A rich ghost town


I work in the West Village, and, particularly on Bleecker Street, storefronts are constantly flickering in and out of existence. (Someone who has lived in the city for almost 10 years told me, jokingly, that you become a true New Yorker only when your favorite restaurant goes out of business.) For a business to thrive in a place as land-constrained as Manhattan, two factors seem to matter most. First, a deep reserve of capital, which allows that store to survive the initial months of poor business as it captures Manhattanites’ attention and slowly ramps up sales. Second, a business model that privileges “revenue per square foot”, the ability to extract the maximum amount of money from every bit of floor space. It should be no surprise, then, that Manhattan is the land of Duane Reades and Dunkins and Starbuckses; drugstores and coffee shops make $500-$1000 per square foot, a figure most restaurants, even chains, would be hard-pressed to beat.

In fact, the businesses that thrive in Manhattan often have a thoughtful, long-term real-estate strategy. (This is particularly true when the cost of real estate continues to grow rapidly.) Here’s an excerpt from a New York Magazine article (from a while ago) entitled, “The Mystery of Duane Reade”:

Whether New Yorkers will actually go to Duane Reade for their skin-care and teeth-whitening needs remains to be seen. But what the company does in its stores may be beside the point. In the end, it really does come down to real estate, and the blazing commercial market may be a boon to the savvy Cuti after all. With banks bidding up prime spaces by 50 percent or more, Duane Reade’s cheap leases have become the jewel of the company. Some 200 of them are locked in past 2008, taking the rents progressively below-market with each passing day. Jeffrey Roseman, a Newmark commercial-real-estate agent who’s leased spaces to Duane Reade, says that the company doesn’t really have to sell another toothbrush. “If the drugstore business were to collapse today,” he says, “they’d probably have one of the more successful real-estate businesses subleasing their stores.”

Likewise, WeWork, which bills itself as a coworking space, is more accurately thought of as a real-estate company trying to exploit the difference between long-term and short-term rental rates. (Most of the floors in the building in which I work are WeWork occupied.)

Underneath all the branding and wide-ranging aspirations — which include a for-profit elementary school called WeGrow — it’s still a real estate company.

“At the end of the day, it is about leasing space,” Mr. Barrack said. And WeWork has leased a lot of it.

The company has said it is the largest real estate tenant in New York, London and Washington. It ranks in the top five in many other major cities. In New York alone, WeWork controls three million square feet of commercial real estate; it controls 15.5 million square feet globally with 335 locations in 24 countries.

Reading these articles, and walking around my city, it struck me that the commercial real estate market in New York operates in ways that most ordinary people would find confusing. I highly recommend an article by Derek Thompson in The Atlantic, called How Manhattan Became a Rich Ghost Town.

These days, walking through parts of Manhattan feels like occupying two worlds at the same time. In a theoretical universe, you are standing in the nation’s capital of business, commerce, and culture. In the physical universe, the stores are closed, the lights are off, and the windows are plastered with for-lease signs. Long stretches of famous thoroughfares—like Bleecker Street in the West Village and Fifth Avenue in the East 40s—are filled with vacant storefronts. Their dark windows serve as daytime mirrors for rich pedestrians. It’s like the actualization of a Yogi Berra joke: Nobody shops there anymore—it’s too desirable.

A rich ghost town sounds like a capitalist paradox. So what the heck is going on? Behind the darkened windows, there’s a deeper story about money and land, with implications for the future of cities and the rest of the United States.

Thompson goes on to explain that this “rich ghost town” arose from a conspiracy of market forces, from higher rents to the rise of online shopping. All of the actors are (mostly) behaving rationally, but what ensues is a market failure. What I find most worrying is that these trends are unlikely to abate soon; that Manhattan shopping has undergone an irreversible change that will bring ever-increasing homogeneity:

In Jane Jacobs’s famous vision of New York, the city ideally served as a playful laboratory, which nursed new firms and ideas and exported its blessedly strange culture to the world. Today’s New York is the opposite: a net importer of the un-weird, so desperate to bring in national chains to pay exorbitant leases that landlords are willing to sit on barren blocks.

