Council Bill on Commercial Leases in Limbo as Evidence of Vacancy Problem Grows

In the wake of the June passage of sweeping rent-regulation reforms in Albany, some local elected officials and small-business advocates are hoping to bring the same style of bold reform to the commercial market, as concerns about vacant storefronts persist.

The decades-old legislation, called the Small Business Jobs Survival Act (SBJSA), would provide commercial tenants with a 10-year lease renewal and give the option of arbitration when tenants and landlords cannot agree on the terms of a new lease.

There’s been no action on the SBJSA  since last October, when the Council held a public hearing (coverage here ). In an August radio interview with WNYC, City Council Speaker Corey Johnson said the October public hearing had raised questions, such as whether or not big-box stores would end up benefiting more from the bill than smaller businesses, that were still unanswered. A spokesperson for Manhattan Borough President Gale Brewer, who last October said the SBJSA  legislation had to be narrowed to avoid motivating landlords to sign leases with bigger chains to avoid dealing with small businesses, tells City Limits she still shares the same concern.

Two other bills to support small businesses passed this year in the Council. The first bill, known as the Storefront Tracker and sponsored by Councilmember Helen Rosenthal,  will require landlords to register the status of their commercial properties so the city can have data on storefront vacancies in order to help small businesses. The second bill , sponsored by Councilmember Vanessa Gibson, will expand the definition of commercial tenant harassment to increase civil penalties for harassing landlords and will allow a court to reject approvals for renewal of construction work by property owners.

Calling those bills important steps to support small businesses, Johnson’s spokesperson tells City Limits and the City Council is working towards solutions for some of the issues presented during the SBJSA hearing.

SBJSA’s main sponsor, Councilmember Ydanis Rodriguez, hopes the bill will see a vote this year.

Small business advocacy groups such as Take Back NYC are not as hopeful as Rodriguez and express disappointment with the City Council.

“Everybody, including the speaker, admits there is a crisis. Vacant storefronts today are everywhere. In Coney Island there is a 15 percent vacancy rate and on my street in Manhattan there is a 20 percent rate. So this is going on all over,” says Kirsten Theodos, co-founder of Take Back NYC. “We are saying make the changes and do what you need to do to pass the bill. Because not doing anything isn’t really an option because the crisis is just getting worse.”

Multiple causes for shuttered storefronts

A recent report   on the store vacancy problem by the office of City Comptroller Scott Stringer attributed the problem to a combination of factors: rising rents, the growth of online retail services and regulatory hurdles to turnover a space from one use to another, such as from a shop to a restaurant.

The report takes a look at a 10-year period during which the citywide retail vacancy rate rose from 4.0 percent in 2007 to 5.8 percent in 2017.  In the boroughs, Staten Island saw the most dramatic increase in commercial vacancy from an average of 4.3 percent in 2007 to nearly 11 percent in 2017. Queens had a rate of 4.0 percent in 2007 to an increase of 6.4 percent 2017 and the Bronx saw a rate of 4.9 percent in 2007 that increased to 6.3 percent in 2017.

But the report found some boroughs have actually seen a recent tightening of the retail space market. The vacancy rate in Brooklyn rose from 4.3 percent in 2007 to 5.8 percent in 2012, before falling  to 5.1 percent in 2017. There was a similar scenario in the Bronx: The vacancy rate peaked at 7.4 percent in 2010 and has since fallen. In both cases, the report says, population growth and gentrification may have helped to improve the retail outlook.

The comptroller’s report said the cause of the rise in retail vacancy rates cannot be pinned on one element. The rise in rents for commercial space by an estimated 22 percent between 2007 and 2017 is a crucial factor.  On average retail rents increased from $42 per square foot to $51 per square foot. In Manhattan, the Soho and the Upper East Side neighborhoods saw the most dramatic increases: an estimated 87 percent leap per square foot, from $60 to $126 and from $79 to $146, respectively.

The report says there is evidence that some neighborhoods have seen a slow decline in commercial rent costs in new leases in prime retail corridors, but not enough to offset earlier increases.

