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Economy Blog #5: Are landlords greedy?

Original post made by stephen levy, University South, on May 5, 2009

The issue of "greedy landlords" seems to a subject of great passion and interest on Town Square.

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Comments (8)

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Posted by Paul Losch
a resident of Palo Alto
on May 6, 2009 at 11:22 am

Paul Losch is a registered user.

Steve,

This is such a touchy subject. I think a distinction needs to be drawn between ground level retail businesses and places such as Facebook or the like which do not depend on foot traffic for their sales.

I am not sure how landlords in town view the differences between the two, but as my beagle and I roam University Avenue on our regular walks, it is pretty clear that something is not right with downtown retail in Palo Alto. I just saw this morning that Gleim Jewelers is vacating its location shortly! They have been there for dozens of years. There are storefronts that have sat empty literally for years in downtown, and several businesses that have opened up there have last just a few years before closing down (Windy's, Neibaum-Coppola to name but two.)

Retail operations of various shapes and stripes do not enjoy the sorts of profit margins than do businesses that do not depend on their location for their success. By contrast, Danger Inc. was downtown for a while, and now they are in a building on Park Blvd near Fry's. No reason for them to remain downtown, as also is the case with Facebook, which I understand is re-locating.

When rents are too high, a retailer has a difficult time achieving success. It typically is one of the biggest expenses such companies have. With so much vacant space downtown, it suggests to me that the current asking rates are out of line with the market. It also becomes a downward spiral, as fewer people will patronize downtown as the retail offerings diminish.


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Posted by Perspective
a resident of Midtown
on May 6, 2009 at 11:44 am

Perspective is a registered user.

Every financial transaction is, essentially, a bet, driven by an assessment by each party of the transaction concerning the risks, costs and benefits of the transaction.

Rationality, informed or not, and emotion enter into the bet.

A renter bets that s/he will make enough money to have the life s/he wants in the rented home/business, and decides the benefits of living/working in the place are worth the costs and commitment. A landlord makes the bet that the rent being paid by the renter is going to be paid, and is going to make the landlord enough money to have the life s/he wants, and is worth the risk of having to pay the mortgages, taxes and upkeep.

Emotion and knowledge enter into determining the outcome.

To "blame" anyone for deciding NOT to rent a business or a home is, as you implied, silly. There are many reasons businesses are choosing not to rent in Palo Alto, and they are quite valid, ranging from oppressive policies and ever rising taxes, high rents relative to return in sales etc.

Landlords not lowering the rent have choices in front of them. FEW businesses are willing to take a rental for just a year. Most want at least 10 year leases. Landlords are making a bet that if they wait a year or two, they will be able to rent their property at the higher rent...and lock it in for the next 10 years. If they rent at a lower rate now for 10 years or more, they are stuck. It is a bet.

It is true that when rents are "too high", retailers have a hard time achieving success..however, business rents on El Camino in Mountain View have been comparable to Palo Alto El Camino rents..yet they are rented and ours are not. Therefore, it is not simply rent that is the problem.




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Posted by stephen levy
a resident of University South
on May 6, 2009 at 1:40 pm

stephen levy is a registered user.

I agree with Paul and Perspective that residents have strong feelings about the climate for business in Palo Alto. It is a separate but important issue from the discussion of property owner behavior and rent determination.

I can provide some data that do not provide an answer to the what should Palo Alto do questions but are interesting about downtown retail.

In the April 20th issue the Weekly on page 20 provided a table of retail sales in downtown. I have the statewide data and thought it would be informative to compare the growth rates.

In the 4th quarter of 2008 retail spending in downtown was down 16.4% from a year earlier while the statewide drop was 16.3%.

In every one of the previous 7 quarters the percent change in retail spending in downtown was greater than the statewide average--either more growth or smaller declines. I admit I was surprised.

Between Q1 of 2006 and Q4 of 2008 downtown retail sales were up 1.5% while statewide retail sales fell by 5.6%. I was even more surprised by these numbers. I don't know why the data are what they are or exactly what it means beyond the obvious point that downtown retail activity has not fallen off the planet compared to the rest of the state.


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Posted by Carla
a resident of Downtown North
on May 6, 2009 at 1:59 pm

Carla is a registered user.

Stephen is right that it is pure economics, and business. It takes two to make a deal, and business owners have to understand their numbers. They must plan for a good and bad economy situation, and they must be able to make ends meet in a bad economy. A bad economy by definition is one where sales drop 20% all of the sudden. This is the situation many business are in at the moment.

