6 Ways Municipalities Can Provide Affordable Space to Make Local Businesses Thrive

For lease

The importance of small local businesses to the vitality and resilience of communities has been well documented if not equally understood and appreciated. Numerous studies have shown that not only do local businesses, whose entrepreneurial owners employ local residents, tend to use more local business service providers and keep the wealth within the community instead of having profits being siphoned off to some remote headquarters, but also they are more civically engaged in the community in which they have a much bigger stake.

Already under the intense pressure of national or multinational chain stores which have pretty much dominated many retail sectors such as fast foods, apparels and general merchandise, thanks to their unmatched economy of scale, bargaining power and access to capital, an increasing lack of affordable store space has made it an even more challenging environment for aspiring entrepreneurs.

The reasons for the lack of suitable store spaces are multifold. In addition to escalating rents as a result of real estate speculation and zero interest rates driving up property prices, mixed-use, urban walk-able neighborhoods in which small businesses thrive, are being re-developed with new building structures catering to large format stores suitable to chains. On a per square foot basis, small businesses pay higher rents than chains, as landlords are willing to accept lower lease rates in exchange for tenant stability. The problem becomes especially bitter for small businesses who invested their time, money and effort in turning the locations into valuable properties only to be driven out by subsequent skyrocketing rents.

In order for a municipality to foster an environment which will allow local small businesses to survive and thrive, and, in the process, keep the economic virtuous cycle circulating and staying within the community, it is imperative upon the city to cultivate such an environment through policy.

A recent report by the Institute For Local Self-Reliance, Affordable Space: How Rising Commercial Rents Are Threatening Independent Businesses, and What Cities Are Doing About It,  outlines such challenges faced by small local entrepreneurs.

The report also outlines several policy tools, many of which proposed or already adopted by various cities, which can be used by municipal governments to alleviate such barriers and provide an incubator for local entrepreneurs. The full report with its recommendations and real life examples from various cities can be found here.

Below is a summary of such policy solutions.

Broaden ownership

In addition to encouraging local businesses to buy their stores, the city can foster community ownership of commercial spaces. When customers and neighbors become the owners of a commercial building, their interests are more aligned with the business tenants. This model includes customer cooperatives, community-owned stores, commercial community land trusts, and real estate investment cooperatives.

With this model, the businesses and the owners benefit, and so does the city. Its residents become more civically engaged and connected, and it also means that decisions about the urban landscape are being made by the people who live in it.

The city can help by spreading information about them and steering capital towards them, such as offering tax credits for local investments.

Reduce the power imbalance in landlord-tenant negotiations

Commercial tenants lack many basic rights and protections. They can be given no notice that their landlord isn’t renewing their lease, or start negotiating a lease with no assurance that their landlord is bargaining in good faith. Compounding this lack of protections, local businesses also create a portion of their space’s value, both by making improvements to that space and by driving their customer base to that location. These sunk costs make businesses even more vulnerable in the negotiation process.

Options to help level the playing field include:

  • Regulate lease renewal to level the playing field somewhat in favor of the tenants.
  • Create a property tax credit for landlords for renting out to small local entrepreneurs.
  • Fine landlords who keep commercial properties vacant while waiting for the highest bidder.

Zone for a local business environment

Absent regulation, commercial space in cities is increasingly tailored to the needs of large national chains. It happens, for instance, when a chain moves in and knocks down walls to consolidate several smaller storefronts into a space better suited for its suburban business model. These spaces can expand to the full length of a city block, as much as 50,000-square-feet and above, a size format that is unsuitable to the local grocer, which is then stuck looking for ever-scarcer small retail spaces with ever-rising price tags to match.

Zoning is one of the most powerful tools that local governments have to shape the city, and it’s also in the arsenal that cities are deploying to address the supply side of the affordable space imbalance.

  • Limiting store widths – by putting a cap on store widths, a city can foster a built environment friendlier to locally owned businesses, which generally thrive in smaller formats, and to limit the ability of chains to stretch out and use storefronts as advertising.
  • Prioritize historic preservation – older buildings are important contributors to cities’ small-scale commercial environment, distinctive character, and healthy street life, and finding ways to maintain and adapt them should be among cities’ top zoning priorities.
  • Preserve and increase the supply of small spaces – through city zoning and land use codes encourage the creation and maintenance of smaller retail spaces, and discourage huge storefronts. For example, one way to do this would be to require new buildings with a certain amount of commercial frontage to have a minimum number of storefront establishments, or to simply cap maximum store sizes. Other ideas include setting stricter limits on when developers can knock down walls to combine frontages.
  • Encourage commercial diversity –create a built environment friendly to locally owned businesses, and to residents and neighborhoods by encouraging diversity and expediting the approval of businesses the neighborhood doesn’t already have.

Set aside space for small local biz in new development

As existing buildings get redeveloped city regulation must ensure that an environment built for small business isn’t replaced with one designed for formula business. Many cities have already begun taking steps to create more mixed-use and walkable development. They can take that further with additional provisions specific to businesses that are also locally owned.

Options include:

  • requiring that a certain portion of ground-level retail space in new developments be set aside for locally owned businesses,
  • that a certain portion of ground-level retail be dedicated to commercial spaces that are small, and
  • that a certain portion of ground-level retail be commercial condominiums, aimed to increase small business property ownership.

Create a preference for local businesses in publicly owned buildings

Cities aren’t just regulators. They are also market participants and cities themselves own and invest in large amounts of real estate. Much in the way that cities create procurement policies that align their purchasing with their larger aims, cities can create guidelines that make city-owned properties, or properties that receive city or county financing, more accessible to locally owned businesses.

For example, Boston’s “Small Business Plan” aims to ”Transform underutilized city properties into small business real estate with leasing priorities awarded to businesses in priority segments,…, and allocate space for small businesses in new publicly-owned developments.”

Recognize businesses as cultural landmarks

Long time legacy businesses which built the character of the neighborhood they’re in, and continue to serve it, are being forced out by rising rents. These businesses don’t have the higher margins, outside investors or shareholders, or pull with lenders or property owners to keep up with dramatic increases to the cost of their space.

Through tax incentives, the city aims to sweeten the pot enough for landlords to agree to new, long term affordable leases to qualified legacy businesses.

 

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