient* markets are ones where, for example, an American auto company continuously fails to meet the needs of the public (unlike e.g. its Japanese competitors), but the government pours billions of dollars into the company to keep it up and running because its unionized workforce provides a lot of votes. Just as a hypothetical example. Since you're all torqued up about "efficiency" and stuff.
Oh, lord, how exciting! I have never been called a "liberty-despising collectivist" before. I really wonder where this term "collectivist" came from. I believe it was Mises and Hayek and, later Ayn Rand, trying to create a conceptual link between fascism and socialism, so they could be grouped into a single class of evil. Now it simply a formal cliche of the collectivist mind of the right. Worker safety laws? You are COLLECTIVIST! Worse than liberal, worse than tolerant!
Oh yes, Neb, thank you for your "translation" of my own thinking. I am a little surprised that a person so fearful of external control by "collectivists" likes to tell others what they are "really" saying. And it kind of misses my point. But that is yet another interesting specimen of the way in which American "libertarianism" evolves into right-wing uber-nationalism and market brutalism. Structure of dominance, at all costs!
I have a sense that in the coming decade America will lose its middle class, rely economically on its military, and suffer an authoritarian tragedy not unlike that of Weimar Germany, and it is ironic that it will probably be young people impassioned by Austrian-Corporate "libertarianism" that will usher it in. But if you read Plato and Aristotle you will see that "Authoritarian Libertarianism" is not such a historical contradiction. It is generally little more that an excuse for strong feelings and snarling anger.
In the mall nearest me, there's a candy/soda/snack shop that seems to move around from storefront to storefront, temporarily occupying them between steadier tenants. It provides a useful service to shoppers and at least some rent revenues for the landlord. Its setup is the sort of thing that can be moved quickly and with minimal cost.
In the city, a pizza place that hates its landlord has to worry about finding and building out a new space, and then charming customers away from the 22 other restaurants within a ten block radius.
In New York at least, businesses and especially restaurants that lose their leases usually go out of business. It's rare to see one move to a new location.
As a retail developer I find this entire thread hilarious. There is nothing funnier than watching people opine on something that they don't know about. First just because you don't see anything happening on a site doesn't mean that nothing is happening. Most real estate development occurs sub rosa. The lease negotiating and approvals process can take months or years depending on the size of the project. The actual construction is the shortest part of the process.
As far as month to month leases go, They happen all the time when neither the landlord or the tenant needs financing. When one of them needs financing the lender is going to require a long term lease.
As far as inner city development goes the issue is size. Modern retail stores are much larger then their predecessors. For example in the 1960's a drugstore was about 1,500 s.f. in size. A new CVS is over 14,000 s.f. In order to get a deal like that done in an urban environment you have to assemble multiple small lots together. The problem is that it requires all owners of the assemblage to agree to sell at the same time. Not easy to do.
This dovetails into the whole problem with urban planning. Urban planners tend to have these utopian visions that do not respect the very dynamic nature of real estate development.
Kind of considering your last 2 posts together, I suppose landlords want to have a senior tranche liability on a business/ proprietor. From the standpoint of some potential small business people it might be nice to have a 'going concern' option removing their liability if they go out of business. OTOH, Kenny Shopshin, mentioned in your blockquote, would have seemed ideal for that, or the nearest thing usually available, a 1 year lease. He might have been 60 years old from the story. He might have a heart attack, and heh this isn't Canada, and die in the snow trying to find his insurance card. Then his wife has a long term lease to worry about and insisting on a long term lease in a slow market just seems to want to play the real estate market rather than run a restaurant.
Another factor not mentioned yet is that when a landlord has multiple properties, he may prefer to endure some level of vacant locations rather than to drop the asking price (which could tend to lead his tenants to demand price breaks). For the same reason, theater operators don't drop ticket prices to a market-clearing level that would assure a full house--such a price would be so low that revenues would be much lower than with a standard seat price and empty seats.
To neighbors, an empty store-front can be an eye-sore and a worrying sign of economic decline--but to the landlord it may just be an empty seat.
Actually, theater owners do discount tickets to fill the house. People who pay full price get the best seats and the security of knowing they will be able to see their first choice of show. If a show sells well, that's the end of it.
But if there are any tickets left, they gets sold through discounters and half price ticket places. This doesn't affect the price that anyone else pays in advance. But the people who wait for the deep discounts run the risk of not getting anything, or at least of having to see their second or third choice of show. The best shows are the least likely to be available at discounted prices. So there's a real trade-off there.
Not sure how any of this applies to commercial real estate, except for very short-term arrangements like stalls at a flea market. It's not hard to imagine people paying a premium to lock in good spots in advance, with any left-over spaces rented to walk-ins at a big discount.
Obviously, I'm thinking live theater here, where there is a live cast and crew to pay for every show.
The economics of movie theaters are different, because there is little marginal cost to showing a film one more time to a half-empty auditorium.
Right -- Broadway theaters do, movie theaters don't. Airlines do, restaurants don't. The point is that there are businesses where it makes economic sense not to discount to market-clearing prices, and commercial real-estate rental is one of those businesses.
Restaurants often do a modest degree of discounting: early bird specials, late-night menus, and of course happy hour.
Monday night specials too. Anything to fill up the unpopular spaces when the cost of running the outfit is more or less the same for each increment of service. You want to operate at capacity all the time in those cases. Or else you close Mondays (or cut back on the number of flights or performances) and don't incur the expense just to serve a few customers.