The reason that most business fail is that they don't understand their own business sector enough to understand the maximum that they should be paying rent. For restaurants it shouldn't be more than 9% or 10% of your revenues. The US average is more like 6%. These are limits, and yes there are many business that are so badly run that even if you control for rents; they can't make it because of other facts. A bad economy exposes everyone, the good ones and the bad ones.

Downtown Palo Alto is considered a luxury location by all measures, just like Beverly Hill and Key West. That is, many business are willing to supplant themselves here (and at the Stanford Shopping Center) sometimes at a loss because the upside is the high branding-visibility one gets from here. Therefore, it is not suitable for brand new business ideas and weak ideas.

Landlords have the right to charge whatever they want, but they too must understand the fundamental economics of the business that should go in; otherwise, their property will continue to be perceived as bad luck spot for entering business. It is for the benefit of both parties for rents to be reasonable.

The only 'greedy' landlords our there are those that are sitting on their properties for about 10 years, like 174 University Ave because no one in their right mind goes.

And yes, although, I hate to see Gleim Jewels out of business, the question remains: are they providing what Palo Altans really want today? Are there too many jewelry shops in downtown Palo Alto? Are they too becoming outdone with online competitions, like Amazon is doing to Borders. The economics change over time, and it is not necessarily the fault of the landlords. They take whatever they can get. And if an idiot business is willing to pay something they can't afford or a lease less than 5 years, that is not the fault of the landlord; that is business.


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Posted by Carla
a resident of Downtown North
on May 6, 2009 at 2:05 pm

Carla is a registered user.

Oh, and I wanted to mention that I am a business owner in downtown Palo Alto that rents from a landlord.


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Posted by stephen levy
a resident of University South
on May 7, 2009 at 4:03 pm

stephen levy is a registered user.

Paul,

I hear what you are saying and I am sure many readers feel the challenges of how difficult it is for retail outlets.

My point is that rents are a market price for space. I am skeptical about saying that property owners are irrational in setting rents.
When there are lots of vacancies property owners here and everywhere make chocies about whether to lower the rent and for how long or whether to wait for the market demand to pick up.

The same is true for homeowners trying to sell in a lousy market. Should they lower the price or wait for an upturn?

The presumption is that both homeowners and landlords will make these calculations as best they can but I see no reason to question their ethics as other posters have done this year.

The issue that residents might like to have certain types of stores downtown that cannot afford downtown rents is a different question. What would you have property owners do? Comapnies and stores come and go all the time. They move or expand or go out of business.

The point of my post was to state the economist view that these are the result of two-party decisions (renters and property owners) and that the issue of "greed" seems misplaced to me.

Palo Alto is a complicated place and sometimes residents want low-price stores in high rent areas and lots of time residents want more shopping opportunities but no traffic. It is not unusual for people to have wishes that are in conflict (that was the point in my What are Voters Telling Us post). These are tough times but I think labeling other peoples' motives both is usually inaccurate and not helpful in making Palo Alto a better place.

Steve


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Posted by Georgie Gleim
a resident of Crescent Park
on May 8, 2009 at 11:21 pm

Georgie Gleim is a registered user.

I would like to make one correction to Carls's post; Gleim the Jeweler is not going out of business. We are merely closing our branch on University Avenue. Our Stanford Shopping Center and downtown Los Altos stores will remain open. Our decision is based on the fact that it is no longer making sense for us to have two fully-stocked retail stores as close together as are our Stanford and University Avenue stores, and we chose to close the one with the lower volume. We will relocate our accounting, appraisal, and estate buying offices elsewhere downtown, without the large retail showroom. We are not making this decision due to "greedy landlords." Our landlord has treated us very fairly for many decades. We simply recognize the fact that we need to adjust our business, as we have done many times since my grandfather opened it in 1931. As we conduct our store closing sale, many clients have shared their stories of what the jewelry they purchased from our store over the decades means to them, leading me to believe that we do hold a place of importance in the community.


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Posted by pat
a resident of Midtown
on May 9, 2009 at 11:34 am

pat is a registered user.

How does this explain the sad fate of Caffe Verona? It's my understanding that the landlord bumped up the rate so significantly that Steve couldn't afford to stay. Then the space sat vacant for 3 or 4 years.


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