The American economy is booming—the Dow Jones Industrial Average trades between 25,000 and 23,000 points, unemployment is at its lowest level in 10 years, and the promise of the president’s new $1.2 trillion-dollar federal tax cut bodes well for growth. But walk down Broadway on the Upper West Side of Manhattan, and you will find a wasteland of sorts littered with “For Rent” signs and empty storefronts that seem to go on forever.
“It’s unbelievable,” said Joanne Scott, 64, an Upper West Side resident. “It looks like a war-torn environment.”
Not that the buildings are destroyed, but in many cases they are empty. A recent report compiled by Councilwoman Helen Rosenthal, of Manhattan’s 6th District, found that of the 1,332 Upper West Side storefronts surveyed, 12 percent were unoccupied. A recent New York Times story estimated SoHo commercial vacancy rents are as high as 20 percent.
“It’s disturbing,” said Ramon Nieves, a manager at P.C. Richard & Son on 86th and Broadway. “It’s only banks and Duane Reade now.”
To Mayor Bill de Blasio, enough is enough. Last December, de Blasio’s administration and the City Council reformed the Commercial Rent Tax, alleviating what had been a costly burden on thousands of small business owners below 96th street in Manhattan. In March, the mayor himself publicly voiced support for a more controversial measure—a new “Vacancy Tax,” which would fine landlords for holding commercial and retail spaces vacant for a yet to be defined period of time.
“Small businesses are the lifeblood of this city,” Mayor de Blasio said in a December 5th 2017 press release about the Commercial Rent Tax. “That’s why we designed the bill to ensure that they’re the ones we’re helping.
The changes to the Commercial Rent Tax mean that starting on July 1st, 2018, the tax threshold for businesses below 96th street paying more than $250,000 in annual rent will be raised to $500,000. For instance, if a small “Mom-and-Pop” store on 87th Street and Broadway paid $300,000 in annual rent, it would’ve been subject to a 4% tax under the old legislation. Now that the threshold has been raised, that same business would now be exempt—and save money. The tax, which was implemented in 1963 as a way to find new means of revenue, only affects businesses south of 96th street, as that was where a majority of Manhattan’s most lucrative small businesses were located when the tax law was written.
The new legislation was passed by the New York City Council and signed into law on November 30th, 2017. The Mayor’s office estimates as many as 2,700 small business will be spared from paying a costly 4% tax.
“I thought this was a good first step,” said Councilmember Keith Powers, of the 4th District, by phone from his East 43rd Street office. “Most people would agree taxing business below a certain street is illogical and that extra 4-percent in your rent every month makes a difference.” Powers is looking to expand the Mayor’s legislation, adding that he is drafting a bill with further reforms that would raise the threshold throughout Manhattan to $750,000 and spread the cost increase to the city on lost revenue over multiple years.
While reforms to the Commercial Rent Tax aim to curb increased vacancy rates by reducing taxes, some industry players believe larger market forces, rather than city policies, have caused the recent retail blight.
“I wouldn’t say the Commercial Rent Tax is causing the vacancies. It’s much more to do with retailers shifting their strategy,” said Victoria Oliva, managing director at Savills Studley, a company that manages commercial real estate tenants. “Retail trends have been moving a little bit toward digital and away from physical. Because the general state of retail has been downsizing, the retail flagship presence has been downsizing as well.”
“No one is to blame. The market decides this,” said Albert Bialek, a property owner and developer with more than 40 years of experience in Manhattan. “The community is affluent, very bright and intelligent. They want to buy the best and they want high-end banking services so the banks are moving right in.”
However, not everyone agrees that “No one is to blame.” While nobody doubts the Amazon.com effect when considering the changing economic landscape for retail and small business in the city, some real estate brokers, small business owners, and average New Yorkers place the blame at the feet of one stakeholder: Landlords. Particularly landlords who raise rents to levels that drive out small businesses, then wait, sometimes months, for the kind of corporate client who pay the higher fees.
“It’s unrealistic landlords,” said Jessica Viola, a broker at City Connections realty who has a vacant property on the Upper West Side.*
Janice Diaz, 40, manager at The Color Room hair salon on Broadway and 101st Street, also sees landlords as the problem. “Our rent gets raised every year within our lease and in turn we raise our prices, a dollar here, a dollar here,” she said. “Landlords want to be rich but we want to be rich as well.”
According to a May 2017 report by the CBRE brokerage firm, between 2010 and 2014 retail rents in Manhattan rose 90 percent, while retail sales only grew 32 percent. Even though CBRE estimates that today Manhattan rents have fallen 30 percent from their 2014 peak, aftereffects from these numbers are lingering on every avenue.
The mayor’s office is seeking to address this issue with additional legislation.
Speaking to WNYC on March 30th, mayor Bill de Blasio said: “I am very interested in fighting for a vacancy fee or a vacancy tax that would penalize landlords who leave their storefronts vacant for long periods of time in neighborhoods because they are looking for some top-dollar rent but they blight neighborhoods by doing it,” before adding “That is something we could get done through Albany.”
Because any type of vacancy tax is considered a new tax, it would need to be passed by legislators in Albany. In comparison, the Commercial Rent Tax change was a reform to an existing tax that fell under “tax relief” guidelines, thus Albany’s approval was not needed.
Not surprisingly, the idea of a tax that penalizes property owners has received fierce blowback from a variety of stakeholders.
“Property owners take a substantial financial hit when they are unable to secure a tenant,” said John H. Banks, REBNY President, in an emailed statement. “A vacancy tax, premised on a flawed set of assumptions, will punish owners further and do nothing to address vacancy.”
Others are looking for more clarification on how the tax would judge the term “vacancy”.
“What’s the standard?” asked Steve Beak, 47, owner of 107 Kim’s Cleaners. “Do they go by a square footage or do they go by unit? A corner unit’s better than two spaces and landlords will probably spread out the loss to tenants.”
Even Councilmember Powers, who supported the Commercial Rent Tax, concedes that, “We need Albany’s approval for a Vacancy Tax,” before adding, “I think Albany would be skeptical.”
When asked to comment on the concerns raised by some about the proposed Vacancy Tax, Freddi Goldstein, deputy press secretary for the Mayor’s office, said in an email: “This is very much still a policy idea we’re working through and don’t have many details to share yet. One of the major challenges we’re still working through is how to thread the needle and do something that will actually result in people leasing storefronts they otherwise may not. If we don’t do that successfully, it’s just a tax without purpose.”
Some New Yorkers, though, support the Mayor’s newest idea to curb the retail rent blight.
“I’m all for that, for both taxes,” said Matt Redler, 69, a resident of Hamilton Heights. “Landlords are warehousing these stores and they should be fined. It’s anti-capitalism but so what? They should penalize them.”
*This story has been amended to more accurately quote this specific broker.