For centuries, NYC commercial real estate was never the main conversation starter. New York City symbolized opportunity, the start of a better life, and a chance to achieve dreams. Anything was possible through hard work and determination.
When many immigrants arrived in America for the first time, the first sight of the Statue of Liberty symbolized that opportunity and the start of a new beginning.
However, in recent years, many small businesses integral to the city’s fabric would tell you things have changed.
2023’s NYC commercial real estate climate is rife with controversy and ethical debates. Landlords have had to pivot their strategies with evolving real estate trends. Plus, since 2010, rents have consistently risen- with the exception of 2020. Consequently, many small local businesses, some around for over a century, have gotten priced out.
Most recently, the oldest cheese shop in the U.S., Alleva Dairy, received an eviction notice after filing for bankruptcy and falling two years behind on rent payments. A months-long legal battle with the building’s landlord over $500,000 in back rent ensued. It was clear-cut. The 130-year-old Little Italy landmark could no longer honor the lease terms and afford the rent. Thus, the landlord terminated the company’s 10-year lease.
Alleva isn’t the only small business squeezed out of its longtime home. Over 50% of small businesses fail in their first year, according to Oberlo, and 66% face financial challenges, according to SEMRush.
Hence, New York City is in the midst of a heated debate. What are the ethical implications of the NYC commercial real estate industry, and how does it affect residents, communities, and beloved local businesses?
What is behind the controversy? Who is right, and who is wrong?
It becomes more complex when you remove raw emotion and look at the facts and figures.
The Two Perspectives and Role of Government
Residents are often angry about the impact of commercial real estate costs on their community businesses and services. As their neighborhoods’ identity change, they miss their coffee shops, local diners, and cheese shops. Who wants the fabric of their beloved communities to change just in the name of profits? When a beloved 130-year-old cheese shop can longer make rent due to no fault of their own, something isn’t right.
However, what about the landlords? Don’t they still have a right to generate an income and do what’s best for their bottom line? Shouldn’t they have the right to do what they want with their own private property? If a tenant does not pay their rent, should there even be a controversy? Plus, if they signed a contract and can’t live up to it, aren’t they in breach of it, no matter the sentimentality?
Furthermore, what role do politics play? To what degree should local and state governments get involved, if at all? For example, despite how sentimental a business is to a community, wouldn’t it be wrong for the government to intervene and use our tax dollars to support a failing business and have building owners suffer the consequences? Plus, when the state becomes too involved in private property, doesn’t that infringe on property rights?
The Perspective of Residents
For several reasons, local NYC residents are frequently irate about small businesses and local icons getting evicted.
First, these small businesses and local staples are often an integral part of the community and provide a sense of familiarity, tradition, and character to the neighborhood. They are often family-owned and operated for generations, making them important community landmarks that residents often cherish. Losing these businesses can devastate the community and cause significant loss and disorientation.
Second, many residents feel that these evictions are part of a more significant trend of long-standing iconic businesses moving out because they can no longer afford it. NYC commercial real estate prices are some of the highest in the world and continue to rise. In an already high-tax environment, rent growth and inflation have made it unbearable for many small businesses to afford their leases, especially in gentrifying neighborhoods. Plus, with retail demand in decline and landlords forced to pivot their strategies, many long-time tenants are being forced out.
Technically, even if landlords have the legal right to evict any tenant they want in breach of contract, from an ethical and social responsibility standpoint, many argue that landlords should consider the impact of their actions on the community. Small businesses and local staples often play a vital role in the community’s social and economic fabric. Their eviction can cause significant harm to the community’s character, pride, and social cohesion.
The Perspective of Landlords
From a legal standpoint, landlords have the right to evict tenants who violate the terms of their lease agreements. In their eyes, they may see it as necessary to evict a tenant in breach of contract. If no rent comes in, how can a landlord generate income, and keep their investment viable? Plus, in present times, NYC commercial real estate landlords face unprecedented headwinds to meet debt obligations and mounting default risks. So their perspective matters.
If a tenant cannot pay rent, how can a landlord cover their mortgage, operating, maintenance, or even living expenses? Is it fair for a landlord to put their business at risk because their tenant can’t make rent?
Additionally, landlords may argue that they have a right to decide who occupies their property. Doesn’t a landlord have the right to terminate their tenancy and seek a new, more reliable tenant if the current tenant cannot fulfill their lease obligations? Even if they’ve been around for 130 years?
At the end of the day, if a landlord owns a commercial space, it’s still their private property. So shouldn’t they have the right to do what they want with it?
Government Intervention- How Much Is Too Much?
When governments try regulating the market and overseeing the business practices of commercial landlords, are they overstepping their boundaries?
Some argue that government intervention in the free market is ineffective and counterproductive. Is it not overbearing if local authorities dictate what landlords can and cannot do with their private property?
Others argue that the government must protect its citizens and promote equity. In other words, doesn’t the government have a moral obligation to secure its citizens’ well-being? Shouldn’t small local businesses have a fighting chance in this increasingly challenging environment?
Ultimately, policy and political philosophy dictate how state and local governments regulate the relationship between landlords and small local businesses. Certain states and municipalities may pass laws more in favor of landlord protections. Other states and municipalities focus more on tenant rights.
For instance, regarding landlords, New York State and City have more stringent regulations than states like Florida. Moreover, despite the high taxes and complex regulatory landscape, New York State and City typically will side with business tenants in disputes.
New York City’s Department of Small Business Services (SBS) is a good example of a government-run tenant resource. It provides free legal assistance for small businesses facing eviction as well as assistance with lease negotiations.
Besides long-standing rent stabilization policies and zoning laws, state and city governments also continue aggressively passing financial assistance programs for small businesses.
Last week (February 7, 2023), the New York State government introduced measures to boost small businesses.
Additionally, on January 23, 2023, New York City introduced the NYC Small Business Opportunity Fund as part of Eric Adams’s “Renew, Rebuild, Reinvent” strategy. However, the program paused after three weeks because the city couldn’t handle the influx of applications. That speaks volumes about how small businesses feel increasingly priced out.
The Key Takeaway: NYC Commercial Real Estate Has a Moral Dilemma
The ethical dilemma surrounding NYC commercial real estate is a thought-provoking and emotional issue that impacts local residents.
On the one hand, there is the perspective of residents emotionally invested in the character and identity of their community. But on the other hand, landlords have a job and must focus on what’s best for their financial bottom line.
Additionally, it’s important to remember that the government plays a role in this dilemma. How much involvement is too much?
Finding a balance between the interests of all parties involved is crucial. Of course, it is easy to take a side when looking at this issue. Yet, it is vital to consider the situation’s complexity and look at the facts and figures.
Ultimately, it is up to landlords, tenants, policymakers, and community members to find solutions for everyone. Solutions that preserve the character and culture of neighborhoods while also allowing for economic growth and development.
So, where do we go from here?