THE BLOG

Rent, Change and Blame

07/10/2014 03:20 pm ET | Updated Sep 09, 2014

Danny Meyer's decision to shut down Union Square Cafe met with disappointment in many quarters, including my house. I lived near Union Square in my early 20s, and although the chic, critically beloved Union Square Cafe was too pricey for me, I liked the happy incongruity of a high-end restaurant anchoring a neighborhood where most young residents subsisted off falafel and Belgian fries. It was a landmark, like Tower Records or Strand Bookstore, in a fun part of town.

The closing of Union Square Cafe is a local concern, but the reaction -- "damn greedy landlords" -- underscores the universality of the circumstances. Mom-and-pop moves into a seedy neighborhood, neighborhood starts to turn around, mom-and-pop is priced out, residents blame landlords for greed. ("Mom-and-pop" is generous for the flagship of the Shake Shack empire, but whatever.)

The rebuttal to "damn greedy landlords," always quietly proffered, is that in commercial real estate, the local market sets the rent, not landlords. If landlords are truly being greedy and asking for more rent than the market will bear, businesses will move down the street, and the greedy landlords will end up with no tenants at all. The market polices itself and, albeit inconsistently and gradually, minimizes greedy behavior.

So the sophisticated kvetcher might change his or her complaint from "damn greedy landlords" to "damn soulless market." Pioneers like Meyer, who started his restaurant at a time when Union Square was fairly seedy, helped make the neighborhood more desirable for upwardly mobile residents, which brought in higher-end retail. Rapidly, everything got expensive, including commercial rent, pricing out the the cool, low-margin stuff that set this bourgeois fever dream in motion: community gardens, locally owned boutiques, lofts filled with young artists, Union Square Cafe. The replacement of these cultural attractions with big-box stores and pseudo-quaint multinational chains is the tragic, inevitable end of this story -- right?

Well, no. For starters, we should be careful in assuming that such a scenario is intrinsically bad. Personally, I think a Union Square full of Bed, Bath, and Beyonds and Pizza Huts sounds crass and boring. But I am not everybody, and neither are bourgeois residents, civic-minded media commentators, and incumbent retailers. Lower-income residents or potential residents, while unable to partake in a $33 Lamb Chops Scotta Dia at Union Square Cafe, might well appreciate a Walmart. An incumbent tenant's displacement is a prospective tenant's gain. And, alien as it seems in our anti-corporate age, some people's lives are bettered when Starbucks or Au Bon Pain thrive, from employees to vendors to stockholders.

Also, the inevitability of multinational domination in Union Square and neighborhoods like it is very much an open question. Rather than accepting market rent from the unseemly megatenants who can afford it, smart landlords who are working on a long-term time horizon can -- and frequently do -- account for the "coolness," historical value and neighborhood fit of a place like Union Square Cafe and willfully, rationally accept less rent. It's not fair or realistic to ask a landlord to act in anything other than its self-interest--it's everyone's governing motive, after all -- but in the right circumstances, self-interest can mean less rent from a tenant that possesses certain intangibles. I work in commercial real estate, and non-monetary factors weigh heavily in every lease we sign. Maybe Union Square Cafe at less than a third of market rent plus cool isn't going to trump Taco Bell at 100 percent of market rent plus no cool, but Mauricio's Artisan Cronuts at 50 percent of market rent plus cool might. It is possible to envision Union Square remaining high-end and interesting for a very long time.

Even if Union Square's landlords do capitulate to large chains -- and when a landlord is in heavy debt or has a short-term time horizon, sometimes non-monetary factors just don't move the needle -- it's important to remember that the development story doesn't end. If a faceless, pre-fab Union Square is indeed unacceptable to residents and incumbent retailers, as I suspect it would be, they will eventually move out, popping the air out of the local real estate market. Rents will stagnate, chic big boxes will be replaced by discount big boxes, and soon you may have a stale 99-cent neighborhood. In insisting on market rent that only behemoths can pay, landlords will have effectively undermined their own investments. (This, too, is the market at work. So while the market may be soulless, it does have a sense of irony.)

To play this scenario out, lower rent means lower maintenance budgets and shakier tenants, which means broken windows and vacancies, which means crime and lower rent still. When that rent gets low enough, who can move in? Community gardens, locally owned boutiques, lofts filled with young artists, and Union Square Cafe. The cycle continues and the neighborhood regenerates.

Over time, the arc of real estate development bends toward meeting people's ever-changing needs. So let's check the blame and think more deeply and calmly about neighborhood change. The landlords are probably not being greedy, and if they are, they'll get theirs in time. The market is a heartless beast indeed, but the same market that compels Union Square Cafe's exit also affords astonishing choice and dynamism for a diverse population.

I don't want Union Square Cafe to be replaced by a Starbucks, but my grandmother probably wouldn't mind. Look at all this space! While she rests with her young grandson near the newspaper stand, I'll be checking out the new Mauricio's Artisan Cronuts in Mott Haven. All things must pass, and that's not all bad.