Another of the causes the report highlights is the market shift to online retail. Another is a shift in the use of commercial space from selling dry goods to selling services such as bars, restaurants, dry cleaners and salons.

While there was an increase of retail establishments of 19 percent between 2006 and 2017, spaces for personal services increased by almost 50 percent while the number of bars and restaurants rose by 65 percent. The report says a similar pattern was evident in employment: “Retail employment in New York City grew by 22 percent, while employment in bars and restaurants grew by 45 percent, and personal services employment grew by nearly 75 percent.”

Rent is not the only burden that might be increasing for retail operators. Generally, most commercial leases include clauses that  obligate the business to pay some or all of the property taxes on the property. The comptroller’s report said property tax payments by retail tenants doubled over the last decade. In 2007, retail tenants paid $1.1 billion in property taxes equal to an estimated 20 percent of total retail rents paid. In 2017, the total property tax payments by retail tenants rose to nearly $2.3 billion, equal to an estimated 23 percent of total retail rents paid.

The increase in retail vacancy could also be driven by what the report called “excessive regulation.” The report examined regulatory indicators such as the time it takes the State Liquor Authority to approve liquor license applications, and delays in the approval  of building alteration permits by the city’s Department of Buildings.

A crucial step in the approval process for obtaining a liquor license is a minimum 30-day period following the announcement of the recommendations from the local community board; input from the community board carries weight with the State Liquor Authority when it makes a decision on whether to approve a liquor license. The report found that the average weight time dramatically increased from 49 days in 2017 to 72 days in 2018, especially in the Manhattan neighborhoods of Greenwich Village, the West Village and Soho.

Meanwhile, the rate of DOB alteration permits unapproved after 30 days has decreased in Manhattan but  the outer boroughs have seen increases as high as 15 percent.

The report comes out after the Department of City Planning released its own findings in August of why vacant storefronts persist. DCP came to some of the same conclusions after examining 24 commercial neighborhoods across the five boroughs. It found an increase in the vacancy rate from 7.6 percent to 9 percent between 2008-09 and 2017-18. The DCP report said the uptick was due to multiple factors, including a rapid market shift in the economy prodded by  technology and changing consumer preferences.

Policy recommendations intersect

The comptroller’s report said the city could try offering tax credits for independent businesses in retail corridors with higher vacancy rates, creating a multi-agency task force to assist new businesses by coordinating and expediting regulatory actions, and moving too “incorporate retail demand into neighborhood planning” especially during the approval and planning process of any major development proposal or rezonings.

Rodriguez says the comptroller’s recommendations are important but can only work when there is a legal lease between a small business and a property owner. Rodriguez says the SBJSA allows for small businesses to negotiate a fair lease with landlords, “These landlords extort these small mom and pop shops asking for more cash for a new lease. The SBJSA requires arbitration which helps resolve with the lease,” he says.

Theodos says  groups like Take Back NYC are afraid “a completely different watered down version” of SBJSA is what will pass.

According to the city’s Department of Small Business Services, there are existing programs that address many of the recommendations that the Comptroller’s office made in the report. According to SBS, its Small Business Advocates program is a point of contact and resource for small businesses that “help New Yorkers navigate government to start, operate, and grow their businesses.” Other programs such as Commercial District Needs Assessments helps with neighborhood planning and commercial corridors and the city has dozens of programs that expand from tax abatement to relocation and employment assistance programs.

Other recommendations in the report come out of the Comptroller’s 2016 Red Tape Commission report, which laid out 60 steps to advance the city’s small business environment such as splitting the Department of Buildings into two agencies, separating its inspection and remediation, requiring the immediate removal of unused sidewalk scaffolding and taking a “proactive, educational approach to helping small business owners comply with city regulations.” Another recommendation was to expand and improve the Department of Transportation’s PARK Smart program in retail corridors — a program created to free up parking spaces, increase public safety, reduce double parking, pollution and congestion.