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Fed Up With Vacant Storefronts, Residents Force Cities To Punish Retail Landlords

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Coast to coast, bustling retail meccas used to embody a decidedly American pastime: shop till you drop. But empty storefronts across the U.S. have cropped up in places that go far beyond the “retail apocalypse” that has battered suburban malls — and some municipalities are fed up.

From retail corridors nestled in some of New York’s trendiest neighborhoods to wealthy bedroom communities just outside of Boston, vacancy signage is becoming more common than glitzy placards announcing a big sale.

Fed Up With Vacant Storefronts, Residents Force Cities To Punish Retail Landlords
Empty ground-floor retail space in downtown San Francisco

Local governments, wary of landlords who choose to keep their properties empty — sometimes for months and years in the hopes of landing a deep-pocketed tenant — are now responding by exacting financial penalties against these proprietors.

“There was uproar from residents over what these [landlords] were doing and how they were getting away with murder,” said Ali Carter, the economic development coordinator for Arlington, Massachusetts. “Residents just see a vacant storefront and wish it was a coffee shop or bookstore. They’re peeved.”

Arlington began its measure in early 2017. It requires landlords to register with the city and charges them $400 annually for each vacant storefront. When the fees were first levied, there were 17 empty storefronts in Arlington Center. Only six remained by the end of the year.

Larger cities, like New York and Boston, are mulling similar measures. Retail vacancies in Manhattan’s West Village neighborhood were up to 11.3% in June — and some parts of SoHo have even hit 20%. In Boston, vacancy rates on the city’s high street of shopping, Newbury Street, were around 10% at the end of 2017. A retail vacancy rate of 5% is generally accepted as the industry standard for a healthy market, according to brokers.

But landlords and developers suggest vacancy fees are not the best solution.

“It’s forcing capitulation, and it’s the government injecting itself into the marketplace to get a result they don’t understand,” Fisher Bros. partner Winston Fisher said.

Fisher, whose family-run company is one of the largest developers in New York, and others suggest more market-driven solutions, such as pop-up retailers or different leasing agreements, to fill those empty spaces may be better for the long-term support of retail in a community. But even as landlords explore such alternatives, several cities are moving forward with vacancy fees.

Taxation Until Reactivation

Fed Up With Vacant Storefronts, Residents Force Cities To Punish Retail Landlords
The Capitol Theater building in Arlington, Mass.

Other cities are hoping to replicate Arlington’s visible success. Carter has been called to testify on the city’s measure in municipalities across the country. She said, however, each region has to tailor its vacancy regulation to fit market conditions.

“Whatever sort of solution they come up with has to be tailored to their community,” she said. “For the 700 or so businesses in our town just outside of Boston, this is not Greenwich Village. It’s a totally different scenario.”

New York City Mayor Bill de Blasio has proposed a fee or tax to penalize landlords with vacant retail space. Other city leaders are advocating a vacancy tax on commercial strips.

In San Francisco, neighborhood commercial districts such as the Castro and the Mission District are seeing an increase in vacancy rates, according to a February report by the San Francisco Office of Economic and Workforce Development. Sales tax revenue slowed between 2015 and 2016 and the demand for ground-floor retail space has declined.

In response, Supervisors Aaron Peskin and Jane Kim are leading the fight for a vacancy tax.

Kim told hyperlocal news site Hoodline the Mayor’s Office of Economic Development and small business commission should do more to fill vacant spaces. She would consider a vacancy tax “to encourage landlords to rent out these spaces.”

Peskin and his staff told Bisnow he is working on a draft to include a vacancy tax on a future ballot.

Boston City Councilor Matt O’Malley is pursuing vacancy penalties in his city, inspired by Arlington. 

Cities see storefront vacancies as a missed opportunity to generate sales tax, which pays for city services, said Lee & Associates Pasadena Founding Principal Dan Bacani, who once served as an economic development consultant for the city of Arcadia, California. 

Arcadia, about a 17-mile drive northeast of downtown Los Angeles, is not proposing a vacancy tax but, like many cities across the nation, is grappling with how to deal with empty storefronts.

“Some cities have poor opinions of landlords because the space is vacant,” Bacani said. “But implementing a tax will only have a negative effect and further hurt relationships.”

A Changing Retail Game Needs A New Set Of Rules

Fed Up With Vacant Storefronts, Residents Force Cities To Punish Retail Landlords
The West Village in Manhattan is becoming known more for its vacant storefronts than its reputation as a shopping hub.

While critics chide landlords for holding out for high-paying tenants, building owners are typically tied to deals made with investors when retail was performing better than it is today.

“The larger idea to get the spaces populated with vibrant uses is a good idea,” CBRE Global President of Retail Anthony Buono said. “I’m not sure taxing is such a great way to incentivize them because they may not be able to perform.”

The U.S. retail sector suffered 3.8M SF of negative absorption in Q2, its worst quarter in nine years, according to Reis Inc. But the solution is not as simple as just backfilling space with eager tenants at a reduced rent.

“What we see in New York is the rents pretty much peaked in 2015 and 2016,” Buono said. “There were many people who acquired those properties at those peak rents. What has happened is tenants have left or wanted to get out of their spaces or haven’t renewed. It’s now 2018, and the market is decidedly different in terms of valuations.”

