Landlords in New York Sue the City Over Unfairly Inflated Rent Affecting Retail Brands
Young professionals in big cities aren't the only ones bearing the brunt of high rent and accommodation costs, as top brands and startups are also feeling the pressure. Four landlords with high-end retail properties in New York City have filed a lawsuit alleging that property taxes were unfairly inflated based on pre-pandemic rents. The owners of prime retail condos on Fifth Avenue and East 59th Street argue that their property taxes are "grossly overassessed" due to outdated income and expense calculations from 2022 leases before the pandemic's impact, per The NY Post.
The lawsuit, first reported by the Real Deal, highlights the plight of landlords whose tenants, including high-profile brands like Harry Winston, Versace, and Ikea, have either vacated or renegotiated leases for smaller spaces. For instance, Harry Winston downsized its footprint at 697 Fifth Ave., drastically reducing the rent from $22 million to $6 million for landlord Vornado.
At 205 E. 59th St., the Zucker Organization faced a $2 million loss in annual rent after Ikea's lease expired in November. The situation is part of a broader trend in New York City's retail real estate market, where landlords are grappling with reduced rental income amid the aftermath of the pandemic and the rise of online shopping.
Prominent figures in real estate, including Daniel Kaplan from CBRE's Investment Properties Group, echoed the landlords' concerns, criticizing the city's tax assessments for not aligning with current market conditions. Kaplan emphasized the discrepancy between projected rent revenue and tax calculations based on outdated, higher rents. These over-assessments not only present challenges for landlords but also affect property sale prices. One property named in the lawsuit, the former Ikea space at 205 E. 59th St., is currently listed for sale rather than lease, reflecting the uncertainties in the retail market.
The retail landscape in New York City has been rocked by the combined effects of rent peaks in 2015-16 and the COVID-19 pandemic, compounded by the growing dominance of online shopping. Recent lease deals, such as Skims' agreement for space at 647 Fifth Ave., highlight the significant rent reductions compared to previous tenants like Versace.
The lawsuit specifically cites the Skims deal, which will bring landlords a fraction of the previous rental income. Despite this, the city's assessment was based on significantly higher estimated gross income, exacerbating the financial strain on property owners. In response to the lawsuit, Fitch Ratings recently downgraded the mortgage on 647 Fifth Ave. due to reduced rental revenue expectations, reflecting the broader challenges facing commercial real estate in New York City.
The latest rental data from Zillow for February 2024 reveals a notable trend in the U.S. rental market. While asking rents have increased by 3.5% compared to the same period last year, rental price growth remains below pre-pandemic averages. Rent prices have surged by 29.9% since before the pandemic, but the growth rate has slowed from the peaks experienced in 2021. Single-family housing rents have soared by 36.6% since pre-pandemic levels, outpacing the growth in multifamily apartment prices, which have risen by 23.6%.
The report also showcases notable rental market trends, such as the average rent across the U.S. increasing slightly to $1,959 per month, with rent prices rising in 47 out of the 50 largest metro areas.