By Jackie Bein
This memo outlines the advantages and disadvantages of utilizing commercial rent control to address the increasing rate of storefront vacancies in New York City, and recommends that the City Council consider alternative policy responses to this issue.
Retail vacancy rates, shown here by borough, have increased overall since 2007.
Introduction
Storefront business activity serves as one of the most visible indicators of economic stability in neighborhoods. Recently, storefront vacancies have been increasing throughout New York City. This issue predates the pandemic, but the last few years have proven a greater need for the city to act as more businesses have shuttered due to waning foot traffic and the inability to pay rent. Also, businesses that were able to negotiate lower rents during the pandemic may now face disproportionately large increases as landlords seek to recoup some of their losses. As landlords hold out for tenants that can afford higher rents, storefronts sit empty amid the uncertainty of the future of the city. This has been documented in part due to a 2019 City Council ruling requiring building owners to register first- and second- floor commercial spaces with the city’s Department of Finance (DOF), allowing policymakers and the public to access information about the occupancy status of these spaces. Commercial rent regulations can help protect small businesses and address the growing number of storefront vacancies. However, the long-term consequences of this intervention should be evaluated, and alternative policies would more effectively ensure vacant storefronts can be filled.
The Case Against Commercial Rent Control
Commercial rent control would ultimately hurt neighborhoods by limiting the ability of landlords to charge market prices. Rent control artificially keeps rents lower than the market rate, which causes inefficiencies. A price ceiling on rent results in a shortage of commercial spaces, as the new price meets the demand curve at a higher quantity than the supply curve. Diamond et. al (2011) found that a San Francisco initiative to expand rent control led to a decrease in supply of rent-controlled units, as tenants living in such units were either more likely to stay or landlords responded by encouraging tenants to move out so they could convert to condo or sell the property to ensure they could get the market value. Similarly, commercial rent control could induce landlords to opt to sell their property or occupy the space themselves in order to get a true market price. This leads to increased turnover and more time for spaces to sit vacant. The overall decline in supply of affordable commercial spaces would also make it difficult for new businesses to move into the neighborhood, which makes this policy a less effective strategy for actively reducing the number of vacant storefronts.
Moreover, the inability to increase rents enough to meet their needs can be especially harmful for smaller landlords. Having limited rental income also dissuades landlords from making investments into maintaining their property, which can have longer-term negative impacts on the surrounding area. While the city should aim to protect commercial tenants, particularly more vulnerable small businesses, from unattainable rent increases, in order to actually ensure storefronts get leased, landlords need a fair market rent.
The Case for Commercial Rent Control
Some advocates propose commercial rent control as a way to counteract empty storefronts and ensure that local businesses can access retail spaces while also being protected from exorbitant rent increases that would otherwise drive them out of the neighborhood. Commercial rent control could take the form of hard rent control, which freezes the amount of rent landlords can collect, or soft rent control, which places a cap on how much landlords can increase the rent. Commercial rents tend to be “stickier” than market changes, so that even as demand for retail space decreases, as it has during the pandemic, rents do not fall in response. This is partly because commercial leases often last longer than residential leases, giving landlords more reason to hold out for a higher-paying tenant rather than entering into a long-term agreement for a low price. Additionally, landlords must often abide by requirements from lenders that prevent them from lowering rents for tenants. As a result, businesses at the end of their leases often face unaffordable rent hikes. Rent control would help prevent the displacement of existing retail tenants, especially small businesses who cannot budget for such high rent increases. This allows for a more diverse mix of businesses to maintain long-term roots in the area, contributing to overall neighborhood stability and other positive spillover effects.
Alternative Policies to Address Vacant Commercial Spaces
Commercial rent control is not the only way to help fill storefront retail spaces. Part of the solution could come from tax policy reforms, such as a recent New York State Senate bill that proposed enabling large cities to collect property taxes on vacant ground-floor commercial lots. This would help disincentivize landlords from holding on to vacant properties until;
Source: NYC Department of City Planning
higher-paying tenant comes in. Also, changes to the city’s zoning codes could help give commercial property owners more flexibility in determining uses for their property, which could enable faster lease-up. Other policy tools, including subsidies or tax credits, could also help support smaller commercial landlords without having to raise rents to unsustainable levels for small businesses. Formalizing small business’ right to a lease renewal would be another way to mitigate tenant displacement. Landlords would still have the opportunity to choose a new tenant, but would be held more accountable for not subjecting the existing tenant to an unreasonable rent increase and would instead be encouraged to negotiate with the tenant to work out a rent deal that would prevent the creation of another vacant space.
Conclusion
The pandemic has taken a heavy toll on small businesses and continues to reshape the landscape of what commercial centers look like across the city. While rent control would help struggling small businesses remain in place, such regulations can also cause neighborhood affordability to decline in the long term and ultimately cause more harm than good.
Jackie Bein is a second year Master of Urban Planning student at NYU Wagner. Her interests include affordable housing development, municipal finance, and civic tech.
