On healthy main streets, securing a tenant involves less cosmetics and more mathematics.

Any visitor who stumbles upon the main street of Bethlehem—the second largest city in Pennsylvania’s Lehigh Valley—is likely to presume or speculate that it’s a prosperous town. And, in most respects, it is: well-maintained streetscapes with sidewalks of brick and slate; an mix of old and new buildings, most of which are in excellent condition; a colonial-era industrial quarter (that recently achieved Department of Interior’s prestigious National Historic Landmark status); smartly situated green space; and a few obvious institutions in the form of the Central Moravian Church and Hotel Bethlehem.IMG_6952And Bethlehem’s Main Street is up against some fairly stiff competition: not only must it contend with the central business districts of Allentown and Easton, the Lehigh Valley’s other two nearby cities, but it has a separate urban commercial corridor across the Lehigh River in South Bethlehem, as well as the shops and specialty services in Steel Stacks, the reviving former campus of the long-running (but now defunct) Bethlehem Steel corporation.

IMG_6949For Main Street Bethlehem to prevail with a variety of stores featuring mid- to upper-middle income restaurants, distinctive services, home furnishings, art galleries, a place literally called The Foo Foo Shoppe, and the nation’s longest continually operating bookstore, it must be doing quite a few things right. Nonetheless, squarely in the middle of its most flourishing continuous four blocks, we encounter a big fat vacancy.speculate on main street: long term vacanciesIt really shouldn’t be that big of a deal, since tenants come and go all the time, even in the most successful commercial districts. But Little Italy on Main apparently didn’t stick around for long: as recently as the summer of 2011, the space hosted another tenant. And, while the restaurant was still operational when I arrived to the region in the spring of 2014, by the fall of that year it was closed.

It’s been sitting vacant ever since, which means we’re approaching two-and-a-half years. Yet all around it are successful establishments. What’s the deal with this place? Obviously, without investigating on a topic with which the owners are not too likely to divulge, I can only speculate, and speculate I will.IMG_6947-editsThis placard has sat into the window for the better part of two years. It’s unfair for me to bring this name into consideration, because, in all likelihood, the real estate broker and his team are doing the best they can at marketing the space to attract a new tenant. If they were as unsuccessful as it would seem, one might expect the property owner to find someone with a greater understanding of a specialty, boutique main street market.

It probably didn’t help the fortunes of Little Italy on Main that the four-block commercial street already hosted two other Italian restaurants.  But surely this attractive space could find a restaurant tenant capable of carving its own niche.  Could the problem be the owners themselves? What if, even in a market with reasonably good foot traffic, the owner/manager is simply asking too much on the lease for this large property? Perhaps there are other strings attached? The Little Italy on Main restaurant used to spread across two separate “chambers”, if you will. It may be that no one is willing to take on the entire large space, but the owners are unwilling to subdivide. Deed restrictions may even keep the various parties’ hands tied.

Still, one would think that, after enough time, the owner would want to cut his or her losses and just secure a tenant, even if it means lowering the lease rates.  After all, throughout its inactivity, the property would still generate carrying costs, and such long-term vacancy on the first floor would obviously compromise the building’s revenue.  Do we know what those carrying costs are?  Why would it ever pay off to speculate for so long?

Based on the visible conditions—an excellent property in a great location remaining vacant for such a long time—it is possible that the owner is paying property taxes at a rate far lower than the market value…or, at least, the value which the owner believes his or her parcel to hold, based on the prices he or she is seeking for that first floor retail/restaurant space. What if the owner is paying so little in property taxes that he/she can defray those carrying costs on the speculative prospect that, eventually, something big will come when the owner finally accepts that pricey lease? A misalignment between the assessed value and the owner’s asking price could foster an environment where a property with a presumably high value remains vacant for long periods of time. After all, if an owner is seeking a lease that suggests the property is worth X but the taxes come from an assessed value of .25X, the owner has far less of an incentive for rushing to secure an undervalued lease. (In such a case, it would take four years before the owner assumes a real loss aligned with the perceived value of the property.)

What I’m postulating here is obviously an oversimplification. I speculate again, but then, so is the owner of the property. The misalignment could come from the fact that the owners are overestimating the appeal of Main Street and asking for too much in an strip that already commands values well above the region’s median. It’s equally possible that the owners are paying taxes in keeping with the assessed value, but they are just absorbing a huge loss while seeking the optimal tenant. Or the building’s physical condition could pose problems that simply aren’t going to come to light. (A reduced leasing rate, however, should reflect those conditions.) But properties like this, which we see from time to time in hot commercial real estate markets, could serve as a red flag to the City that the parts aren’t adding up to a satisfactory whole. After more than two years, this vacancy is a black eye for Bethlehem’s main street, and it certainly can’t help the neighboring property owners, who undoubtedly seek more foot and vehicle traffic passing by their storefronts.IMG_6951

Then again, maybe Main Street isn’t living up to its full potential.  As good as it looks, there are weaknesses, particularly noticeable on the intersecting Broad Street.    I’ve heard murmurings that “it ain’t what it used to be”, where “used to be” is as recent as 2010, before it faced so much competition with the growing entertainment options at Steel Stacks in South Bethlehem. The market push to speculate may be stronger than ever, only because of mounting uncertainty in the strength of commercial corridors in general.  Chronic main street vacancy could have a variety of causes, but the end result benefits nobody, except the prospective tenant—which, in this case, appears once again to be nobody.