But in the past five years, the problem of rising vacancies and monotony has actually gotten worse. It would be one thing if New York were simply trading eccentricity for accessibility—that is, knocking down fusty establishments to build new apartments with affordable housing. But the median home value in Manhattan is still over $1 million. For both middle-class families and emerging companies looking for a foothold in the city, it’s the same dispiriting picture: rising returns to incumbent businesses and legacy wealth, with fewer chances for the upstarts, the strivers, the rest.

The story repeats, in slightly different forms and varied contexts. High rents, for instance, are driving unique and highly acclaimed restaurants out of Union Square West. Greedy landlords have pushed great restaurants out of Boerum Hill and into lower-cost areas of Brooklyn like Clinton Hill and Bed-Stuy. And, once these areas are fully washed over by the wave of gentrification, the cycle will undoubtedly repeat.

I was perusing a list of the best taco shops in New York. Having lived in the Southwest for most of my life, I have very specific opinions about how tacos ought to be made: the necessity of fresh tortillas, and the insistence on a minimal set of ingredients — meat, salsa, cilantro, onions. The author of the article I was reading, Robert Siestema, shares my viewpoint. What was striking about the list he assembled is the spatial distribution of restaurants: the number of locations in the outlying areas of New York, like Sunset Park, Bushwick, East Harlem, Melrose, and Jackson Heights. But, when you think about it, it makes sense. Where is housing cheap enough that an immigrant community — the predominant patrons of such a restaurant — can assemble? And where are commercial rents cheap enough that a “no-frills taqueria” can sell tacos for $2 or $3 and survive? Even the taco shops that violate this pattern, like the “Fast and Fresh Burrito Deli” I frequent in Boerum Hill, seem to me like pleasant accidents, cases where the revenue being made would not be more than a Duane Reade or Starbucks, and perhaps where the business, long-ago, fortuitously secured a long-term lease at a reasonable rate. These establishments have managed to violate the market equilibrium so far, but, in the long run, everything equilibrates.

Everything equilibrates in the labor market, too, and it makes me equally sad. One of my friends recently got her Ph.D. in English (hurray!). She is now on the academic job market, where, apparently, there are roughly 3-5 jobs each year for people with her expertise. (Needless to say, there are far more than 3-5 English Ph.Ds per year applying for these positions.) She conceded that if she is unsuccessful this hiring cycle, she will probably abandon academia for a tech job, by trying her luck in the ever-proliferating zoo of New York coding and data bootcamps. I don’t begrudge her decision, or fault her thought process, but I do feel that this event, if it comes to pass, represents a loss for the world. If she goes to Grace Hopper Academy and becomes a front-end engineer, she will likely be making six figures designing a better-looking button for the mobile site of a company that sells subscription toothbrushes. Surely studying English, no matter how esoteric, would bring something far more sublime and beautiful to the world than that. When I think about tech, the quote I keep returning to is “The best minds of my generation are thinking about how to make people click ads.” The counterpart in commercial real estate, I suppose, is “The best minds of my generation are thinking about how to maximize revenue per square foot”. I realize this represents an elite point of view, but I would contend that, in both cases, the market is giving us what we say we want, or perhaps what we really do want, but not what we truly need as a society.

In fact, if the arts have managed to eke out an existence in this capitalist world, it is likely by ignoring the laws of market equilibrium. Students pursue the humanities out of love for scholarship and writing, not out of love for money. Postdocs and adjuncts teach and contribute research even while realizing that they are being exploited. Aspiring journalists continue to take out loans to pursue degrees, even though the field is shrinking and will continue to do so. People write, and will always write, because the act of creation inherent in writing will always be more fulfilling than running an A/B test to increase the lead-to-conversion rate by 1%, no matter the market forces pulling us in the latter direction at the expense of the former. And I would like to believe, similarly, that there will always be a no-frills taqueria in New York that serves up exquisitely seasoned meat on a fresh tortilla, garnished with cilantro and onions, and with a small slice of lime on the side: not because the market demands it, but precisely because it doesn’t.


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