But if you are making a profit just from your peak operations, and if maintaining the extra capacity doesn't really cost you anything, there's no real reason to discount excess capacity to sell it off. If a strip mall is 90% full, is there any out-of-pocket cost (as opposed to foregone revenue) from carrying the empty units?
Can someone explain food court economics to me?
The successful mall by my house has a food court where some store have been there for eternity (DQ, Chick-Filet, Sbarro, the Japanese guy). Chick-Filet and the Japanese place are by far the most popular.
Other stores rotate on a almost yearly basis: the Mexican type guy by the entrance, the location by the hallway to security/restrooms, the corner spot by the cell phone hawker.
Occam's Razor would say it's bad food. But I know that a few of these tennants offered good product and they still ended up on the outs.
Is "location" a factor in food courts?
National franchises (more stable) vs. independents (more volataile)?
Is is possible the whole discussion is based on a false premise? According to Reis, strip mall vacancy rates are at about the same level as Manhattan storefronts. Here's the NY Times story with a graph:
http://www.nytimes.com/2009/07/21/nyregion/21vacancies.html?_r=1
And here's a report on the Reis survey:
http://www.calculatedriskblog.com/2009/04/mall-vacancy-rate-increases-sharply-in.html
Right now, they're both at about 9.5% vacancy. The strip malls appear less volatile, but that may be an artifact of its being a national survey.
Maybe two more reasons (alluded to in the article) - brokers as gatekeepers (with low incentives to show short term leases, if they are truly gatekeepers to the market, nothing clears) and a public-good concept (in contrast to the mall, the benefit of one store owner's success is not entirely captured as the next owner also gains). And, of course, different expectations of the future play a role (renter holds out thinking things will get worse and vice versa for the landlord). Just a thought.
Real estate people don't think like you and me.
About 10 years ago I ran a small manufacturing company in the Midwest. We leased an office/warehouse suite in a complex of 7 other units. At the time there was a vast overcapacity in the market (still is) and 4 of the units were empty. Several months before our lease was to expire I contacted the landlord to sign a new lease. Rather than being overjoyed that we were staying, he stated that our rent needed to be increased by 15% to make up for the empty units! With other locations just blocks away heavily recruiting us, I said NFW. However, I was willing to continue at what we were paying due to the hassle factor of moving. No dice, he held firm. We moved.
For the next 4 years I drove past the old location on the way to work. It remained empty.
This paragraph of Megan's contains the seeds of the obvious answer:
Clearly, what is needed here -- as in so many other aspects of life -- is a good, progressive solution. Can you see it hinted at in Megan's description of the problem? Why do malls funtion better? Because they are run by "professionals" who are "better managers". And why do urban storefronts not benefit from the same great management? Because "there's no one landlord in charge of them."
So what's the patently obvious, progressive solution to the problem? Have the government find some qualified professionals to take over management of urban storefronts. All of them. This would probably require the government to take ownership of all the land they will be so ably managing but perhaps there can be some agreement worked out whereby the land-owners get compensated. After all, in aggregate, the skilled management of all storefronts by government experts will result in higher revenue that should mean more money for the stupid landlords currently destroying each other with their futile competition.
Frankly, I'm somewhat surprised that a committed progressive like Yglesias didn't jump to this obvious solution allowing improvement over the market with a little rational government involvement.
Isn't it odd how literally every single problem that anyone has ever had could so easily be solved with the application of expert management empowered by the might of the state? One wonders why we are still struggling with so many issues when all it would take was someone with the strength and will to take power and put us all out of the misery of "freedom" and "competition" and the "free market" and usher in the glorious progressive utopia.
Speaking of empty storefronts, looks like no one's buying Obamacare. Rasmussed has him approval down to 45%, a new low... and Zoby has him at 42.
The next wave of foreclosures will be in this sector, watch the commercial property dollar fall hard at the end of 2009. Most small businesses that have been operating lets say 5 years or more still are having difficulty getting loans.
There are several reasons for the appearance of this anomaly.
1) Loan covenants.
2) You are missing a significant component of cost. A commercial building is storage rental or an efficiency apartment. My last move cost $10 per square foot. The previous building cost $4/sq. ft to prepare for our business and that really didn't do much. Turning a Circuit City location into some other type of business costs more than people think. A tenant won't pay for it out-of-pocket and a landlord won't pay for it unless they can amortize it over a longer lease.
Our last move cost over $100k without those TI's. Moving is very disruptive.
3) If rent is not a major cost of your operation, zero rent is not an incentive to move to a poor location.
We've got one really dead mall here (at least until last year when the city and county needed to find cheap space after being flooded out of their riverfront buildings). From what I've gathered from news stories, part of the problem getting a renovation effort off the ground is divided ownership of the building, including pieces that are in foreclosure. Approving and financing a project is extremely difficult.
I'd suggest you get some facts before you shoot off with things like "But I think his and my impression is likely correct: malls are less likely to have many empty storefronts than urban areas."
You and others developed a whole set of posts without even having facts but just your "impressions." Sheesh. Get back to "reality-based."
Actually, it has to do with cost curves taught to you in microeconomics. The decision to close on the long run is very clear. If you are not covering your fixed costs, you close down. This is true for both tenants and landlords.
The landlord may be waiting for better real estate conditions to sell for his/her gain. They could be using the property as a tax write off.
In my community, the city is slowing buying off vacant properties, tearing some down, rehabbing others. They have hired an outside business developer to "package" the area to the "right types" of businesses.
http://cheapogroovo.vox.com