Tackling the Problem of Commercial Gentrification

Date: 1 Nov 2002 | posted in: Retail | 0 Facebooktwitterredditmail

Rising commercial rents are generally a good thing; they are an indication of the health of a business district and encourage landlords and banks to invest in building improvements.

But in some communities, commercial rents are rising too far too fast. Often this sudden run-up is driven by chain retailers, which discover the appeal of an area and sweep in by the dozens, offering above-market rents for choice spots and sparking a frenzy of speculation. Landlords raise rents across the board and opt not to renew leases for existing tenants in order to attract a national brand. Banks are often willing to lend building owners more capital at better terms if the lessee is a big-name tenant rather than an independent business, no matter how successful.

The displaced local businesses are not the only casualties of this process. The community as a whole suffers. Businesses that meet everyday needs, like the hardware store and the barber shop, are replaced by chains and upscale boutiques that primarily serve tourists and leisure shoppers. Residents are forced to shop elsewhere for basic items. The local economy becomes more dependent and vulnerable to outside forces—from boardroom decisions to stock market drops. Over time, building owners also lose as the character and unique appeal of the district evaporate. Why shop downtown when the mall has the same stores, free parking, and better weather?

For commercial districts undergoing a rapid rise in rents, or at risk of one, there are number of strategies that could help ensure that locally owned businesses continue to be part of the district:

1. Encourage Owner Occupancy

The best way for a local retailer to maintain a stable location at a reasonable price is to buy the building his or her store occupies. Cities and states could encourage this through income or property tax incentives (in the same way that many jurisdictions tax owner-occupied apartment buildings at a lower rate than those with absentee landlords), or by providing low-interest loans for this purpose.

2. Create a Commercial Land Trust

Community Land Trusts (CLTs) have been used effectively for thirty years in cities nationwide to maintain affordable housing. A CLT is a nonprofit corporation that buys property in a city and holds it in perpetuity for the benefit of the community. Homes on the properties are sold to low-income families at affordable prices. The land beneath the homes is leased indefinitely. When the family decides to sell the home, the CLT repurchases it for a price set by a formula that allows for a fair return on the family’s investment but maintains affordability for the next owner. (To learn more about CLTs, visit the Institute for Community Economics or Burlington Associates’ CLT Resource Center.)

The CLT model could be adapted for commercial districts with the requirement that buyers or lessees of CLT buildings be independent, locally owned businesses. Although a few CLTs have been involved in non-residential projects such as office space for nonprofits, to date none have been involved in maintaining affordable retail space. But there’s no reason the model would not work for this purpose, according to Julie Orvis of the Institute for Community Economics, the group that originated the CLT model and provides technical assistance and grants to help CLTs get started. In fact, the major source of funding for CLTs, HUD’s Community Development Block Grants, are available for both housing and economic development.

3. Establish Municipal or Community Owned Retail Space

A city could buy a commercial building and contract for its management with the stipulation that space be leased only to local businesses. Rents would be stable and below market, reflecting the city’s actual costs of owning and maintaining the building with no profit. A town could also lease a building and sub-lease the spaces to local businesses at subsidized, below-market rates.

Another possibility raised by Donovan Rypkema of Place Economics is a land write down. It’s common for cities to buy land and resell it to developers for less than the acquisition price in exchange for the developer building a stadium or some other publicly desirable project. Communities could likewise target key downtown properties for re-conveyance with the stipulation that they house only locally owned retailers.

4. Identify and Revitalize Underutilized Commercial Districts

Communities should consider whether there are underutilized, perhaps run-down, commercial districts in the city where local businesses pushed out of high-rent areas might relocate. If so, the community might focus revitalization and economic development resources on making these districts vibrant and viable alternatives for local stores.

5. Implement Small-Scale Zoning

Many chain retailers will not open stores smaller than a certain size or that have street frontage of less than 25 feet. Maintaining the small-scale character of a retail district through zoning rules that stipulate maximum store sizes can reduce interest from national retailers and stave off gentrification. The Brookside neighborhood in Kansas City, for instance, limits stores to no more than 10,000 square feet and several San Francisco neighbors set limits at 4,000 square feet. Both have found these measures effective in keeping locally owned, neighborhood serving businesses.

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.