Retail Real Estate Bubble Turns Manhattan Into A "Shopping Wasteland"

The Fed loves to repeat how necessary and vital inflation is for economic prosperity, but in the case of midtown Manhattan's "prime" retail real estate, it is doing nothing but helping cause once extremely prominent shopping areas become the very same "ghost towns" they turned into during the 2008 housing crisis.

Mayor DeBlasio's asinine solution to this issue created in part by faulty government policy: more government and more regulation.

So much for the recovery.

As if brick and mortar retail didn’t have enough problems to deal with being methodically decimated by the ever growing behemoth that is Amazon, store owners are now facing rent that is simply so high it makes it impossible for most to open retail stores and do business in once prominent areas of downtown Manhattan.

On Saturday, the New York Post wrote an article confirming our writeup from late March suggesting that high prices are driving businesses out of town:

If you want to see the future of storefront retailing, walk nine blocks along Broadway from 57th to 48th Street and count the stores.

The total number comes to precisely one — a tiny shop to buy drones.

That’s right: On a nine-block stretch of what’s arguably the world’s most famous avenue, steps south of the bustling Time Warner Center and the planned new Nordstrom department store, lies a shopping wasteland.

It shouldn’t come as a surprise to anybody that Amazon and other online retailers have had a profoundly negative effect on traditional brick-and-mortar retailers. One look at the recent Chapter 11 retail bankruptcy filings and it becomes obvious why one year ago the CEO of Urban Outfitters said that "the retail bubble has now burst"

This is the narrative that has been playing out for the last couple of years as we have watched retail stocks like Sears, JCPenney and Macy’s get destroyed while online shopping names have performed extraordinarily well.

But what may come as a surprise to some is the fact that the constant need to keep prices of real estate and rent rising, regardless of traditional supply and demand, is exacerbating things to a degree where some of the most sought after real estate in the world has now become deserted and barren. The article continued:

The same crisis blights the rest of Manhattan. The people invested in storefront retailing — real-estate developers, landlords and retail companies themselves — tell us not to worry. It’s a “transitional” situation that will right itself over time. Authoritative-sounding surveys by real-estate and retail companies claim that Manhattan’s overall vacancy is only just 10 percent.

But they are all wrong. Bricks-and-mortar retail is shrinking so swiftly and on such a wide scale, it’s going to require big changes in how we plan our new buildings and our cities — although nobody wants to admit it.

...

And yet, it’s scary to think that one of the city’s great pleasures, window-shopping — which also ensures vibrant, crime-deterring sidewalk life — will become a thing of the past except at certain locations.

At this rate, we face a future where streets will be mostly dark at sidewalk level for miles on end. Third Avenue in the East 60s, Broadway north of Lincoln Center, many blocks in the supposedly thriving Meatpacking District are halfway there already.

What is "progressive" Mayor DeBlasio's solution to the problem of rising rents as a result of government policy? More regulation and more government, of course! He wants to actually fine landlords who keep spaces empty until they fine tenants. Talk about the blind leading the blind:

Few retailers can afford to pay more than $250 per square foot annually in rent — yet landlords persist in asking $400 a square foot and up to $2,000 a square foot in prime zones like Fifth Avenue and Times Square.

Mayor de Blasio wants to fine landlords who keep spaces empty until they find tenants who’ll pay astronomical rents. But there’s no fair way to judge who’s actually guilty. Would he punish the owners of the small corner building at 1330 Third Ave. at East 76th Street, who slashed the “ask” from $420,000 a year in 2016 to $360,000 in April 2017 and still can’t find a tenant?

In other words a socialist mayor wants to fine capitalist merchants as punishment for policies enacted by the Federal Reserve (whose direct debt and deficit monetization also has extensive socialist underpinnings).

To be sure, none of this comes as a surprise to us - or our regular readers - because in late March owe recalled our own 2009 tour of Madison Avenue to discover that it also had turned into a ghost town. Just a week ago we told our readers that the ghost town that was New York's "Golden Mile" was not surprising: after all the US economy had just been hit with the worst recession since the Great Depression, and only an emergency liquidity injection of trillions of dollars prevented a global financial collapse.

What is more surprising is why nearly 9 years later, at a time of what is supposed to be a coordinated global recovery, a walk along Madison Avenue reveals the exact same picture.

And aside from us and the New York Post, Starbucks CEO Howard Schultz also noticed the disturbing trend, stating at the company's Annual General Meeting:

Now, as a result of what we're witnessing, we're also seeing something else and that is, there is a proliferation around the country right now of empty storefronts. We took a walk in New York two weeks ago from 59th street to 79th on Madison Avenue, and we lost count of how many empty storefronts there were in ManhattanIt reminded me of the cataclysmic financial crisis in 2008. But what's happening is very simple, the rent structures for the last 5 to 10 years, have been rising at historic rates and retailers do not have the amount of  customers they had during these last 5 to 10 years and could no longer economically survive.

