Hypergentrification and the Disappearance of Local Businesses

Wealthier people often move to gentrifying neighborhoods for the mom-and-pop stores, but their presence is driving the shops away. Can cities save them?
by | August 2015

Alan Ehrenhalt

Alan is a Governing senior editor.

Moviegoers remember its cameo in the 1998 movie You've Got Mail. But this real-life shop around the corner closed in 2008, making way for a cafe. (Flickr/12th Street David)

In New York City, and especially in Manhattan, 2015 may be remembered as the year the neighborhood store suffered a mass extinction.

Small retail businesses have been closing their doors in New York this year at a rate that longtime students of the city’s commercial life say has no precedent in their memory. At the beginning of the year, in a much publicized departure, Café Edison, a Times Square institution, gave up after 34 years at the same spot. Since then, every few days has seemed to bring news of another small business closing -- a shoe store, a diner or a hole-in-the-wall cheese shop. Multiply those closings by a few hundred, and you’ll have an idea of what is happening these days on the New York commercial front.

It seems curious, at first glance, that a majority of the retail extinctions seem to be taking place in fashionable or increasingly popular parts of the city, such as Tribeca and the East Village in Lower Manhattan, and Williamsburg and Park Slope in Brooklyn. It seems curious, but it’s merely ironic. The attractiveness of New York’s gentrified neighborhoods has lifted commercial rents to the point where many small-scale tenants -- even those operating at a profit -- can no longer afford to pay them. Prosperous residents who were drawn to these neighborhoods in part because of the quaint mom-and-pop stores are finding that their own presence helps drive the stores away. In recent months, says Manhattan Borough President Gale Brewer, “the mom-and-pop crisis has intensified with a fury.”

Tim Wu, a Columbia University law professor who ran for lieutenant governor in 2014, calls this situation “high-rent blight.” Others describe it as part of a much larger phenomenon: hypergentrification, defined as a mature stage in the gentrification process when merely affluent residents are displaced by the truly rich, and when commercial real estate properties reach a market value that makes it difficult for anyone but a national or global corporation to pay the asking price. In a relatively short time, the East Village has lost cafés, theaters, shoe stores, toy stores and gift shops. Tribeca, in a process that has been well-documented by its neighborhood newspaper, The Tribeca Tribune, has lost a bistro, a pizzeria and a coffee house, among other longstanding commercial institutions. “Many Tribeca residents complain that neighborhood-friendly stores seem to be vanishing before their eyes,” one local told the Tribune recently. An East Village blogger who goes by the pseudonym of Jeremiah Moss put it much more bluntly: “Small businesses,” he wrote, “aren’t just struggling -- they are being targeted for assassination.”

At an earlier stage of its gentrification history, Tribeca had more than its share of empty storefronts, a vestige of its previous status as an unattractive and somewhat dilapidated corner of Lower Manhattan. But it also had a significant assortment of small, independently owned retail establishments -- bookstores, coffee shops, hardware stores -- catering to the middle class that lived nearby. You can still find independent merchants on Tribeca’s streets in 2015, but they’re boutiques and other high-end specialty stores appealing to tourists and wealthy newcomers who have been settling in the community. Many of the workaday neighborhood stores have been replaced by bank branches and chain drugstore outlets.

The Real Estate Board of New York insists that the big retail die-off of 2015 is mostly a matter of insufficient sales. But the tenants tell a different, generally consistent story. As they describe it, the die-off nearly always follows a familiar process: The tenant’s lease comes to an end. At that point, the landlord has several attractive options. He can sell the building for a price substantially greater than the amount he paid for it. Or, more commonly, the landlord simply raises the cost of a new lease to an amount the tenant can’t possibly afford and refuses to negotiate.

New York newspapers have reported this year on a framing gallery in Tribeca whose rent was tripled in one quick move, with no negotiation possible. An Asian department store in Soho with 40 employees saw its rent quintuple when national brand-name stores began appearing in the buildings around it. It now sells its merchandise online only. Some of the city’s small-scale merchants look back fondly on the days when their most difficult burden was a payment of $500 a week or so to the local Mafia boss.