In San Francisco, the 3.2% retail vacancy rate at the close of 2017 was a slight improvement from Q3 but an increase from the 2.4% seen at the end of 2016, according to Cushman & Wakefield data. Though the vacancy rate seems low, most commercial real estate tracking firms only concentrate on the city’s big shopping districts like Union Square and downtown San Francisco, not other neighborhood commercial districts such as Mission Street, Ocean Avenue and Calle 24. Those neighborhoods are seeing a 10% to 14% vacancy rate, according to the the San Francisco Office of Economic and Workforce Development report.

City officials need to understand that retail is going through part of a normal cycle, Cushman & Wakefield Vice Chairman Kazuko Morgan said.  

“Everyone is always focusing on the negative, negative, negative,” said Morgan, who is based in LA and brokers deals in several of the most popular shopping districts from Rodeo Drive and Melrose Avenue in Los Angeles to Union Square in San Francisco. “A lot of the closures are the tenants who have been there 20, 30 or 40 years that have cycled out. So it’s a natural end of an era for a brand.”

Landlords Look Elsewhere For A Fix

Fed Up With Vacant Storefronts, Residents Force Cities To Punish Retail Landlords
Shops along Newbury Street in Boston

With so much brick-and-mortar contraction, landlords are looking to alternatives to generate foot traffic. Some say better zoning could be a real shot in the arm to land more long-term tenants in cities’ biggest shopping corridors.

“All landlords have different opinions as to why there are vacancies,” Boston-based C. Talanian Realty Co. Director of Business Development Chris Talanian said. “What we can agree on is the city needs to take a hard look at the zoning process. If you make it easier for businesses to open up in the Back Bay, there will be more businesses opening up in the Back Bay.”

The Talanian family owns and manages one of the largest real estate portfolios along the Boston retail mecca of Newbury Street. While still a popular destination, Newbury Street has lost some longtime tenants, and landlords have looked to maintain foot traffic by introducing more pop-up stores as well as activities like Open Newbury, sporadic weekends in the summer that close the road to car traffic and turn the corridor into a giant block party.

While he says retail generally trends upward, Talanian said City Hall could help Newbury by streamlining some of the zoning processes required to open a venue in the city’s Back Bay neighborhood. Special permits are required to open a store, even if there is already another retail outlet in a building. This can drive businesses away, and Talanian said overcoming the challenge won’t be easy.

“I’ve been talking about this until I’m blue in the face,” he said. “Nobody wants to take it on because it means taking on the neighborhood.”

Many landlords pursue quick fixes to vacant storefronts in the form of pop-up stores. Online retailers like Warby Parker have begun to expand into brick-and-mortar stores with long-term leases. Smaller brands looking to follow suit are doing so with less of a commitment in the form of pop-up stores with leases lasting months instead of years.

“When these digitally native brands become successful or get that mojo going, they really need to be in brick-and-mortar to have a viable brand,” Buono said. “Then, they end up in real estate, and real estate is expensive compared to Instagram and social media. There’s sticker shock with leases, capital improvements and everything else. For that reason, that’s why a lot of these brands turn to pop-ups that turn into longer-term stores.”

Changing Focus

Fed Up With Vacant Storefronts, Residents Force Cities To Punish Retail Landlords
Santa Monica's Third Street Promenade

Beyond online retailers launching pop-ups, traditional retailers also are changing focus. On Melrose Place, Nordstrom, which is known to occupy an average of 140K SF of retail space at malls, introduced Nordstrom Local, a 3K SF concept store. The store provides a more personalized and intimate shopping experience and a much smaller footprint.

Nike introduced its new Nike Live concept store down the block on Melrose Avenue. The store brings together digital elements for a personalized physical shopping experience for its consumers.

“People have so many choices now, you have to have a reason to get people inside the stores,” said Morgan, who was one of the brokers that represented the landlord in the Nike deal. “There are certain things you can’t buy online. You can’t buy an experience. You can’t go to Disneyland online.”

Other landlords find solutions in repositioning properties. Along Santa Monica’s Third Street Promenade, where more than 11 million visitors come each year, many of the retail storefronts that once lined the popular outdoor pedestrian mall have become creative offices or mixed-use properties.

Such repositioning can require new conversations about what is wanted out of a property.

Lee & Associates’ Bacani said cities need to partner with tenants. Recently, he was involved in a deal in which a local church was planning to occupy a vacant retail space in downtown Monrovia, California. City officials were hesitant at first because churches don’t generate sales tax.

Bacani said he suggested the church open a coffee shop and an independent bookstore. Those could generate sales tax while the church services could be held in the back of the property.  

Though the deal never materialized, Bacani said “the point is, we have to come up with creative concepts to fill these vacant storefronts that benefit the tenant and the city.”

While landlords grapple with the best path forward for solving the problem of empty storefronts, Talanian sees the current scenario as more a shifting period than the retail apocalypse touted in headlines. He has had positive feedback from tenants who ran pop-ups from his company’s buildings on Newbury Street and were interested in inking longer-term leases.

He has noticed more stores opening along the corridor in recent months that make him optimistic about the retail hub’s future and sees them as proof a vacancy fee isn’t needed to bring more tenants in.

“It’s always been cyclical upward, and it will continue. We’re just in a shift period,” he said. “It’s the natural cycle of retail, and a number of things can be at play. Is it tough zoning? Price point? It’s a lot of factors, and there’s not one silver bullet."

CORRECTION, AUG. 13, 1:52 P.M. PT: A previous version of this story misspelled the name of Cushman & Wakefield Vice Chairman Kazuko Morgan. The story has been updated.