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Design Talk by MV no. 017 - The Nitty Gritty and Biz Economy Vs. Social Economy: Exploring Commercial Rent Increases Amidst a Struggling Brick and Mortar Sector Pt. 02

Intro

Last week, I introduced a series of Design Talks that sets out to explore how and why commercial rents are hitting astronomical marks, paradoxically, in an age when brick and mortar commerce is really struggling. I cited this New Yorker article, and I really can’t help but cite it again to kick off today’s talk. Invoking the doyenne of city knowledge herself, the article calls out Jane Jacobs’s argument that “cities were explosive drivers of economic growth” because of their operational dynamics of “intra-city trade.” The article continues:

“She highlighted, among other things, the ease with which local businesses trade goods and services with each other, and eventually make the city into a net exporter of desirable goods and services. But high commercial rents can threaten that basic dynamic. If national businesses, not local ones, come to fill a neighborhood, the area may become merely an importer of goods and services.” 

Jacobs’s concern is correctly placed. And it is a concern I share, and am working against, not only for my own business and my neighbors-in-commerce, but for the fate of the city I live in and I love so wholly.

With that in mind, let’s embark on another round of tapping into resources, articles, and thinkers to help explain the confusing relationship between brick and mortar, retail, and real estate.

Zoning, Investment, and Banking (A Few of My Not-So-Favorite Things)

Rezoning is another one of those behind-the-scenes city operations that, with relative quiet, can drastically affect our urban landscapes. The way they’re laid out, what sorts of industry is supported in what areas, and the divisions between private and public, commercial and residential space are all involved. As CityLimits.org reports, “zoning measures to prevent chain businesses have… become a popular solution” to plights facing small businesses in gentrifying or changing areas. There’s a lot of power to zoning ordinances, but it can be a legislative toughie to trickle-up the idea of small business necessity.

Another “toughie” is the fact that in the last decade and change, federal legislative proposals have made it all the more difficult for small businesses to take root and to flourish. In May, CNBC chronicled some of the specifics of this trajectory. “Major changes to the [federal] bankruptcy code went into effect in late 2005,” it reported, “largely shifting from debtor-friendly to creditor-friendly after successful lobbying attempts on behalf of creditors and in the case of retail, landlords.”

 

The article continues, moving from how this sort of federal legislation affects small businesses, to how it’s in fact negatively affecting the partners and players whose job it is to support them: “‘Because of the pressure to generate returns, [private investment firms] constructively do something that effectively burdens a company with so much debt, it can't sustain that debt,’” making its only exit strategy to close its doors. Coupled with increased interest rates scaring away investors, it can get pretty dismal for the non-national, non-big box retailer.

Additionally complicating things is the fact that in order to get mortgages, to in turn purchase more buildings, owners must cite anticipated earnings for their current properties. With the incredibly obscured commercial real estate earnings (rents) that we discussed last week, those “anticipated” earnings are in fact a false truth. Banks, then, have actually been okay with these properties sitting empty—the owners continue to say they’ll get a quick return when they get a big paying tenant… eventually, that is. (Some banks will even knowingly increase the value of a property for a chain store.) In reality, the obvious solution to discontinue the propagation of empty storefronts and bloated property values would be to take a fair price for the available commercial units on the market.

But it’s never that easy, is it?

Business Economy Versus Social Economy

To sum up what we’ve covered so far, small businesses cannot expand and grow because of prohibitively high overhead costs, and escalating costs of rent have become purely arbitrary, with no real reflection on ROI (return on investment) for the businesses. Owners have effectively pushed what the market can bear to a breaking point.

A “healthy” commercial real estate vacancy level, as the Times reports, is about 5 percent. But many neighborhoods, especially in New York City and other metropolises across the U.S., are witnessing much higher vacancy rates, like SoHo’s whopping 20 percent vacancy rate. Safe to say, we’re not witnessing a very healthy CRE ecosystem.

Some businesses, like I’ve referenced before, will open shops in destination or touristy neighborhoods like SoHo purely as a marketing stunt, which is another way perception is swayed in terms of retail aliveness. These businesses are often national or international, and can afford the high rent even if sales are low because it bolsters their brand presence. The way in which these ploys are unproductive, at best—and likely damaging, just as empty storefronts can be—is that they rarely involve ethical investment (energy, bureaucracy, capital, or otherwise) in their neighborhoods. Their end goals are often shorter term than that sort of investment involves, which is exactly the backbone of traditionally successful, mutually beneficial residential-commercial relationships.

Returning to the study that CityLimits.org produced, “chains reinvest roughly about 14 percent of revenue back in the local economy, while independent, locally owned businesses reinvest about 48 percent.” That is an incredible gap, and signals the disparity we’re suffering from when we’re surrounded by chain stores. It’s a drastic potential loss in job growth and the expansion of industry that’s interested in community engagement.

Another pertinent point, which is called out in New York City Council's 2017 Plan for Retail Diversity, is that “local retailers are better for the city because they are a vehicle for immigrant entrepreneurs.” What sort of character would New York City have without the diversity of not only its population, but also of its commercial players? A complementing report on commercial displacement in NYC, published by the Association for Neighborhood and Housing Development just last month, “suggests that communities of color… are losing access to localized economic development and opportunity [because of] the lack of small business financing in these neighborhoods.” The lack of financing leads to the lack of locally run commerce, leading to a lack of local hires, or employment opportunities, and ultimately to a weakened civic unit.

The Wrap-up

Next week, in the last installment of this three-part series, I’ll be highlighting resources, solutions-oriented platforms, civic servants and legislators, and activist communities that are all doing great things to take action against the sort of trickle-down policies damaging our retail-real estate-independent business realities.

Also, as I introduced last week, the upcoming launch of Design Talk Roundtable (a live extension of Design Talk by MV!) will be this upcoming February 6th. Mark your calendars, and join us as we kick off this conversation in real life. My co-host is Jay Norris, the founder of Guesst, the real estate sharing platform on which I’m chief retail strategist, and we’re going to be in talks with Maxwell Ryan, Apartment Therapy media’s founder and CEO; Darin Vest, head of real estate for L’Oreal; and Malene Barnett, a fellow creative and entrepreneur, owner of Malene B. Atelier.

RSVP here for the February 6th Roundtable!

 

Till next week,

MV

 

As told to Emily R. Pellerin

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