Small Business Survival: Tenants & Landlords Sound Off on Rent Escalation
Editor’s note: This is Part 1 of an eight part series on Small Business Survival, the centerpiece of a yearlong reporting project partially funded by our readers and community partners. The following article also appeared in our September print magazine.
Behind the counter of Ben Freedman Gent’s Furnishings hangs a fuzzy photograph taken from an April 1989 broadcast of the television program 60 Minutes. It shows the owner of the Orchard Street retailer, Mr. Freedman, alongside legendary entertainer George Burns, who was leading correspondent Ed Bradley on a tour of the old neighborhood where he was born and raised. Twenty-five years later, the store hangs on as a time capsule of an earlier era, while so much around it is unrecognizable. Today, George Burns might have a few choice zingers for the new generation consuming a $67 tasting menu across the street at Contra or snapping up a pair of limited-edition Air Jordans for $190 at sneaker haven Extra Butter. He might also spot a present day funnyman, Dave Chappelle, a regular customer at East Coast MMA Fight Shop, one of the young-gun retailers carving out a new niche on Orchard Street.
This year has not been a barrel of laughs for many of New York City’s iconic businesses. The long list of soul-crushing closures includes treasured spots such as the Cafe Edison, Pearl River Mart and even a corporate-owned NYC institution, FAO Schwarz. On the Lower East Side, 25 years of gentrification have exacted a heavy toll. Small businesses continue to shutter at a fast clip. Yet with the very big exception of the Streit’s Matzo factory, the neighborhood in the past 12 months has been spared the kind of cataclysmic closures plaguing many other parts of the city. One reason for this is the sad fact that many historic businesses vanished long ago. Another is that retail rents on the LES, while escalating, are still well behind the hottest downtown shopping neighborhoods, such as Soho and the Meatpacking District. These realities help explain why, at least for a little while, you can still buy a $10 shirt on Orchard Street.
Beginning this month, The Lo-Down is launching a yearlong reporting project focused on small- business survival on the Lower East Side. Far from being a nostalgic journey, it will seek solutions for strengthening new and old businesses alike in one of Manhattan’s last authentic neighborhoods. We begin by taking a hard look at the critical issue of rising commercial rents from the points of view of both tenant and landlord. During the summer months, both new and established retailers, property owners, real estate brokers and local business leaders all weighed in on the mounting challenges. What emerged is a picture of a neighborhood in transition, still clinging to its small-scale roots yet very much in danger of losing what remains of its distinctive character.
For this story, we focused on the six-block stretch of Orchard Street from Division Street to East Houston Street, the historic discount shopping district. Out of 217 total storefronts, 30 were vacant at the time of our mid-August survey. Only one national chain, American Apparel, and one big bank, Bank of America, had infiltrated the stretch. There were about a dozen remaining stores identified with Orchard Street’s Jewish past, including Ben Freedman, which opened in 1927.
ORCHARD STREET BY THE NUMBERS
Total storefronts: 217
Vacant spaces: 30
Restaurants & Bars: 37
Contemporary boutiques: 34
Old School Businesses: 12
Art Galleries: 22
Chains/Corporate Stores: 2
Dry Cleaners: 2
*Based on an August 2015 survey of the blocks between Division Street and East Houston Street.
During a recent conversation in the cluttered office above the store, current owner Avi Saks said, “We used to be very busy. It’s getting slower all the time.” Sheila, his wife (and Ben Freedman’s daughter), explained during an earlier interview that 70 percent of their business comes from longtime customers who keep coming back year after year. But in an era in which shoppers can buy exactly the shirt they want with a few clicks of a mouse and have it delivered to their front door the next day, new business is sparse.
Ben Freedman likely would already be closed if the Saks family had not purchased the building at 137 Orchard St. in the 1970s. But it’s still not easy. While similar buildings have sold for more than $8 million in recent months, operating costs keep rising. The most recent quarterly property taxes were $43,000, up sharply from just a few years ago. To make matters worse, a hotel project next door has been stalled for eight long years. Scaffolding and plywood completely obscure the clothing store’s signage.
“The city has no interest in preserving businesses like my business,” said Avi Saks. “At a point, tenants can’t stay in business. Maybe the future is bright, but the present is devastating.” While he’d love to persuade his son to take over one day, Saks knows it’s not possible to raise a modern family on the revenue the once-thriving shop is now producing.