So they're closing stores and as a result of this, I can promise you just like I predicted in 2014 that rents are coming down and landlords are going to have to get religion, or else their stores are going to stay empty. And we're already beginning to see a different level of reception in terms of what we believe the cost of occupancy should be. And this is going to bode extremely well, specifically for us. We're adding almost 700 new Starbucks stores a year. And so we are going to take full advantage of the economic reality of this situation. And as we go forward two, three, four, five years out even though labor is going up in terms of cost of labor, we believe rents are going down and the economic model of Starbucks is going to be enhanced as a result of this macro situation. And we're just at the beginning of this trend.

So the hilarious irony of Keynesian theory once again rears its ugly head as New York’s current retail apocalypse and prime real estate exodus has, in effect, caused some of the most traversed city streets to look like they did during the financial crisis of 2008 once again.

Needless to say, this is the direct result of force-engineering a "recovery", instead of letting the free-market recover on its own: you get a "recovery" that is anything but, and only works as long as the source of endless funding - the Fed - keeps pumping. Meanwhile, the Fed and its fawning media supporters have always been able to duck behind the outperforming stock market as a false indicator of the health of the economy as a "scorecard" for the recovery. But with the market now topping out and reaching levels of significant volatility, and the March jobs number handily missing expectations, how can the Fed justify that their policy continues to make sense when it is putting a good portion of Manhattan into the very same shackles and chains it was in during the crisis we are "recovering" from 10 years ago?

Comments

bshirley1968 Chuck Walla Sun, 04/08/2018 - 00:13 Permalink

"The Fed loves to repeat how necessary and vital inflation is for economic prosperity......."

The problem is necessary "inflation" required to float this bloated pig of a debt ridden hell hole economy, is way more than the zombie debt ridden hell hole economy can muster.

The zombie is stumbling right now. A few more steps and a little more weight and it will fall over.

But hey, like Trump said, a little pain will just make us stronger. If that's the case, we are about to be synonymous with Hercules.

In reply to by Chuck Walla

GreatUncle bshirley1968 Sun, 04/08/2018 - 06:36 Permalink

Inflation is only necessary to support the government debt it is in fact detrimental to the economic prosperity of the population who have been turned into economic slaves through government taxation.

You taxes pay for what services?

Ask the question what good is that service for you?

You will be lucky to find any justification for the taxes you pay.

 

In reply to by bshirley1968

techpriest Stackers Sat, 04/07/2018 - 22:55 Permalink

not a single store that sells any kind of real merchandise.

Of course not. Real merchandise can be delivered. It can also be had over Craigslist (moving sales) swap meets, and so on.

Currently it is too expensive to have someone come to a person's home to do haircuts, nails, etc., so it is still economically sensible to have a single store everyone can come to. In contrast, by getting the goods I'm looking for from an "anonymous" source, or from places where I will see like-minded people (swap meets, moving sales by people with similar hobbies, etc.), I get both the stuff I want and a better buying experience on top of it.

IMO, if there's anything to change here, it would be to make it easier for people to meet and work on stuff together. For example, I love the Makerspace model.

In reply to by Stackers

Endgame Napoleon SethPoor Sat, 04/07/2018 - 20:55 Permalink

The more time passes since 2008, the more things stay in the same dark hole or are magnified in all the wrong ways. It is sad that New York’s luxury retail, a symbol of national prosperity, is this shaky. 

DeLousio is a bad major, the kind of public official who goes to Europe to attend a left-wing steeet protest, like a college kid, after a police murder.

DeLousio just does whatever springs into his head. Rent is too d****d high, so issue a decree, like some king, telling owners they cannot charge more. Unless he knew the individual circumstances of all of the owners, he would not know whether that was possible for them. 

The rent does, however, sound incredibly high. WHO could pay that much rent while still making a profit? Store owners also must pay staff, and with rent absorbing so much of what the merchants make, I hate to even think about the wages in a city with equally high apartment rent. 

In reply to by SethPoor

ldd Endgame Napoleon Sat, 04/07/2018 - 22:54 Permalink

ny is just going through a cycle and reverting back from the highs of yesterday. remember when (maybe before your time) it used to be dangerous and you could pick up buildings for a song compared to what they go for now.

some of my former clients own many buildings there. we are talking one family owning many buildings. look at all the buildings and then imagine all the buildings in the cities around the world. most people do not understand the immense wealth in the hands of some families. if you met some of these people you would not suspect they owned any buildings.

In reply to by Endgame Napoleon

GreatUncle Endgame Napoleon Sun, 04/08/2018 - 06:41 Permalink

If the landlord realises you are making a profit ... up will go the rent to extract it.

So they give you a lost leader on rent into setting up a shop only to find the costs are elevated.

