This is a vexing problem I was made aware of by friends that are in the retail business, renting their stores from landlords. It's really brutal. Retailers take on all the risk, put in the work to revitalize a neighbourhood, and their reward is that when lease renewal comes up in 10 years, it spikes and they're faced with a choice of being displaced or handing over an enormously increased part of their margins to the landlord which has done literally nothing.
The others that benefit are the nearby condo developers, that take photos of cool retail in the area to put into their brochures in order to help sell their product. They benefit from the land speculation and the work from others.
I don't really have a solution except that I can see that the landlords benefit from scarcity, and their leverage and ability to raise rents would be lessened if there was more viable retail spaces to take advantage of.
So the city could help retailers by dramatically liberalizing retail zoning and allowing more competitive high streets to develop. This could take the edge off being forced to move by a landlord jacking up rent.
> Retailers take on all the risk, put in the work to revitalize a neighbourhood, and their reward is that when lease renewal comes up in 10 years, it spikes and they're faced with a choice of being displaced or handing over an enormously increased part of their margins to the landlord which has done literally nothing.
This happens on the personal side as well, where property tax rates are artificially depressed - or more accurately, subsidized - until the property changes hands. When we bought our nearly 30 year old house that had had zero improvements, additions, or renovations since initial construction, our property tax bill increased 300% and has since "stabilized" to +10% a year.
What is truly insidious about this is that it's impossible to guess or estimate until you've already purchased the home, and by then it's too late to do anything about it except complain at the courthouse, which might get you a year's abatement if you're lucky.
If we let property taxes just be whatever they "should" be without penalizing home-buying in the process you could at least know what you'd be paying rather than having to factor in a 3-5x increase.
> If we let property taxes just be whatever they "should" be without penalizing home-buying in the process you could at least know what you'd be paying rather than having to factor in a 3-5x increase.
I wouldn't be surprised to hear this varies by jurisdiction. In CA, which has large property tax jumps on sales thanks to Prop 13, it seems like you can know the annual property taxes in advance. The sale price is the taxable valuation* and you can find what the local tax rate is (or you can infer it pretty closely from another recently sold home's public municipal taxes paid).
So solves one problem, but is still problematic :)
*I assume this is the general case, anyways; maybe there's details I'm forgetting about separate tax rates on the land and the improvements; the split of the overall proper value between those two categories was mystifying when I bought...
Where is this?
As far as I know, my area doesn’t do that. The assessments go up over time, but there’s no large jump on transfer of ownership.
This is in California.
The hand-wavy explanation is that in the late 70's when this initiative passed (Prop 13), home values were rising rapidly due to an influx of people moving to the state and higher inflation rates of the times. Many people that owned homes, including those that had purchased their homes and retired, were getting priced out of their homes on the property tax rates. There are other rationales or rationalizations depending on where you come down on it. But Prop 13 was intended to slow property tax growth while you owned the property, with assessment reset to full market value at sale time.
Isnt this a bit circular?
By definition if it hasnt been overturned yet, then the opponents havent mustered enough political capital to overturn it.
So its complaining they are disadvantaged by policies due to having inferior political capital, no duh!
(Presuming the original motivation wasnt entirely random)
I think you may have replied to the wrong comment.
California - proposition 13.
There seems a bit of inner conflict in what you're saying. If retailers "revitalizing a neighborhood" leads indirectly to them getting priced out due to rising land values, isn't it also true that poor people living in the neighborhood get priced out at the same time? Is it a good or bad thing to make a neighborhood more hip, is the retailer a hero or a villain?
It's absolutely the case that poor residents get priced out and do not necessarily benefit from a neighbourhood becoming hip.
The cool new retail is tangentially to blame through second order effects, but the real problem is the inflexibility of the system in responding to change which results in a shortage of housing, which means that the disruptive impact on low income persons is really severe as they have no where to move to when things become more expensive or they are evicted.
Much like how the solution to increasing retail rents is more flexibility in retail zoning, so to is the solution for increasing rents.
It's less of a big deal if a cheap lame neighbourhood suddenly becomes cool if you can easily bail out because there's plenty of affordable apartments elsewhere. The problem we're in is that there's a general shortage and so in many places, losing a long held apartment is like an existential crisis because everywhere else is even more expensive and there's a shortage.
Another approach is that in redeveloping "cool" areas we could increase land/property taxes and developer fees so as to recapture the land lift and divert toward public realm projects that benefit existing long time residents. The area becoming cool and getting new condos pays for the new pool and new below market housing.
