Are greedy landlords destroying our neighborhood?

It was recently posted on a neighborhood Facebook page that the rising number of empty storefronts in Bucktown (the extremely trendy neighborhood in Chicago where we live) is evidence that skyrocketing rents are forcing businesses out and soon we will find ourselves living in a ghost town. The comments went on to celebrate landlords finally getting what they deserved. Those vicious bastards drove-out all the cool stores with their rising rents and then – whoops – they accidentally pushed it to far! Now no one can afford to be here anymore and its all coming crashing around. Where is my violin which I wish to play in ironic mock-sympathy?

But is that really what is going on? Could rents really be increasing at a time when all businesses were fleeing the neighborhood? The answer of course is “no”. Rent can only be increasing at a time when demand outstrips supply. So why the empty store fronts?

The simple reason is that when rents are rising dramatically, landlords can more easily afford to let a storefront sit open for a bit while they find a new tenant who will pay a much higher rent.

Imagine the normal example – the way people think it used to be. When rents are flat – give or take a few percentage points in either direction – a landlord wants to keep all his tenants because the cost of having the unit sit empty for a month or two can’t be recouped by higher rents later. As a result, landlords will aggressively try to keep their storefronts full – even if that means lowering rents a teeny bit.

However, when rents are rising rapidly a smart landlord will see a temporarily empty storefront as a good investment that can bring in a higher paying tenant later. In fact, an empty unit that is re-rented at a rent 15% higher after one month will recoup the lost rent in 10 months and generate 180% return on investment (forever!). Compare 180% return to the less than 1% return your interest bearing checking account delivers to understand how attractive this is.

So before you go expecting tumbleweed to roll across Damen Avenue, recognize that rents in Bucktown are jumping right now which means it is the best possible time for landlords to let their units and storefronts empty for a bit. Over time, things will change and the number of retailers wanting to get into Bucktown will get closer to the number wanting out, turnover will fall, and rents will stabilize. Until then, expect to see lots of empty storefronts and expect to welcome new higher-end (and arguably less-interesting) retailers.