15 thoughts on “On healthy main streets, securing a tenant involves less cosmetics and more mathematics.

  1. Chris B

    Clearly the problem is the streetscaping, which resulted in the loss of two parking places in front of the building. 😉 (There is a giant municipal garage literally around back, so parking can’t really be the issue.)

    Interestingly, the most recent Google Street View shows the “Corked Wine Bar” across the street, which appears to have opened between 2011 and 2015. The old sign in the Little Italy window says “we are BYOB”. Could the lack of a liquor license hastened the decline of Little Italy when a new competitor arrived on the block? Also, I do not know how expensive a license is in PA, or even if there is a secondary market as here in Indiana; I do recall from my time there that the liquor laws are substantially…unusual. Could a new operator even get a license?

    Speculating further on finances…it appears from aerials that the building is a relatively deep hodgepodge of connected structures behind, most of which appear to be residential in nature. My guess is that the apartment rents might sustain the building.

    Reply
    1. AmericanDirt Post author

      Yes, downtown Bethlehem is replete with cheap garages. I’m sure that’s all that keep it going strong.

      Pennsylvania liquor laws are indeed burdensome, and, from what I can tell, the more populous counties have fierce competition, thereby driving up the prices. (That’s probably why Philly is the nation’s unofficial BYOB capital.) Since everyone knows that BYOBs are commonplace in the more urbanized Pennsylvania counties (like Northampton, where Bethlehem is located) I doubt that was a huge factor. As I mentioned, there are literally two other Italian restaurants within a block radius–I might go out on a limb here, but could it have possibly been that Little Italy on Main simply wasn’t that good? Call me crazy…

      Apartment rents, which are steep in downtown Bethlehem for notoriously unimproved properties (i.e., no washers/dryers, hot and cold taps, radiant heat) could very well sustain this building, as you noted. But such a persistent vacancy on an otherwise pretty strong street is likely to raise the ire of neighboring business owners.

      Reply
  2. Paul

    Interesting article. Here in Broad Ripple in Indianapolis we have been dealing with long term vacancy issues. It looks to be over for the most part as there has been a flurry of lease signings as of late, including the BR Ave & College corner that remained vacant for 5 years!

    My first thought was that the rent was too high and landlords were still expecting a home run bar – Kilroys, Brothers, etc to come in and stack cash in order to pay very high square foot costs. However, Broad Ripples bar scene peaked a few years ago IMO and has been fine but not gangbusters since about 2012. I speculated that landlords finally realized that another big party bar wasn’t going to come knocking and lowered their expectations – which hopefully will allow a greater diversity of businesses to come in but who knows.

    People thought it was a sign of Broad Ripple sliding downhill but I don’t. Sure it may not be the hot area that is on fire with investment. But the rent is also still extremely high for Indy and likely pushing away smaller businesses who can’t afford it. There is still so much activity there that I can’t imagine that people wouldn’t be lining up if the rent came down a little bit – and I bet it would still be sustainable from the landlords perspective too.

    I agree that increasing the true holding cost via property taxes would force owners to make tougher decisions sooner and put these buildings back to productive use. Perhaps a land value tax!

    Reply
    1. AmericanDirt Post author

      Thanks for your comments, Paul. I actually had that building in Broad Ripple in mind when I wrote this article…

      I also find the claims that Broad Ripple is going downhill to be completely off base. It’s not the boho center it once was, but even outside of Broad Ripple Avenue, where the “bro bars” dominate, the rest of the neighborhood still has quite a bit of eclecticism. And, beyond just Coil, at least 3 or 4 other multifamily proposals along Westfield should that the developers see great demand in the neighborhood, while upgrades/improvements of existing structures further reinforce this.

      If rent remains high, then the neighborhood is fundamentally not cold. The biggest challenge is keeping a culture where small businesses can still afford to locate there, as they did in the past. Outside of BR Avenue, things still seem pretty strong in that department.

      Reply
      1. Chris B

        That corner in BR has been vacant a lot over the years. It used to suffer from lack of obvious parking (which was around the corner) but that can’t be an issue now.