Should be mentioned as an aside that the actions themselves of poor people can ultimately gentrify a neighbourhood just as much as retail. A neighbourhood can become known for a vibrant arts/music scene that ultimately gentrifies it not just because it has some bars, but because the working artist residents are they themselves creating the attracting works in putting on events and shows. They earn a meagre income as working artists but ultimately may displace themselves as condos come advertising themselves on the scene that they've created.
Cyclical neighbourhood change I think is inevitable so I think what we really need to focus on is not necessarily finding ways to keep neighbourhoods the same, but giving people and retailers options so that when change happens, it's not disruptive and painful.
Depends whether or not the city allows other neighbourhoods to exist/grow/change. If the total floorspace in the city is fixed in regulations, then ofc anything done to improve conditions will hurt people on the bottom. The people who can afford a "revitalized neighbourhood" would happily live in brand new housing built on top of land in the nearby mansion district, displacing no one, but city planners do not allow that - new apartments can only be added to the city stock by destroying old ones, new store floorspace can only be added by destroying old etc. This forces everyone to play musical chairs with too few chairs and the only winners are those who own the chairs.
I heard that in Japan, it's common for condo developers who want to buy out smaller buildings to compensate the owners with an equal amount of floorspace in the new building - not sure how common that practice actually is, but what a way to align incentives!
I think a common thing in Greece was that owners themselves would redevelop their properties much denser, retaining an apartment or two of equal floorspace to their own home, and then leasing or selling out the others to fund the redevelopment of lot.
This sort of flexibility would be really welcome in North America but SFH neighbourhoods are frozen in stone, so when the nearby high street becomes cool, all the little former working class single family homes become million dollar homes that can only be purchased by the rich, and the working class people that may have previously rented them are booted out to who knows where.
Long term residents may own their properties, protecting them from rent increases and letting them share in the wealth should they sell up and move.
For various reasons it’s extremely rare for retail businesses to own the buildings they operate out of.
You aren’t looking at it in the long term view. Yes that works for people who have been living by there for 40 years since the area was not so nice. But how they are rich (housing value increase) and no one new who is not rich can move it. Eventually the people who have been there long will die and it will only be for the rich.
A hero. It's pretty simple. No need to complicate things.
Just like saving a (healthy) life is a good thing, even if you can spin some stories about the dignity of death or whatever.
By that logic making an area worse deliberately is a win for affordability.
I've seen a similar thing happen (though more rarely) where a retailer owns the building or space, and after 10 or so years, looks up and realizes they could make more take-home by renting it out.
In truth, retail is a pretty awful business. People love the romanticism of it and the "simplicity", but really it's a shit way to make money the vast majority of the time.
$100k of money sitting on shelves depreciating. Narrow hours when most of your business comes, but need to hang around all those other hours for the trickle of other customers. Dealing with theft. Dealing with bottom tier workers. Dealing with the general public
It's really best when you are already retired and just want something to do for fun.
Vanity shops/restaurant projects by rich spouses are very much a thing in some rich towns as well.
People who are doing it for fun since they have nothing else to do with their time and this also hurt competing businesses that actually need to make money.
That said it would probably be fun way to engage with the community in whatever retirement hobbies you have. Like a daytime cafe / nighttime lounge / listening bar / art gallery thing haha.
You do need some staff you can trust to deal with all the not fun parts. Anyone who has worked retail as a teen knows what that’s like.
If you own the building and rent to your spouse it often makes sense to charge as high as you can because of depreciation.
Of course, you have to be careful to avoid self dealing.
Location or land is a scarce resource by nature. I believe, the notion that more competition will fix things for cant really hold up. By designating more commercial zones, you just move around where space is left but you dont ensure that the same development happens there too.
Retail condos avoid this problem, although require the business to have access to more capital.
https://shoppingcenterbusiness.com/retail-condominiums-break...
But in general most US cities have an excess of retail space. Eliminating a lot of it would probably be a net positive.
here in the Netherlands a lot of shops that use to own their building switched to renting it to some sucker who does all of the work for a fraction of the profit. Then, when they go bankrupt you put a new sucker in.
> Retailers take on all the risk
> landlord which has done literally nothing
This isn't really accurate. It actually takes a decent amount of work and capital input to get a set of retail buildings into usable shape and keep them that way. The internet caricature of landlords is that the buildings just popped into existence one day and the landlords rent them out, but there's obviously more to it. I know several attempts at retail real estate development that flopped and lost investors a lot of money.
There's also a risk involved in renting out the properties. Not all tenants will pay the rent, and when they stop paying for long enough you have to evict. It takes a long time to get someone's business out and turn the property over so a new business can move in. The rents have to be adjusted to compensate for some of that loss, but in a downturn (e.g. COVID) the losses can all sync up at once and torpedo the financial model used by the landlord.