To really set up a viable business you have to own the property or fuck it off as a waste of time.

This is the end scenario those in Europe actually fled to the Americas to escape.

The king owns you and he demands his taxes!

In reply to by Endgame Napoleon

hairball48 SethPoor Sat, 04/07/2018 - 21:55 Permalink

" What is "progressive" Mayor DeBlasio's solution to the problem of rising rents as a result of government policy? More regulation and more government, of course! He wants to actually fine landlords who keep spaces empty until they fine tenants. Talk about the blind leading the blind:"

 

Ah yes, the 9 month 3 week sage of ZH :)

Well you obviously didn't look hard enough sport. Check the paragraph I quoted above from the article.

In reply to by SethPoor

junction hairball48 Sat, 04/07/2018 - 22:45 Permalink

DiBlasio is anything but a liberal.  Silence from him about that Brooklyn shooting where 3 plainclothes cops hop out of an unmarked police car and immediately gun down an emotionally disturbed person holding a scrap metal pipe.  Those cops probably rushed to the Crown Heights scene after having a few drinks at a bar nearby.  Anti-crime cops are allowed to drink booze in bars, by the way, undercover, you know.     

In reply to by hairball48

techpriest junction Sat, 04/07/2018 - 23:18 Permalink

This is where the two party narrative breaks down. The "right" has descended into embarrassing cop worship, and the "left" has descended into a total freak show. Of course, there have been many books explaining how we got to this point, but the way back is going to involve a few generations having to intentionally make the right choices while fighting both sides of the Kleptocratic Party until it finally dissolves into the dustbin of history.

In reply to by junction

pcrs techpriest Sun, 04/08/2018 - 01:08 Permalink

It rarely happened that a empire in decay reverted and it's citizens and rulers reverted to sanity. Instead they rather burn their chaos down like Nero. Or Napoleon or Hitler, Mao or Stalin. A reversion to sanity is about as likely as an apple unrotting.

The 2nd law of thermodynamics prevents it. Empires collapse, always and everywhere. The population dumbed down enough to follow any charlatan who demands more power to solve the issues created by the power his predecessors got.

More power in the hands of fewer people. The left wants the 1% to control the guns, to redistribute the wealth. Both wealth and guns will be held by the 1%. Regulations will be gigantic, chaos enormous, just like it always went. As the Byzantine empire shrunk, they called them Byzantine regulations. 

In reply to by techpriest

Let it Go SethPoor Sun, 04/08/2018 - 13:06 Permalink

The article is just pointing out the area is looking like much of middle America.

This reflects the real economy that exists somewhere far from Wall Street and can be seen in parts of America where most of us live. After eight long years of near or zero interest rates, massive government deficits, and watching tons of money and stimulus being poured into the economy we remain mired in slow growth.

In the end, our future has a way of being tied to reality and certain economic laws as well as laws of nature that hope and delusion cannot defy. While these bonds can be ignored for a time the force they have over us at some point will suddenly pull us crashing to the ground. More details in the article below.

http://The Real Economy Beyond Our Financial Institutions.html

In reply to by SethPoor

fleur de lis hedgeless_horseman Sat, 04/07/2018 - 21:42 Permalink

The landlords charge huge rents because they know they can take the vacant property rents off their taxes.

With the extra money they buy property elsewhere.

The whole thing is a scam.

The landlords know very well that the merchants cannot pay, but that is not what they really want anyway.

They want the taxpayers to foot the bill which is exactly what happens.

If the landlords charge rents that the neighborhood cannot support they should negotiate a fair rent, sell the property, or eat the losses.

Or they can pay the rent out of their own ill gotten gains.

But under no circumstances should taxpayers be stuck with the tab for a sleazy landlord scam.

That loophole needs to be closed.

 

 

In reply to by hedgeless_horseman

fleur de lis techpriest Sat, 04/07/2018 - 23:57 Permalink

A tax accountant would be the best one to ask.

I was told this by someone when I was asking about seemingly successful shops which suddenly closed, because it made no sense.

It was the first time I heard about the landlord/rent/ tax deal.

Since then I noticed shops one after the other shuttered in places where they could thrive.

How much of a hike did the merchants get that they closed up and suddenly left?

Who knows?

They're gone so how can anyone ask them?

And how is it that the landlords can go for such long stretches without rent?

If the landlords can cover the cost of the vacant property until they can find a merchant willing to pay his stated rent, fair enough.

But does that make any sense?

Something is rotten.

 

In reply to by techpriest

fleur de lis pcrs Sun, 04/08/2018 - 02:17 Permalink

Don't know anything about that, just that I asked about the vacancies and that was what I was told.

Why would so many renters have to leave?

And why would the landlord want to leave the space open if a fair rent for a given neighborhood would bring rent? 

Something is amiss.

The massive vacancies make no sense. 