A few historic neighborhood businesses, including Russ & Daughters, Katz’s Deli, Moscot Eyewear and Zarin Fabrics, are thriving. The new generation has taken over these family businesses (or in the case of Moscot, joined the management team), diversifying products, implementing new marketing strategies and making the most of the Lower East Side’s new cachet.
Business at Zarin’s has been strong during the past several years. David Zarin, who runs the 80-year-old family business and also sits on the board of the Lower East Side Business Improvement District (BID), is committed to the neighborhood but also concerned about its future. A couple of years ago, he gave up most of the designer fabric store’s first-floor space to make way for a TD Bank branch, one of two banks now occupying the ground floor of the historic building at 69 Orchard St. Earlier this year, a longtime Lower East Side landlord sold the property for $25.6 million to the Malachite Group, a large real estate firm that owns 4 million square feet in shopping centers across the country.
Zarin’s has a long-term lease and is in no immediate danger of losing the three floors it occupies, but rent escalation is a real concern. David Zarin said he hopes the Lower East Side can hold on to its “neighborhood feel” while adding exciting new retailers. But given the current real estate trends, he knows this vision might be wishful thinking. During an interview last month, Zarin said, “I would hate to see stores like mine (legacy businesses that have evolved with the times) get pushed out because they can’t afford to be here anymore. It would be great to have that mix of old and new, unlike places like Soho, where all of the old, cool places are gone and it’s like a big shopping mall now.”
One of the biggest challenges for all types of retailers on the Lower East Side is the lack of daytime foot traffic. For this reason, any boutique without multiple revenue streams (such as an online store), a built-in clientele and a robust marketing strategy is destined to struggle. Yet even some businesses that do everything right can’t escape the relentless pace of rent inflation.
This year has brought big changes for The Cast, an edgy custom leather shop that’s been keeping the rebellious rock ’n’ roll spirit alive on the Lower East Side since 2004. Chuck Guarino and Elisa Maldonado operated out of a miniscule space in the Zarin’s building for more than five years. But in June they announced on Facebook, “Manhattan real estate has sunk its fangs into yet another victim. We’ve lost our lease.”
When told that their old spot—little more than a closet before the DIY built out—had been listed online for $3,500 per month, Maldonado laughed, saying their landlord had actually wanted even more from them for a lease renewal. But the brand that started in a Ludlow Street basement has not given up on the LES. While some production has been moved to Los Angeles, The Cast this month is opening a new, larger store in the back of another Orchard Street boutique, The Great Frog, at 74 Orchard St. Maldonado said maintaining a presence in the neighborhood is important to the brand. “I feel [The Cast] is representative of the culture that was the Lower East Side,” she explained. “It’s about keeping that spirit, identifying with it and [making a statement that] “we do belong there!”
Hip lifestyle and streetwear brands have been attracted to the Lower East Side for years. If anything, the appeal is growing. East Coast MMA Fight Shop opened a space at 131 Orchard St. as 2014 drew to a close. The shop, which stocks a line of “combat gear” plus T-shirts and other clothing items, started on Long Island in 2011. Owner Zach Lipari said he wanted to have a foothold in “a hip, up-and-coming” area of New York City. A Long Island neighbor, cutting edge sneaker store Extra Butter, encouraged Lipari’s LES move, and they share a like-minded customer base of young men. “I’m super happy to be here,” he said. “We could not have made a better decision.”
On the Lower East Side, commercial rents range from around $100 up to, in a few special cases, $250 per square foot. It seems crazy to call that affordable, but in relative terms, asking prices in the neighborhood are more manageable than in a lot of other places. In Soho, for example, the brokerage Cushman & Wakefield reported the average retail rent in the second quarter of this year was $508 per square foot. Across the city, commercial rents are skyrocketing as more private equity firms spend lavishly to acquire buildings and then must make their investments pay dividends. Some private equity has entered the Lower East Side market (below East Houston Street). But for the moment, the players are relatively small compared with the types of heavyweight firms that have snapped up large numbers of properties in the East Village.
One potential game changer on the LES is a gleaming new retail complex attached to the 296-room Hotel Indigo at 180 Orchard St., between East Houston and Stanton streets. It sprawls over 10,600 square feet, with 23-foot-high ceilings and a 100-foot wall of glass at street level. In a neighborhood full of small commercial spaces in tenement buildings, it offers a rare opportunity for big players who have often overlooked the area.
