Montreal’s empty storefront problem is a lesson to every city

For struggling brick-and-mortars in Montreal, real estate speculation is the final nail.

Instead of poring over laptops, people in the back of an old-school café in Montreal’s Mile End are reading, chatting, and decompressing from a busy week. Three middle-aged men—including the owner of the storied Club Social, the Saint-Viateur Street haunt that once served as a private hangout for Italian immigrants—gripe about escalating rents in the neighborhood.

“They’re pushing out businesses. No one can afford these rents!” one exclaims, while the others nod. 

I eavesdrop while waiting for my café au lait. Coincidentally, I’m here to interview Susan Usher, a local property owner and a member of a neighborhood citizens’ committee, for the very same reason: How rising rents—some double, triple, even quadruple their local market value—are keeping storefronts empty and plunging the area in an ever-evolving state of transition and, at times, even disrepair.

“Why on earth is nothing better than something?” asked Usher over the Friday evening din of the busy café. As the owner of a building with a ground-floor retail space and two apartments above (including her home), she could never survive months without a storefront tenant. 

“These are not people like me,” she said, referring to those snapping up commercial buildings to leave them vacant. “These are deep pockets that can sit on a property, that can refuse to renew a lease with someone, then leave it empty for a year or two years, and for whatever reason it doesn’t seem to bother them.

“That’s when we introduce the word ‘speculative,’” she continued. “A loss in one place is written off [against] a profit in another.” 

Speculation is a phenomenon taking over the world’s real estate, in which investors play the market by sinking cash into properties then sitting back and watching as they gain value. Many don’t get into the game to be landlords; they just want the returns. If a building doesn’t earn rental income, there’s always the losses column on their tax forms.   

This problem is not unique to Mile End. In 2018, London had nearly 25,000 empty commercial spaces. In New York City neighborhoods, commercial vacancy rates fluctuated between 10%–20%—more than double a healthy rate. Pockets of other cities struggle too.   

To be fair, not all empty storefronts are caused by active speculation. Some buildings are owned by the heirs of original buyers who have long since paid the mortgage, and who are now just waiting around for a big payday. Some are owned by well-intentioned landlords looking to find quality tenants at a time when e-commerce and same-day delivery are putting the squeeze on brick-and-mortar retail. 

But speculation is growing, and when it’s motivated purely by profits it can poison entire neighborhoods.  

Inside the financial game of speculation

There are some investors trying to do the right thing.

As the owners of 16 retail properties, Ali and Yousef Farasat of Montreal’s Immobilier YULiv do their best to skirt the empty storefront problem by negotiating fair rents with quality tenants. “You’ve got to pick some retail stores that are going to bring traffic to the street, and even take less money at times for doing that,” says Ali Farasat. “For us, it’s easier to rent lower, but to a better tenant.” Even with that philosophy, though, there are times when they have a tough time finding good tenants. 

But there are growing numbers of properties being scooped up by people and companies looking to park their wealth in a locale more certain to generate generous gains than the stock market. The real estate industry, and the banks that underwrite it, are more than happy to accommodate. 

“Banks are definitely a large driver of the real estate industry because the owner of the building gets to depreciate 100% of the purchase price regardless of whether it was raised through debt or equity,” says Kurt Koegl, a CPA focused on real estate and a partner at Marcum LLP, referring to U.S. law. “Levering the building, especially when interest rates are low like they are today, really multiplies the return that landowners get.”

Lending agreements can include covenants that dictate how much in liquid assets an owner will maintain or what the debt-to-equity ratio will be, Koegl continued. These covenants protect the bank’s mortgage investments. They can also indirectly affect how much rent a landlord is willing to accept. Depending on how rich the investor is and where he or she is located, sometimes it’s easier to set the price impossibly high and wait it out for a big-ticket retailer who will lock into a multiyear lease. With that, landlords can make back in just a few months what they would have earned from years with a low-paying tenant. 

In Montreal as in New York City, there seems to be little rhyme or reason about which areas get hit hardest by the speculation machine. One of NYC’s most famous neighborhoods, Greenwich Village, has one of the city’s highest commercial vacancy rates. 

Rather, when a building is bought by a relatively price-insensitive entity to serve as a high-interest bank account, it seems to be more about the type of property. Speculators usually like luxury condos, which they can flip onto the short-term rental market and make a killing. 

But who would speculate on an ailing industry like brick-and-mortar retail? 

Cities need to step up—fast

When storefronts are involved, it’s often because there are residential units above, said Gregg Bishop, NYC’s commissioner of small-business services. “It’s quite possible that the residential income is enough to carry the building, so therefore there isn’t that urgency to get the commercial space rented,” he explained. “That’s kind of the worst-case scenario.”

To some investors, storefronts may be a write-off, but to a neighborhood they’re a symbol of community health. Restaurants, bars, and cafés are local anchors, bringing foot traffic to an area, Bishop said. Street furniture and landscaping—benches, plants, lights, murals—keep people around, which improves vibrancy and security. Popular businesses inspire others nearby to open.  

But even a poorly maintained building gains value over time. And without someone keeping a close watch on street-level properties, blight and crime can find an easier foothold. 

About a mile’s walk southwest from Montreal’s Club Social, a two-story building that spans the entire length of a block is covered in colorful street art—some beautiful, some not so much. Urban affairs consultant Glenn Castanheira points to the building. It used to house a mechanic shop known as George’s Garage. 

“A staple that was known in the neighborhood forever has been [mostly] vacant for 15 or 20 years,” he explained on a frigid February afternoon from inside the warm café across the street. The only tenant—a local favorite serving Lebanese food—is moving across the street soon, at which point the dilapidated building will be fully vacant. The widow who owns it will eventually pass it on to her teen grandson when he comes of age, said Castanheira.

Whether those who can’t be bothered to lease at decent rents are slumlords or rich investors, the effect is the same: nothing, when there could be something.  

Empty storefronts are a particularly hot topic in Montreal at the moment. The city government recently convened a committee and held public consultations on the matter. As of July 2019, the city had an average ground-floor vacancy rate of 15%, with some areas as high as 26%. The city has implemented some measures to help offset the issue, including lower property taxes for the first $500,000 of assessed value, and a financial assistance program for businesses affected by major street work.  

Other cities around North America are trying to address the scourge of empty storefronts in their own ways. San Francisco has a legacy business program and a formula business restriction. New York City is building a vacancy registry and wants a vacancy tax. Chicago heavily fines, and even prosecutes, building owners who let their empty buildings fall into any state of blight.  

In Castanheira’s opinion, addressing the issue of empty buildings without building a more supportive, data-informed environment for streetfront small businesses to thrive in will only perpetuate the problem. He compares the reaction to the response to global warming: No one does anything until the house is on fire.  

“If it’s not crisis time, it’s T-minus 12. We’re really close,” he said. “Once you cross that line of rents being too high, or an x proportion of properties being in the hands of a certain type of landlord, it’s really hard to go back.”

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