How Might NYC Lessors React if Commercial Rent Control is Enacted?

As reported by media outlets, City Councilman Stephen Levin has re-introduced legislation to impose commercial rent control here in NYC. See Crain’s New York Business report here. Levin introduced his bill in 2019 but was unsuccessful in getting the legislation to a vote. No one is sure whether Mayor DeBlasio is supportive. It is a safe bet that the commercial real estate industry is adamantly opposed.

The commercial rent control proposal would mimic the mechanisms used for residential rent control here in NYC. The City would create a “Commercial Rent Guidelines Board” (“CRGB”) consisting of seven members appointed by the mayor. Annually, the CRGB would establish the rate of rent adjustments that would be legally permissible year to year. The rent control regulation would only apply to smaller leaseholds — retail and office spaces of less than 10,000 sq. feet and manufacturing area of less than 25,000 sq. feet. The legislation would regulate all payments made to a lessor. “Rent” is defined in the bill as “any consideration, including but not limited to pass-along, received by the owner in connection with the use or occupancy of any commercial space.” See the text of the rent control bill here.

Despite historically low rents in much of NYC and high vacancy rates, the push for rent control is driven by fears that rents will soar. This is especially true as the economic impacts of the COVID pandemic decrease. Industry watchers expect this to happen in the next couple of years. Rent control advocates see a real risk that commercial tenants will see an enormous spike in rates in a couple of years as landlords try to recoup losses suffered.

How might commercial lessors react near-term to the proposed commercial rent control legislation?

Even if the City Council does not pass the rent control legislation, commercial lessors and lessees could see several near-term impacts as lessors attempt to blunt any adverse impact expected if the bill is enacted. The proposed legislation does not seem to involve any initial restrictions on the amount of rent Landlords can charge before passing the bill. If passed, the CRGB will regulate rent “adjustments.” Thus, immediately raising asking rates is one strategic response to possible rent control legislation from a lessor’s perspective.

For example, Crain’s reports here that, as of July 2021, the average asking rent fell to $615 per square foot across the City for retail space. In SoHo, the asking rates are as low as $487 per square foot. If rent control is on the horizon, Lessors could now strategically raise the asking price. Landlords could strategically begin a lease with “high” rent rates but provide significant rent abatements or other non-rent concessions.

NYC could also see lessors consolidating separate commercial spaces and demanding that potential lessees sign leases over 10,000 square feet. The City could see a decrease in small retail and office tenancies in this manner even if the legislation fails. NYC could also see lessors shift from three to five-year leases to one to two-year leases, along with a continued rise of so-called “flex space” and “pop-up” leasing.

If passed, the commercial real estate owners will undoubtedly legally challenge the bill as being beyond the power of the City Council to enact. The State allows residential rent control. There is no corresponding state law authorizing commercial rent control. But, because there is some possibility of commercial rent control, lessors are likely to add provisions to upcoming lease signings that attempt to blunt the potential for adverse financial impacts.

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