The Keynesian problem that ails the UK commercial property market

As JM Keynes noted, we humans just hate having our nominal incomes reduced. We're a lot less worried about falling real incomes through inflation and the like a long as nominals don't fall. This is something of a problem in a recession for that's exactly when real incomes should fall and also when we've not got much inflation.

The answer is to do as we have done, create a flexible labour market. Thus, in recessionary times we get falling incomes, not massively rising unemployment. This is exactly what did just happen in fact and is a great victory for that idea of the flexible market. Sure there was recessionary pain. But it was generally shared, not just dumped on the 10 or 15% who lost their jobs an thus everything. The rise in unemployment we did have was very much lower than we would usually have expected from such a fall in GDP.

Places such as Greece have had to have very much higher unemployment, very much more economic pain, in order to get those reductions in real wages.

At which point: 

The fashion retailer Next is preparing to take a stand against landlords who grant rent cuts and store closures to rivals using a controversial insolvency process.

Company voluntary arrangements (CVAs), which allow struggling businesses to walk away from their liabilities, are sweeping through the retail industry as traditional operators reel from a downturn in consumer spending and the ongoing shift to online shopping.

Retail and restaurant chains including Byron, Jamie’s Italian, Prezzo, New Look and Carpetright have used CVAs to close hundreds of sites and cut rents on hundreds more since the start of the year. House of Fraser and Mothercare are among those ready to follow.

Like many healthy retailers, Next, run by Lord (Simon) Wolfson, believes that CVAs give an unfair advantage to competitors by allowing them to sever leases while better-run companies are forced to honour expensive commitments. New Look slashed rents by up to 55% on some of its stores.

Next has started demanding a “CVA clause” when it renegotiates leases. The clause says Next’s rent should fall by a similar degree if one of its neighbours in a shopping centre or retail parade achieves a rent reduction through a CVA. The move could have huge implications for the commercial property market if other healthy retailers start asking for similar clauses, leading to mass drops in rents.

One of the things which ails that UK commercial property market is that rent reviews within a lease are upwards only. Thus directly analagous to our nominal wages problem. There has to be considerable and sustained pressure for rents to fall. Meaning that the economy as a whole is less flexible than perhaps it should be.

Not something we need to do something about for as we can see something is already happening under simple market forces. But it is something we should be aware of.