Retail Under Attack, Slippery Slope

SAN FRANCISCO—New York City and San Francisco are 2,900 miles apart, but seem to be in the forefront of an attack on retail landlords. Not so long ago, the New York City Department of City Planning, responding to complaints from residents of the upper west side of Manhattan, established limitations on store fronts in three corridors, which were rezoned as special districts. This followed an action in San Francisco, establishing strict formulas for retail businesses throughout the city. Now Manhattan’s East Village is attempting to obtain municipal support to establish restrictions on retail space in order to protect small businesses by creating an environment where national chains, global boutiques and banks and other institutions cannot offer higher rents as an inducement to landlords to not renew leases of long time tenants. Although this presently seems like isolated incidents that are not an area of concern, it could also be the first steps on the slippery slope to commercial rent control.

Although it is laudable for communities to want to protect long time merchants in their neighborhoods, there is a cost in doing so, which is always ignored when these issues have arisen in the past. First, the chains, boutiques, and institutional tenants usually hire more people than the traditional mom and pop stores. Second, the landlord can collect significantly greater rent from national tenants than a small local store, which means that the town or city will collect more real property taxes which, in the case of New York City, is the only tax the city collects (by having control over the assessment mechanism) without requiring the approval of the state. Finally, the long time tenant, who is being protected from competition, is having its rent limited, but is not also agreeing to freeze its prices or improve its service or merchandise. In fact, the action by the municipality in limiting competition, has the opposite effect; it creates a disincentive for the retail tenant to do anything but maximize its revenue while its costs are being frozen.