Every Monday morning, Artnet News brings you The Gray Market. The column decodes important stories from the previous week—and offers unparalleled insight into the inner workings of the art industry in the process.
This week, on what happens when what goes up, stays up forever…
HIGH AND DRY
Last Sunday, law professor Tim Wu penned an op-ed for the New York Times about how to untie the knot choking New York City’s real-estate market in this very strange, very unsettling year. His criticisms clarify some of the unsexy economics clogging up the dynamism that helped make the city the global center of the art industry decades ago, and his proposed fixes would work wonders to restore some of that energy at a time when it’s desperately needed.
As Wu sees it, the central dilemma of the Empire City’s real-estate market is that it doesn’t actually behave like a market is supposed to. He explains:
Ideally, rents should go up and down in tandem with supply and demand. But that isn’t happening in New York City. Commercial rents are “sticky”: They stay high even when demand is low.
According to Wu, the problem distills down into a poisonous shot and chaser of bad financial incentives and bad bank behavior. It’s exactly the kind of stuff that no one gets into the arts to think about—and partly for that reason, exactly the kind of stuff that warps the arts more aggressively than outsiders realize.
So what’s the issue? Here are six words that will almost always help you in a conversation about American business decisions, and almost never help you on a date: Let’s start with the tax code.
A New York storefront left vacant from 2010 until 2016. Photography by Billie Grace Ward. Courtesy of Wikimedia Commons.
Property values are what make real estate a financial asset. The government agrees that any owned space is worth a specific amount of money that plays into your net worth and your tax returns. So if you own real estate, you generally want its property value to stay high.
Although the tax code enables all kinds of complex financial chicanery, it can be maddeningly simplistic, including on aspects of property value. For example, the tax code does not acknowledge that a commercial space could still be worth $20,000 a month on paper even if the owner decides to rent it to, say, an art dealer for $10,000 a month in a historically dismal economy. Trying to make that argument to the taxman in 2020 would be like trying to propose ethical non-monogamy to a 17th century Protestant; there’s just no framework in place to allow for the concept. Instead, substantially reducing rents in the short term “could entail recognizing a multimillion-dollar decrease in the official property value,” according to Wu—a terrible tradeoff in many landlords’ eyes.
The situation gets worse because of what property owners can and can’t deduct as losses on their taxes. Here’s a perverse incentive for you: If you own a space worth $20,000 a month and keep it vacant in a recession, you can legally claim a loss in accordance with that amount, dramatically lowering your tax bill (while also maintaining the space’s full property value). But if you instead respond to the decreased demand by renting that space to, say, a budding arts nonprofit for $10,000 a month, you get taxed on the rental income while being allowed to deduct… absolutely nothing. (Oh, and your property value craters, too.)
Appalled yet? Just wait until you choke down the grim chaser to that stomach-turning shot…
JR, Unframed—Ellis Island (detail). Photo: Sarah Cascone.
LOCK IT UP
As a general rule, I’d rather live in a cave than defend landlords. That said, Wu explains that, in an increasing number of cases, many New York landlords are contractually required to keep rent prices high no matter the state of the economy.
Like so many other slow-motion atrocities happening right now, you can thank Wall Street for this. The commercial mortgages now offered by big banks often codify a minimum rental price for the property in question. If the landlord paying the mortgage makes a deal with, say, a new art-services company for less than the minimum rent, the mortgage goes into default, and the bank can seize the property.
Wu also notes that minimum rents have become a larger part of the mortgage market as banks have increasingly gone on to securitize mortgages. In these cases, minimum rents and other lease terms “can be modified only by investor consensus,” which is unlikely to materialize.
There’s a dark irony at work here, too. For anyone who skipped The Big Short, securitized mortgages (AKA mortgage-backed securities) and the side bets made on them were the dynamite that Wall Street used to blow up the world economy in 2008. Granted, back then the nitroglycerin was radioactive subprime home loans, not commercial loans. Still, the point is that a key ingredient of what wrecked so many people inside and outside the arts during the Great Recession is, in its own way, back to create even more havoc in our current downturn.
While the damage inflicted by these different interlocking mechanisms in the real-estate market has been especially severe since March, it’s worth keeping in mind that they’ve quietly been hurting New York and its art scene for years. History makes it glaringly obvious that the New York art world thrived in the second half of the 20th century partly because rent was cheap and regulations ranged from reasonable to lax. (The downside, of course, is that this is also why it was a cesspool of crime and health hazards.)
However, Gotham has been on the opposite end of the spectrum for some time now, and its art scene has grown increasingly sclerotic as a result. I’m not saying that some compelling new ideas aren’t breaking through anyway, or that some longtime presences aren’t finding ways to innovate. I am saying, though, that it’s rarely a good thing for any city’s creative ecosystem to be primarily made up of people with the resources to pay artificially inflated rents. That’s generally where the New York art world is right now—at the most self-destructive time.
Now, Wu proposed a few common-sense solutions to loosen the real-estate gridlock: eliminating minimum rents in commercial mortgages; implementing a financial penalty for leaving rentable spaces vacant for longer than 90 days; ramping up investigations of fishy real-estate deductions on tax returns; and reforming zoning laws to incentivize repurposing properties (say, from office space to residential apartments).
All of these are achievable with enough political willpower. All of them could give the New York economy a valuable jolt. And all of them could restore some of the dynamism that first made the city the thumping heart of the art world decades ago.
Yet none of them are the types of things we in the industry tend to discuss when it comes to the question of fixing a system almost universally perceived as broken. It’s easy to see why: They’re boring! They’re arcane! They’re not even about art! But just as we’re seeing in government on the grandest, highest-stakes scale, sometimes the future depends on thinking through the details you least want to think about.
That’s all for this week. ‘Til next time, remember: if something is no longer allowed to bend, eventually it’s going to break.