The Institute for Local Self-Reliance (ILSR) has released a report that examines how high rents are both forcing businesses to close and hampering start-ups. The study, “Affordable Space: How Rising Commercial Rents Are Threatening Independent Businesses, and What Cities Are Doing About It,” was released on April 20 and explores six strategies that cities are using to create an affordable environment where local businesses can thrive.
When researching this report, Olivia LaVecchia of ILSR, who authored the study with ILSR Co-Director Stacy Mitchell, told BTW via e-mail that “it was really striking to realize how much this problem is being driven by a financial system that favors national brands over local businesses.”
For instance, in some cases, LaVecchia noted, local businesses actually have to pay higher rents than national chains, because national chains might have a credit rating that allows property owners to receive better terms on their mortgage from their bank. “It creates a deck that’s stacked against locally owned enterprises, and makes it difficult for them to compete on their own merits,” she said.
According to the report, the cost of leasing commercial space is soaring in many U.S. cities, threatening the future of independent businesses. “There’s a surge on the demand side. As cities are booming, people are rediscovering the appeal of walkable neighborhoods with small-scale storefronts, and national chains are entering cities as they pursue new markets,” said LaVecchia. “On the supply side, older buildings that have traditionally been hospitable to local businesses are getting razed for new development, and those new developments often replace them with large-format commercial space that’s designed for national chains. There are also issues around commercial real estate increasingly being the site of financial speculation, as global investors look for places to park their capital.”
The result is that as rents increase, urban neighborhoods that were once good for entrepreneurs are now “becoming increasingly inhospitable to them,” the report noted.
In an Independent Business Survey released in February 2016 by the Institute for Local Self-Reliance in partnership with the Advocates for Independent Business, 59 percent of independent retailers reported being worried about the escalating cost of rent, with one in four describing it as a top challenge. The trend isn’t limited to retailers, the new report points out. The price of industrial space is rising rapidly, too, jeopardizing a budding renaissance in urban manufacturing.
Among the examples of the six broad policy solutions discussed in the report are Salt Lake City’s investigation into creating a “Buy Your Building Program” to help local businesses purchase their property, New York City’s efforts to give small business owners certain rights when it comes time to renew their leases, San Francisco’s ordinance encouraging commercial diversity, and Seattle’s plan to lease city-owned property to local businesses with favorable terms.
The study notes that the significant increase in rents is not limited to more affluent neighborhoods, but is occurring across a range of communities. Indeed, some of the “most intense pressure” is falling on businesses in lower income areas. Here, the report stresses: “Just as there’s a public stake in the availability of affordable housing, so, too, is there a public interest in the commercial side of the built environment. Having a healthy independent business sector is closely tied to other municipal policy priorities, including reducing climate emissions, expanding jobs, lessening economic inequality, and strengthening the social fabric of neighborhoods.”
The reasons for the increase in rents are complex and numerous, but some of the key factors the report lists are:
- Soaring commercial real estate prices — a global surplus of capital seeking higher returns is flooding into urban commercial real estate, causing a speculative run-up in prices.
- The increasing popularity of cities — cities are booming as more people seek walkable, mixed-use urban districts. While this has increased opportunities for businesses, it’s also driven up demand for small storefront space, with the rise in rents often significantly outpacing sales growth.
- The growth imperative of national chains — increased demand is also coming from national chains, which, having saturated the suburbs and under pressure from shareholders to show square footage growth year after year, have turned to cities to sustain their expansion.
The report does provide a number of broad policy solutions that officials, business owners, and community leaders have come up with for keeping space affordable and helping entrepreneurs. These include promoting building ownership among independent businesses as a way to keep occupancy costs stable; providing business owners with protections when it comes time to renew their leases, including options for a long-term lease or recourse to arbitration; protecting established commercial districts and adopting ordinances that promote business diversity; and requiring that a portion of the space in select new development projects be set aside for locally owned businesses.
LaVecchia noted there is a community demand for neighborhoods anchored by locally owned businesses. “Right now, though, there’s an imbalance of power not related to the viability of the business that’s still impacting locally owned enterprises,” she explained. “What really needs to happen now is for local residents to shift public policy, and push cities to use smart policies to create an urban landscape where locally owned businesses can thrive.”