        Back when there was still actual retail in the village, Houseworks had a pretty long run in the space.

        Again, there is an upstairs, so it does earn some rent even when the marquee space is vacant.

        Reply
        1. Paul

          So far it looks like Louie’s Wine Dive is making a good go at it. They are usually busy when i peer in – even on the odd Monday or Tuesday. I think that there was more of a perfect storm to that spot of failed concepts, down economy, and a landlord really reaching on the rent. There is just too much foot traffic for that spot to be abandoned.

          Reply
          1. AmericanDirt Post author

            I suspect the owner of that corner parcel was gunning for a big-name tenant, and, after five years, he/she finally landed it. Louie’s Wine Dive is hardly a mega-chain (I count eight locations right now, including the BR one), but it probably has more capital than a mom-and-pop in the area and could afford the high rent. The question is whether the assessed value of that property (per the City) is remotely at the level that the owner clearly assumed it to be worth.

          2. AmericanDirt Post author

            I suspect a similar situation to the Broad Ripple property is taking place in Fountain Square, with the former “Skip’s Market” property. It has sat vacant for close to a decade, I’d imagine. I know at least one entrepreneur (the couple who until recently ran the Funkyard) considered that property for their biz, but bailed after looking at the leasing costs in comparison to the scale of improvements needed. Until recently, it looked like Neal Brown was going to refurbish it with his new Japanese restaurant, but now he’s taking the soon-to-be-vacated Recess space, it may sit vacant for many more years. If the City assessed the property at a level comparable to the owner’s estimated value, I’m sure there would be more effort at securing a tenant.

  3. Alex Pline

    These are all great questions. In Annapolis we have a very similar situation. I’m sure the reasons differ with the specific local circumstances. I have asked around here quite a bit about commercial rents in the past and the responses I get are that they are too high for the area and the times. Perhaps one reason for that is a lot of the property is held by a few individuals who have owned it for a long time and likely have very low carrying costs. Couple that with the added costs of our overzealous historic preservation and it makes the numbers hard to live with for small/boutique businesses and leads to tenants with deeper pockets like the new Chipoltle at Market Square, not that I have anything against Chipoltle (I don’t). I like their food, I just wish I could get a beer there too 😉

    Reply
    1. Anonymous

      Thanks for the comments, Alex. I have a feeling this a problem across otherwise healthy main streets. As Paul above noted, we had a similar problem in my hometown of Indianapolis. I think there is a likely misalignment between the assessed value of a property and value that the property owner presumes it to be worth; either the property owner is sailing by on land assessed far less than it should be, or the land is genuinely not worth much and the property owner is asking for too much (and thus assuming it’s worth far more). If it’s the latter of these two in your situation, it’s hard for me to imagine the owner’s carrying costs are low, no matter how long he/she has owned the property.

      But yes, if the general regional leasing rates are high, it’s going to be difficult for many small businesses to afford the rates. And so….Chipotle. (Is it a Maryland thing? Most Chipotles I know do sell beer.)

      Reply
    2. AmericanDirt Post author

      Thanks for the comments, Alex. I have a feeling this a problem across otherwise healthy main streets. As Paul above noted, we had a similar problem in my hometown of Indianapolis. I think there is a likely misalignment between the assessed value of a property and value that the property owner presumes it to be worth; either the property owner is sailing by on land assessed at far less than it should be, or the land is genuinely not worth much (assessed correctly) and the property owner is asking for too much (and thus assuming it’s worth far more). If it’s the latter of these two in your situation, it’s hard for me to imagine the owner’s carrying costs are low, no matter how long he/she has owned the property.

      But yes, if the general regional leasing rates are high, it’s going to be difficult for many small businesses to afford the rates. And so….Chipotle. (Is it a Maryland thing? Most Chipotles I know do sell beer.)

      Reply
      1. Alex Pline

        On beer, it’s an Annapolis thing. The city liquor control board holds licenses very tightly, something that brings out the downtown residents (mostly older) with pitchforks. For that matter they have a no fast food ordinance too, but “fast casual” has just squeaked under that bar. The Chipoltle was actually held up in court for over a year because they were sued by Moes (another fast casual southwestern food chain) ostensibly for not being above the regulatory bar, but we all know it was just an anti competitive move…

        Reply
          1. AmericanDirt Post author

            Interesting. I’ve seen zoning ordinances in the area I live that seek to distinguish “fast food” from “fast-casual”, allowing the latter and prohibiting the former, just like in Annapolis. And, per the zoning ordinance’s definition, fast-casual is characterized by offering “a higher quality product”. Now I couldn’t help but wonder what benighted individual gets to determine whether a restaurant is high enough quality to be “fast-casual” versus “fast food”…but I guess zoning officers have that intuitive gift. I sure don’t.

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