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A Report Examines How Rising Rents Are Hurting Local Businesses, and What to do About it

Amy Cortese | April 22, 2016

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Affordable housing has been a focus of policymakers for years. But skyrocketing real estate is displacing more than families: it’s also forcing thousands of small independent businesses from their commercial spaces.

A new report pulls back the curtains on the increasingly precarious reality of small businesses in America today, at least those in cities and neighborhoods experiencing rapidly rising rents.

The report, “Affordable Space: How Rising Commercial Rents Are Threatening Independent Businesses, and What Cities are Doing About It,” paints a wrenching picture of local businesses being forced out of their longtime homes and the neighborhoods they helped to make desirable. Produced by the Institute for Local Self Reliance (ILSR), a 42-year old nonprofit that has been at the forefront of the local economies movement, it examines the forces driving the rise in commercial rents and explores policy fixes that cities and local groups are adopting to reverse the troubling trend.

The policy fixes range from programs that help business owners buy their buildings, to legal protections for commercial tenants, to zoning changes that encourage small business diversity. These policies are no give-away: as the authors note, a diverse base of local businesses is closely tied to the social and economic health of communities and aligns with broad municipal policy priorities, from job creation to climate change mitigation. And who wants to live in a neighborhood with cookie-cutter generic chains?

A Critical Issue

As in the residential market, commercial rates are soaring. The cost of the average retail lease has shot up over the past year by double digits in cities from New York to Nashville. In some areas, leases have doubled, tripled and even quadrupled. It’s not just affluent areas, either: the report points out that some of the hardest hit local businesses are in low-income neighborhoods, such as the Bronx.

ILSR's Olivia LaVecchia
ILSR’s Olivia LaVecchia

In a recent ILSR survey of more than 3,200 independent businesses, 59 percent of retailers said they were worried about rising rent, and one-quarter described it as a top challenge. (Other concerns included competition from Internet retailers and lack of credit).

“Rents have come to be the most critical issue in the survival of locally owned businesses,” Betsy Burton, president of the American Booksellers Association, is quoted saying.

It’s not that the small businesses being displaced are weak: the indie retailers surveyed by ILSR saw sales grow an average of 4.7 percent in 2015, including a 3.1 percent gain during the holiday season. That contrasts with the lackluster performance of many national retail chains, which saw holiday gains of just 1.6 percent.

Overall, the businesses surveyed by ILSR (including service providers, manufacturers, restaurants, farmers and other types in addition to retailers) expanded their employee base by 5.6 percent in 2015.

So what gives? The researchers, Olivia LaVecchia and Stacy Mitchell of ILSR, outline a web of forces that are driving up commercial rents and tipping the scales in favor of large corporate chains.

These issues include:

– Soaring commercial real estate fueled by global investment and speculation

– Urbanization and a growing preference for walkable, mixed-use urban districts

– The encroachment of national chains, which have saturated the suburbs, into urban areas in their quest for growth

– A limited and declining supply of small commercial spaces suitable for independent businesses

– A preference for large national companies over small business on the part of commercial developers and lenders

These forces are complex. But efforts by local governments and advocacy groups are showing promise. The report presents 6 strategies that are having success, which are briefly described below:

1. Broaden Ownership:

ILSR's Stacy Mitchell
ILSR’s Stacy Mitchell

Roughly three-quarters of independent retailers lease their space, leaving them vulnerable to rising rates and redevelopment. So one solution is to expand real estate ownership by small business owners.  In Austin, a lease-to-own program is being floated, while Salt Lake City’s Economic Development Loan Fund lends money, including for down payments, to local businesses that don’t qualify for bank loans. A more grassroots approach is being explored in Minneapolis and New York City, where citizens are forming real estate investment cooperatives to buy properties and keep them in the hands of the community.

2. Reduce The Landlord-Tenant Power Imbalance

Commercial tenants have little bargaining power with their landlords, and even less legal protection. Landlords can decide not to renew a lease, for example, with no warning. In New York, the Small Business Jobs Survival Act seeks to address that imbalance by providing basic rights for commercial tenants, such as a timeline for lease negotiations, longer-term lease options and recourse to binding arbitration when there is a dispute. Others are exploring the use of tax incentives for landlords to help level the playing field for smaller tenants. Policies have also been proposed that would fine landlords who sit on vacant commercial properties while they wait for the highest bidder.

3. Zone For Local Business

Zoning has long been a powerful tool and cities are beginning to deploy it to ensure an adequate supply of commercial space suitable for small businesses. That can take the form on caps on store size or width in certain corridors, or zoning an area for adaptive reuse, as Phoenix has done in an old warehouse neighborhood. San Francisco, meanwhile, uses zoning and permitting to encourage commercial diversity.

4. Making Room for Local Business in New Development

Some fast-growing cities are beginning to resemble China, with construction cranes dotting the skyline (yo, Brooklyn, we’re talkin’ about you). How do you make space for local businesses in such an environment? Preservation of historic buildings plays a key role. Another solution is to require that a certain amount of ground-floor retail in new developments be set aside for small commercial tenants, including retail condominiums.

5. Making Space For Local Business in Publicly Owned Buildings

Cities own buildings, and there is great opportunity for them to align their role as landlords with public priorities, just as many have begun to do with procurement policies that favor local businesses. In Seattle, city officials are seeking local business for a newly renovated transportation hub, where they plan to offer flexible, affordable leases. The report points out that these local business-friendly policies could be extended to any developments that cities help to finance or subsidize.

6. Recognize Businesses As Cultural Landmarks

We all have them: those businesses—whether theaters, restaurants or bookstores— that have been around for generations and have helped define a neighborhood or city.  Many international cities have long recognized and protected their iconic businesses, and some U.S. cities are now following. San Francisco last year created a Legacy Business Registry  (defined as those that have been in business for 30 years or longer and contribute to the city’s identity) as well as a fund that makes grants to these local institutions.

“We hope the report will serve as a jumping off point for a deeper conversation about how to ensure that cities remain affordable, vibrant places for community enterprises,” says Mitchell, co-director of ILSR.

What is your city doing?

Download a pdf of the full Affordable Space report here.

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