The immediate result of the present churning isn’t always a brand-new bank or drugstore. Often it’s a storefront that stays empty for months at a time. Landlords sometimes jack up the rent not because they have a chain tenant in the wings, but because they hope to snare one. The landlords call them “credit tenants.” In the meantime, there are tax deductions to be claimed. And if the building was a recent purchase, the landlord is paying off the acquisition at interest rates much lower than those that would have prevailed at any time in recent history.

In any event, the die-off is real. The question is whether the local government has the power and the political will to do anything about it.

Odd as it seems now, New York City actually had a commercial rent-control law on the books from 1945 to 1963. Promoted by a Republican governor and Republican mayor amid fears of wartime rent gouging, it served primarily to protect tenants’ negotiating rights and drive speculators out of the market. It was upheld in court on several occasions, but when it finally expired, there was little agitation to renew it.

By the mid-1980s, the situation had changed. Merchants were again complaining about impossible lease conditions, and City Council Member Ruth Messinger introduced what she called the Small Business Survival Act. SBSA provided that tenants in good standing had the right to negotiate 10-year leases with their landlords and would have imposed binding arbitration when no deal could be reached.

SBSA went nowhere then, and although it has been reintroduced in every city council session for nearly three decades, it still hasn’t gone anywhere. But in the recent climate of soaring rents, the legislation has sprung back to life. By 2013, it had acquired 32 co-sponsors on the city council, more than enough to guarantee passage if it came to a vote, but then-Council President Christine Quinn declined to bring it up for consideration. Small business advocates pointed to Quinn’s ongoing campaign for mayor and her campaign’s connection to the real estate industry, whose role in local campaign finance has continued to grow in recent years as real estate has become an even more dominant player in the New York economy.

The mayor elected in 2013, Bill de Blasio, initially seemed to be supportive of commercial tenants’ rights. But since taking office, he has done little to further the cause. The new council president, Melissa Mark-Viverito, has said she will hold hearings on the issue but will not say whether she supports the bill. For her part, Brewer, the Manhattan Borough president, arguing that the original SBSA will never pass, has offered a milder small business protection proposal. It would call for mediation but not binding arbitration and would provide for guaranteed lease renewal, but only for a single year rather than 10.

Tenant activists think Brewer’s bill is much too weak; the real estate association thinks it’s too strong. The real estate lobby would prefer tax subsidies for landlords who refrain from rent gouging, but this isn’t an idea the city council is likely to go for. So the possibility of a stalemate remains, and meanwhile the city’s small business die-off continues.

There are other potential ways of dealing with the situation. Some cities in Pennsylvania impose a surcharge on vacant property over and above the property tax; Pittsburgh did this in the 1980s, but the tax was repealed after five years. San Francisco has a law that, under certain circumstances, allows neighborhoods to vote on which chain stores can locate in the area.

The San Francisco approach is unlikely to attract support in many other cities, but it does point to what may be the ultimate moral question in this crisis: Just whose rights deserve to be considered? If the only legitimate contestants are landlords and tenants, the landlords will win nearly all the time. But if the residents who patronize a neighborhood’s businesses are deemed to have some rights -- both the newly arrived gentrifiers and the old-timers who have hung on through decline and recovery -- then the idea of providing some stability to commercial life takes on a different coloration.

In the current climate of economic opinion in the United States, the notion of neighborhood commercial rights sounds like a far-fetched idea. But at earlier times in the nation’s history, and in much of the urbanized Western world to this day, it’s an idea that is treated with considerable respect. That is why there are more than 30,000 bakeries in France, and local artisans get to approve new lease applications from supermarket chains.

No doubt France overdoes it. Maybe the United States has as many bakeries as it needs. But it’s not crazy for the people who buy the bread and eat in the cafés to be treated with a little more respect than the landlords and political leadership of New York are currently giving them.

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