As New Yorkers' own love-hate relationship with the residential version of rent control has shown, such regulation comes fraught with so many problems, both macro and micro, that it can end up hurting the people it is supposed to benefit. Certainly this will be the case with commercial rent control which is a foolhardy attempt to tamper with a real estate transactional market, a market providing a fundamental stimulus to local enterprise and to the long success of our city as a world financial capital.
No one doubts that ours is a free market that runs in cycles. Through the 1990s and the early part of this decade, office space in New York was relatively plentiful and reasonably priced for any tenant willing to look and negotiate. In the middle part of the decade, office rents soared to unbelievable heights, causing a landlord's market and forcing some companies to relocate, close or settle on an unwanted compromise.
Now, with the economic downturn, tenants are back in the driver's seat and in a position to negotiate leases on the most favorable terms. While this tenants' market will not last forever either, it is testament to why this market must remain unbridled by politically- motivated city legislators.
The proposed bill would require that a landlord submit to mediation and subsequently formal arbitration if they and their tenant cannot agree on renewal terms. The bill further freezes a tenant's increase at the end of a lease until they come to terms with the landlord or unless the landlord receives a higher offer to fill the space.
Such a law would create more difficulties than already exists and do little, if anything, to help tenants. The result would be a paralysis of the real estate market and a host of disincentives for landlords and tenants to do business, a consequence that would further cripple our already struggling economy.
Landlords, for example, instead of being fairly compensated by the market, would expect limited or no return on investment. They would have no incentive to invest in or maintain property because of an inability to replenish capital and recover increases in operating expenses such as fuel, electricity, and labor. Over time, as we have seen on the residential side, there would be a deterioration of building stock from lack of maintenance, cleaning and attention. Hallways would be dirty, HVAC would not function and windows would begin showing cracks. Buildings and eventually the entire city would seem run down.
Furthermore, landlords would have no incentive to negotiate in good faith if there were a third party who imposes a solution. Why negotiate in earnest, if an arbitration panel might provide a better deal?
Tenants, on the other hand, would have a false sense of entitlement and not be inclined to engage in good faith negotiations. The bill would replace the currently healthy give-and-take with posturing "to make points" that would later be effective in winning over an arbitrator. The atmosphere would change from free face-to-face exchange and negotiation to one of a courtroom where parties are adversaries.
Tenants would be more inclined to remain in offices that are the wrong size or located in the wrong place, just as home renters have a powerful incentive to stay put under rent control. This would mean that other prospective tenants who might be able to better use the space would be shut out. There would be no incentive to achieve the best use of properties and a greatly reduced or nonexistent market for commercial space. Fewer deals would be consummated.
Think about it. We will have an illiquid market and tenants and landlords behaving and making decisions for all of the wrong reasons in a market that depends on the smooth functioning of its real estate stock.
Over time, rent control would subsidize businesses that are not competitive and keep out other, more competitive businesses. Transactions would go into a long-term hold file as the waiting list for arbitration decisions lengthens, reducing the amount of business done in New York. Some business may be forced to move outside the five boroughs just to get a deal done. Others will choose to do so because they prefer a real estate market not driven by coercion.
Finally, consider the economic impact. One critic estimates a loss of over a billion dollars in tax revenues. Many construction jobs would be lost as well as jobs for the people who clean, maintain and renovate existing properties. Of course, New York will lose jobs of highly paid executives who seek an effective, responsive marketplace. We need more jobs, not fewer, in New York today.
Marisa Manley is president of New York City-based Commercial Tenant Real Estate Representation. To contact the author, click here.
The views expressed in this article are those of the author and not GlobeSt.com.
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