In reply to by pcrs

fleur de lis ElTerco Sun, 04/08/2018 - 12:59 Permalink

If an empty storefront is used for laundering money or covering for anything illegal, it should be seized and sold.

Just the same as .gov would do to a struggling citizen unable to continue car or house payments.

But then there is always the possibility that the .gov screwballs are in on it anyway so nothing will get done and the storefront can continue lawlessness without any fear of the law.

 

In reply to by ElTerco

Plus Size Model techpriest Sun, 04/08/2018 - 10:29 Permalink

Hey, ex real estate broker here. Real estate accounting is absolutely horrid and I'm constantly amazed that so few understand it. In my shithole, landlords receive tax breaks for manufactured hardships on top of the BS I explain below.

https://chicago.curbed.com/2016/10/6/13188872/storefront-retail-vacancy…

Even funnier, the guy that sponsored the legislation in the link above is a partner in one of the largest ad valorem tax mitigation firms in Chicago. Yup, you guessed it.

If you really want to go deep down the rabbit hole, look into U.S. Codes 1245, 1250, 1031 and 1033. It's complicated and obfuscated, but what these these codes do is grant license to book building depreciation as a return on capital. Everyone knows that buildings don't fall apart and turn into a worthless pile of dust in a few decades, but the IRS seems to think they do. To sum it up, rich people pay no tax and you get the bill.

This link is just one simple explanation of how the whole process works.

https://www.american-apartment-owners-association.org/property-manageme…

In reply to by techpriest

Plus Size Model fleur de lis Sun, 04/08/2018 - 14:56 Permalink

It's just the latest fashionable rent seeking scam. If you saw some of the property management books that I have seen, you would fall out of your chair.

It's real simple to understand. The rentiers don't want to write down debt and shutting the doors + collecting the tax break is easier than dealing with some schmuck that can't make rent and / or building inspectors. I've seen owners get tax breaks for vacancies that were larger than the sum of rents collected when they had tenants. As an added bonus, sometimes banks will appraise the properties even higher after tenants are gone and issue more loans so the same rentiers can do the same thing with the proceeds from the new loans.

Pro-rentier economics are a tough pill to swallow. Instead of a charge against production and consumption, today's National Income and Product Accounts depict rent-extracting activities as producing a "product."

In reply to by fleur de lis

fleur de lis Plus Size Model Sun, 04/08/2018 - 15:14 Permalink

Like every other scam, the RE and .gov racketeers never know when to stop.

They fattened up the golden goose and now they will kill it.

Just as well.

That is one golden goose we can all live without.

It was ill-gotten gold for them and crushing poverty for the ordinary people they abused and swindled.

If the IRS really needed the money they could have long since gone after the management books you mentioned.

It would have paid off a sizable chunks of state debts.

But they are probably all in-laws anyway.

The Internal Rip off Service would rather go after exhausted workers who do not have the money to fight them back.

And where are all the fancy .gov LE types?

Has none of this ever reached the ears of the FBI?

Oh, that's right -- they are too busy looking for Ruskies and hookers.

But a few years ago when someone was selling loosies on the sidewalk it bothered .gov enough to order the police to arrest the seller. 

And that was only cigarettes, but they saw fit to pounce. 

What about all the state attorneys?

Have they never, ever heard rumors of such widespread vacancy fraud right under their noses?

Nope -- they are also looking for Ruskies.

Never dawned on them while they were picking up coffee on the way in to work that the stretches of vacant businesses seemed strange.

This scam seems to be widely known but for some reason it is untouchable.

That means very powerful people have an interest in keeping the scam going.

Who owns whom.

 

In reply to by Plus Size Model

Plus Size Model fleur de lis Sun, 04/08/2018 - 15:37 Permalink

Exactly, it's pretty bad here and the foxes are guarding the hen house. Like I said, that guy in the video and in the link I posted is a principal at Finkel, Martwick & Colson PC, a law firm that specializes in tax appeals. The Cook County Assessor is also his client at a consulting firm his family runs. His whole family is deep in the Democratic Party of Cook County.

You really think he's going to shoot himself in the foot?

https://en.wikipedia.org/wiki/Robert_F._Martwick_Jr.

UPDATE: The Martwick link won't click through but the page is the same if you find it manually. Amazing!

In reply to by fleur de lis

fleur de lis Oldwood Sun, 04/08/2018 - 00:17 Permalink

Agreed.

If the .gov dweebs set up a system that is favorable to the landlord, why would they not avail themselves of it?

This should be verified as it was told to me by someone leaving a business some time ago.

Maybe it started out as a short safety net but kept expanding.

Whatever. 

The fact is that streets of shuttered retail properties makes no sense.

It also adds to community decay.

If the landlord cannot get the rent he wants he should negotiate, sell, or carry the cost himself until such time as he finds a renter.

 

In reply to by Oldwood