A lead broker at Cushman & Wakefield, Jesse Hutcher, said, “We’re seeing interest from people we never expected to consider the Lower East Side as an option.” Potential tenants, including high-end restaurant groups and national retailers identified with the Upper East Side and other high-dollar neighborhoods, have not balked at the $200-per-square-foot asking price, he said. The opening of the Ludlow Hotel last year, this fall’s debut of the Indigo and news that Equinox health club is coming to a new project from developer Ben Shaoul at the top of Orchard Street are all playing into the LES’s “up-and-coming” storyline.
If Hutcher gets his price, rents in the surrounding area are sure to escalate, putting even more pressure on independent businesses. But not everyone is convinced the Lower East Side is ready for a Soho-like transformation. Right across the street from the Hotel Indigo retail, a glassy commercial strip attached to another hotel, Sixty LES, has had its struggles. A storefront once leased to the short-lived Landbrot Bakery has been vacant since that business made its exit two years ago. A larger space, currently occupied by Claw Daddy’s, a casual seafood spot, has been a revolving door of restaurants.
Josh Frank has handled commercial leasing for local firm Misrahi Realty for more than a decade. Over the years, he’s done deals to bring nightlife establishments such as Inoteca, Hair of the Dog, the Slipper Room and Sauce to the Lower East Side.
Nightlife has been the dominant force in the neighborhood’s commercial real estate game. As more hotels and art galleries open, he’s noticed an uptick in foot traffic. Frank expects that trend to continue, especially once the big Essex Crossing project on Delancey Street comes on-line in a few years. But the bigger factor preventing national retail brands and “big box stores” from entering the neighborhood is the small-scale of most spaces. “I don’t know that you’re going to see J. Crew here anytime soon,” he said
Michael Forrest is a local property owner and the board chairman of the Lower East Side BID. He has a small portfolio of mixed-use apartment buildings including 98 Rivington St., where he opened the Italian restaurant Galli last year in the former Inoteca wine bar space. Forrest also co-owns 252 Broome St., a building that until last month was home to Jin Sushi. The Japanese restaurant closed Aug. 15, in part due to rising costs and frustrations with the city bureaucracy, and will soon be replaced with a Southeast Asian restaurant called The Lucky Bee.
While there are obviously exceptions, Forrest believes most landlords try to keep longtime commercial tenants in place. When you own a building and you have mom-and-pop businesses on the ground floor, “there’s a lot of emotion involved,” he said in an interview at his Ludlow Street office. “But at the same time,” Forrest added, “I’m trying to run a business and I’m trying to be profitable, and that’s the reality of the world.”
Another reality, he said, is that operating a century-old tenement building is not as lucrative as it might appear. He gave the example of a typical property with 16 apartments—14 of them rent stabilized—and one or two retail tenants. The community, of course, has a strong desire to see those affordable apartments preserved and mom-and-pop businesses kept in place. A rent- stabilized residential tenant might be paying $500 per month; the same apartment could rent for eight times as much on the free market. Then you add in ever-escalating property taxes (one tenement on upper Orchard Street, for example, has seen its annual taxes nearly double to $240,000 in the past five years). It all amounts to a narrow profit margin in the building as a whole.
A variety of government incentive programs exist for the construction of new, affordable housing. But Forrest, reflecting the longtime opinion of the BID, noted that there is zero support for owners of tenements to preserve existing affordable apartments. “For the Lower East Side owner who has a 25-footer with rent-stabilized tenants,” he asserted, “there is no tax credit, there is no subsidy. There is nothing… I think there’s a lack of appreciation, sometimes, in the actual dynamics of what it means to run a building and a business.”
So what’s the solution? Tim Laughlin, executive director of the BID, offered one answer.
“We would like the city to look at potentially setting a tax rate for small tenement buildings that is different from their larger counterparts,” he said. If owners agree to preserve rent-stabilized apartments and to maintain affordable rents for mom-and-pop stores, they’d be eligible for the lower rate.” If the goal is to preserve affordable housing and at the same time to protect independent businesses,” Laughlin argued, “we need to provide incentives for property owners to continue to operate their buildings.”
It seems like a straightforward proposal, but this being New York City, it is, of course, complicated. City and state officials have talked for decades about reforming the property tax system, which has been called one of the worst in the country. Mayor de Blasio, who has promised to take on the thorny issue, has warned that coming up with a realistic proposal will “not happen quickly or easily.”
When we resume our special series next month, The Lo-Down will take a closer look at the idea of property tax relief as a strategy to save small business. We’ll also explore other ways to moderate commercial rents, including dueling proposals in the City Council for rent renewal mediation and/or arbitration.