'Hard To Justify': NYC's Commercial Rent Control Debate Is Back, Vexing CRE

A renewed discussion of commercial rent control has put the real estate industry on high alert, with opponents rushing to provide substitutes for a regulation they say would hurt both business and the city.

‘It’s not just ‘Oh rents are limited, boo hoo’ … This punishes new entrepreneurs," Real Estate Board of New York Senior Vice President of Planning Basha Gerhards said. “When you put these controls in, it reduces the values over time, and reduces the tax over time, and that is problematic.”

New York City Council Member Stephen Levin introduced legislation, which is known as Intro 1796, in 2019 that would create a system of commercial rent registration and regulation and would apply to retail stores of 10K SF and under, as well as manufacturing sites 25K SF and smaller and offices of 10K SF or less. The rules would need to be approved annually by a seven-member Commercial Rent Guidelines Board, appointed by the mayor.

More than 20 council members support the concept, which was the subject of a council hearing last week. Real estate players claim it would stymie small business growth, drive down property values and harm the city’s recovery. With rent caps in place, landlords would avoid smaller operators and opt for larger players with better credit, REBNY argues. Some say the city council doesn’t have the constitutional power to create such legislation, and it would immediately face a legal challenge.

“Seventy-five people testified against the commercial rent control, we hope that resonated,” Gerhards said.

REBNY is pushing instead for the elimination of commercial rent tax, which is a 3.9% tax on gross rent paid by commercial tenants below 96th Street in Manhattan that paid $250K or more in rent. It is also suggesting regulations for small businesses be removed to allow for easier and speedy permitting and licensing and lobbying city council to create a tax abatement policy that incentivizes landlords to keep legacy businesses and businesses owned by women, people of color, immigrants, artists and new entrepreneurs in their buildings.

Commercial rents have been plummeting in recent years, a trend that was accelerated during the coronavirus pandemic. Just 1.3M SF of retail space was leased in the second quarter of the year, down 60% from the same time period last year, when about 3.3M SF was leased as deals negotiated before the pandemic closed, per CBRE. Decreased activity drove asking rent prices down to $615 per SF, a 10.7% year-over-year drop.

But those decreases followed years of rents going up at breakneck speed; across the city, average retail rents jumped 22% between 2007 and 2017, per analysis from the New York City Comptroller.

And in some neighborhoods the increases were even more dramatic — SoHo's average rent more than doubled, from $60 per SF in 2007 to $126 in 2017. On the Upper East Side, average retail rents jumped 87%, from $79 per SF to $146, per the analysis. 

“It is not intervening in an existing lease, but what it does is take away the incentive for landlords to rent to multinational chains that have deep pockets,” Levin told The Real Deal about his proposal. “It takes away their incentive to hold space open to wait for a chain store.”

Neither Levin, nor Council Member Ben Kallos, a co-sponsor of the bill, were available for comment.

But Manhattan Chamber of Commerce President Jessica Walker said that this would hurt, rather than help, smaller businesses.

“If the bill is passed, it would disadvantage small businesses because landlords would have to jump through so many hoops in order to work with small businesses there would be a disincentive to do so,” Walker told Bisnow. “After the crisis, we are in a renter's market, and there are some great deals for small businesses. It’s really hard to justify this legislation right now.”

Small businesses have been disproportionately hit by the public health crisis. In April, LISC NYC, a community development nonprofit, ran a survey of minority-owned small businesses across the five boroughs and found three-quarters of those kinds of businesses fear they will be forced to close if they do not receive immediate financial relief.

With the city’s ban on commercial evictions now in place until January, being thrown out is not in the cards for many — although landlords can still seek judgments against tenants who haven't been paying rent, accruing sometimes enormous debt loads that will eventually come due.

But Walker said legislation that keeps rents from rapidly rising isn’t addressing the issue at hand.

“This misses the point that small businesses need right now — businesses need customers," she said. "Rent can be a huge issue, [but the focus should be] more around lease negotiations and trying to figure out how to work with landlords.”

Alexander Lycoyannis, a member with Rosenberg & Estis’ Litigation and Appeals Department, argues there is no provision in New York’s constitution to allow for the city’s legislative body to introduce rent control; it must be done at the state level.

“There would be an immediate legal challenge if this law were passed,” he said. “[Legislators] see this as an opportunity to exert political control over the current depressed commercial rent levels and keep them low and prevent the free market allowing them to rise.”

The body representing restaurant owners in the city, the NYC Hospitality Alliance, said some of its members support the policy, arguing enormous rent increases have crushed independent restaurants and nightlife venues. Rent regulation could “mitigate displacement” in gentrifying areas, the group’s executive director, Andrew Rigie, wrote in an email.

He added members have also said that landlords have significant leverage in lease negotiations and a “more level playing field” is necessary. Still, he said the group is working through differing perspectives before finalizing a position.

“We’ve also heard from members of our industry who oppose this policy who have made compelling arguments that such policy can cause landlords to invest less in the upkeep and upgrades of the properties where businesses are located, disincentivize investment and new development that has supported the growth and success of hospitality businesses, and may eliminate landlord tenant improvements that will make it more difficult for new chefs/restaurateurs and undercapitalized entrepreneurs to open new restaurants,” he said. “It could also stymie the decrease in retail rents and landlord contributions to be found in the Covid-19 market.”

No doubt, shifts as a result of free-market forces have created opportunities for some tenants. Some smaller retailers and e-commerce operators have seized on the chance to grab space at a lower cost than in previous years. Some retailers and restaurateurs have even bought their own retail properties as prices have come down.

"At the end of the day, the council is a legislative body, they have to make a decision,” Gerhards said. “Are they going to listen to the BIDs, the chambers, the thousands of people who emailed and said it is a horrible idea, or listen to a vocal minority?"