As Commercial Rents Rise, Local Businesses Feel the Squeeze

In cities across the U.S., rising commercial rents are threatening the viability of local, independently-owned businesses. Mom and pop shops are being priced out by national chains. Residential developers in search of a large-scale housing opportunity are pressuring the industry to relocate.

A study by the Institute for Local Self-Reliance (ILSR) finds this is a widespread problem. “The sharp rise in rents isn’t limited to affluent neighborhoods. It’s happening across a range of communities, with some of the most intense pressure falling on businesses in lower income neighborhoods.” A diverse group of cities including Oakland, Nashville, Milwaukee, Charleston and Portland, ME are being affected. “The problem is especially detrimental to people looking to start new businesses, further raising barriers to entrepreneurship and stunting economic dynamism,” the report states.

As cited in the ILSR report, LoopNet data shows how quickly rents have skyrocketed. Between 2015 and 2016, retail lease rates jumped 16 percent in Oakland, 19 percent in Nashville, 12 percent in Milwaukee, 26 percent in Charleston and 22 percent in Portland, ME. Meanwhile, the average rental rate for industrial properties jumped 14 percent in Austin, 15 percent in Atlanta and 8 percent in Louisville.

ICIC is seeing this trend in our own work, too.

Last fall, ICIC partnered with LISC Boston and The American City Coalition to produce a set of place-based recommendations to support business attraction and retention efforts and strengthen and expand key commercial and industrial clusters in Boston’s Fairmount Indigo Corridor.

The Fairmount Indigo Corridor—an inner city neighborhood home to an estimated 135,000 residents—is a critical industrial commercial hub in Boston, containing 22 percent of the city’s remaining industrial zoned land.

ICIC’s cluster analysis of the Fairmount Corridor identified a set of specialized and growing clusters in Newmarket and Readville, two lower-density industrial commercial nodes in the corridor. Supporting the growth of these clusters, and leveraging additional area assets (e.g. proximity to transit, workforce availability), create an important opportunity for local economic development and job creation.

Although the corridor in many ways has not benefitted from the region’s economic growth and lags behind the rest of Boston across a range of economic and demographic indicators, existing businesses within the corridor are at risk of displacement given regional demand for new residential housing.

Low-density industrial commercial areas like the Fairmount Corridor are often targets for multifamily housing developers looking to build new product at scale. The growing scarcity of industrial commercial properties is driving up rents in those that remain, jeopardizing well-paying jobs for inner city residents.

Some of these transactions are beyond the control of local policymakers. But municipalities aren’t just throwing their hands up in the air and blaming the free market economy. As we highlight below, a number of cities are exploring unique strategies to keep commercial space affordable for entrepreneurs.

Create a “Buy Your Building Program” to Broaden Ownership

Not every small business is positioned to purchase the real estate they occupy. Yet encouraging ownership of commercial spaces can help control rising rents. Salt Lake City, which has seen retail lease rates rise 9 percent in the last year, is exploring the creation of a “Buy Your Building” program that would help connect local businesses looking to purchase their property with city financing and a network of local partner banks.

Encourage Joint-Ownership among Business Owners

For businesses that cannot afford to own their own real estate, purchasing a piece of a building might be another option. Cooperatives allow for community ownership of a shared space, in which each investor is granted an ownership share of the entire building with rights to use a dedicated space. Real estate cooperatives are most often relegated to the housing sector, but they can be used for commercial real estate as well. A group of Minneapolis residents, frustrated with the pace of redevelopment in their area, came together to purchase a former mattress factory. They transformed it into the NorthEast Investment Cooperative in 2011, a real estate investment cooperative, small business group and incubator that allows businesses to become an investor for as little as $1,000. “We’re trying to be a catalyst for change in the community,” says Chris Bubser, an architect and chair of the group’s Property and Tenant Committee.

Offer Strategic Rent Subsidies

While most would argue that municipalities should not be offering widespread rent subsidies to local businesses, because it could constrain growth, there are instances where this makes sense. In response to continually rising commercial rents, SF Heritage led an effort to create San Francisco’s “Legacy Business Registry.” The first-of-its-kind legislation, passed in 2015, allows City officials to nominate companies that have been in business for at least 30 years for an employee and rent subsidy. The legislation also authorizes the City to give a $4.50 per square foot yearly subsidy (up to 5,000 square feet) to property owners who extend ten-year or longer leases to “legacy businesses.” The City allocates $2 million a year from its general fund for this program, with the intention of recognizing long-term small businesses and nonprofits as historic assets.

Regulate Lease Renewal

Municipalities often have policies in place (rent control or otherwise) to protect long-term residential tenants from displacement. Few policies exist to protect small business tenants in a similar fashion. Many small businesses operate on month-to-month leases and are given very little notice before having to vacate or face steep rent increases. ILSR’s report profiles the story of Angelo Santos, the owner of a 600-square foot restaurant in New York City’s Washington Heights neighborhood. He had been operating his business in this location since 1997 and in 2015 was paying $5,000 a month in rent. The building he was in was sold as part of a $31 million real estate deal and his rent suddenly skyrocketed to $9,000 a month.

NYC’s Small Business Jobs Survival Act (SBJSA) was proposed to address issues like these. The bill would have given commercial tenants three specific rights: (1) a minimum 10-year lease with the right to renewal, so they can better plan for the future of their businesses; (2) equal negotiation terms when it comes time to renew their lease with recourse to binding arbitration by a third party if fair terms cannot be found; and (3) restrictions to prevent landlords from passing their property taxes on to small business owners. Needless to say, the bill was controversial and ultimately did not pass, but offers some insight as to how municipalities might get involved in helping to regulate lease renewals.

Fine Landlords for Vacant Properties

In commercial corridors, the spread of vacant storefronts can lead to blight quickly. Landlords often hold out on renting their properties until they can find the highest or most credit-worthy bidder, which keeps valuable commercial space out of the hands of local, independently-owned small businesses. To combat this problem, some cities have started to fine landlords for keeping their properties vacant. San Francisco fines any landlord who keeps a storefront vacant for more than 30 days, requiring the landlord to pay an annual fee and register with the city. New York City has proposed a similar ordinance that would fine landlords after six months of vacancy.

This past summer, Arlington, Massachusetts – a small community located just outside of Boston – began exploring the strategy, too. “If you’re showing a track record of having a long duration of vacancy, we want to make sure there’s some kind of financial disincentive for you,” said Town Manager Adam Chapdelaine. Arlington has experienced a spate of business closures as rents continue to rise, yet landlords struggle to find businesses that meet their rent expectations. As a result, vacant storefronts have proliferated.

Set Aside Space for Small Business in New Developments

Many small businesses cannot afford to sign expensive, long-term leases like those commanded by new real estate development projects. Real estate developers (and their lenders) instead often opt for national brands with deep pockets. Making matters worse, many new real estate development projects were once home to local, independently-owned businesses that were displaced when the property changed hands.

One way to protect small businesses is through zoning that requires developers to set aside a certain percentage of their space for small businesses. A related strategy is to implement zoning that prohibits national, chain retailers from opening within a certain district (e.g., a downtown overlay district). These zoning tools can level the playing field, making it more affordable for companies at high risk of displacement.

These strategies offer a glimpse into the ways cities and towns are trying to protect and retain local businesses in the face of rising commercial rents. Not all solutions will work in every community, and sometimes it will take a combination of solutions to create an impact. Even in areas where commercial rent pressure is less extreme, cities may still consider how these strategies might support economic growth and business development.