Raising Business Rents is Sometimes a Very Bad Idea
A few years ago in my article When Not Renting Is Sheer Lunacy I noted that some landlords in my hometown were stupid enough to raise their rents so high that they lost their tenants and ended up with empty stores for years; some of them for ten years or more.
Now I see the same thing happening in the Chelsea area in New York City:
DNAinfo.com New York, 4 Feb 2014, Vacant Storefronts Line Eighth Ave. as High Rents Force Out Businesses
Owner Michael Turowski behind the counter on Paradise Cafe's last day.
CHELSEA — For 20 years, Eighth Avenue was Michael Turowsky's home. He ran the Paradise Cafe where he served snacks, coffee and conversation under a bright rainbow flag.That ended in July when rent for the cafe space at 139 Eighth Ave. abruptly doubled and he was forced to close up shop. Turowksy has barely been back to the neighborhood since.
...
More than a dozen businesses on that stretch shut down during 2013 and early 2014. Many storefronts remain vacant as landlords hope to draw in tenants that can pay huge monthly rents.
...
Last March, beloved leather bar Rawhide at 212 Eighth Ave. closed after rent rose from $15,000 to $27,000 a month. Close to a year later, it remains vacant.
Camouflage, a clothing store that opened in 1976, followed in Rawhide's footsteps when it had to shut down last month after its rent jumped from $7,000 to $24,000, the business owner said.
The problem of course is that these landlords do not do the math. Take the case of the landlord above who raised the rent on Rawhide from $15,000 to $27,000 a month. He loses $180,000 every year the place remains vacant, so it will take longer than that at $27,000 a month with a new tenant before he profits even a penny from his rent increase.
It gets worse every year that his place remains empty. Here is a chart of how long it takes at the new rent to make a penny profit from his rent increase:
| months vacant | months at new rent | years to wait to break even |
|---|---|---|
| 12 | 15 | 2 yrs 3 months |
| 24 | 30 | 4 yrs 6 months |
| 36 | 45 | 6 yrs 9 months |
| 48 | 60 | 9 yrs |
Raising rents is always a gamble. As I mentioned at the top of this article, I know of cases where stores have remained vacant for more than a decade. In the Rawhide case, it's been empty almost a year, if it stays vacant another 3 years, that is, until 2017, the landlord won't be better off with the rent increase until the year 2022. The longer a store stays vacant, the more likely it will never, ever rent at the higher rate. I've seen it happen. A lot.
The sad part of the Chelsea case is that the places that are being forced to close are businesses that are not affected by the Internet and have long term viability. Landlords may be trading great destination places for transient tenants who cannot compete with online businesses. And commercial first floors that are long-vacant may affect the landlord's apartment rentals above. Apartment renters don't want to live in a dying neighborhood. The landlords are taking a big gamble that they may kill the neighborhood.
Rather on taking a chance at losing a tenant, I would prefer to take $15,000 and put it on 22 Black on a Roulette Wheel in Las Vegas. That way I don't risk losing $15,000 every month for years and if I'm lucky I make more than a half million dollars in less than one minute rather than waiting for years and years for the increased rent to equal that amount, if ever. The Roulette Wheel is a better bet. I don't like to gamble.