Retail spaces also need to be kept up. It's common in my area for groups to buy out blocks of spaces and overhaul the old parking lots, landscaping, lighting, traffic patterns, and security so that they go from being sketchy run-down locations to something safe and inviting.
I'll probably get downvoted for trying to add some balance to the conversation because this is an internet comment section and my comment wasn't "landlords bad", but retail property investment isn't really a magical safe investment like everyone assumes. Keep that in mind if anyone hits you up for an investment opportunity related to one.
There is risk in choosing tenants for sure, though it is usually the case that the retailers themselves are putting in the expense and sweat equity into renovating a space. Sometimes this is cost shared, often it isn't.
I know my retailer friends painted their store themselves.
It is in the scarce retail environment where landlords have the least amount of risk around choosing a tenant because if one fails they can easily get another. So a city adding more retail zoning would increase vacancy, increase risk to landlords and hopefully reward good retail tenants.
>This isn't really accurate. It actually takes a decent amount of work and capital input to get a set of retail buildings into usable shape and keep them that way. The internet caricature of landlords is that the buildings just popped into existence one day and the landlords rent them out, but there's obviously more to it. I know several attempts at retail real estate development that flopped and lost investors a lot of money.
Nobody develops the sort of organic small scale anything anymore because the caricature informs the local government who then sink their teeth in at every turn and the end result is that the only people doing new development or refreshing stuff at great expense are corporations capable of fending off the government or rich enough to play along.
I think big players also have significant risk exposure during black swan events and the timeline of their operations makes those incidents not entirely unlikely to occur. It's sort of like insurance - most of the time they just get to extort rent, but sometimes they get crushed, too.
https://finance.yahoo.com/quote/HPP/
Check the 5-year on Hudson Pacific. They're down 96% and dropping. They own a significant number of downtown commercial properties in SF and LA. They're completely underwater, their spaces are barely half full, and they can't lower rents without violating their bank loan covenants.
Of course, if the commercial landscape hadn't shifted in a way nobody could predict then, yes, they'd likely have continued to print money for the foreseeable future. Instead, they're left holding a very heavy bag and will take it to the grave.
Anybody who has entered the retail business as a renter for the past 15 years has made a mistake. Because land lords do this to everybody. If their goal wasn't to suck the lifeblood of people and businesses, then they would have invested their money into something different than becoming landlords.
If you have a great retail idea, then you need to get investors behind you so that your company can outright own the stores. Otherwise you will be leeched on endlessly. It's incredibly hard to get on top if you're depending on the good will of landlords.
Solution: Online shopping until the bubble collapses.
That's a nice just so story for the cases in which a landlord benefits due to the success of his tenant. Now do the ones where the property value goes down because of any of a zillion other factors.
CRE has historically provided very good and stable returns, especially compared to retail businesses who face extreme failure rates and risk; trying to compare the two is insulting.
So retail business owners are just dullards who can't figure this out like you can?
I imagine most people are not capitalized, confidently practiced in it, or interested in that kind of business. Took 10 seconds to think about it.
What about it? Do property investors deserve guaranteed increase in asset value? Do other investors deserve that?
Of course not. It's your apparent assumption that property investors are not providing value because it's certain to go up or something.
They aren't selling in urban places.
Spitballing solution: In addition to LVT, rental tax? Nah, that just drives the purchase price to a higher level. Hmm. Also it drives up the cost of the minimal viable business (hence the coffee sheds in parking lots).
Allowing more supply is the only good answer.
We are in commercial zoning oversupply to be honest. New retail units going up all the time under apartments failing to lease because there is only so much retail demand, at least at the prices offered but we know people would rather take a loss from an empty unit they can write off than actually lower rent and underlying asset value they use for collateral for loans.
Really depends on local markets. NYC by comparison has a lot of new condos that go up with zero street level retail space.
It all gets filled up with an expansive lobby and amenities.
Makes the surrounding street life dead.
Could we fix that with a vacancy tax for retail?
There are too many factors that intersect to lead to these outcomes that make it easy to detect any one silver bullet. Valuing a property based on rents seems to be another big issue since it sets up incentives to increase rent and valuations even when the real estate market doesn't support that rent increase.
It's almost like you could describe the physical store as the means of production so what we're talking about is the worker's relationship to the means of production.
You might say: but what abou the owners? Many such small businesses are just jobs you buy. Many don't survive when the owners don't move on or the business sells for what's a relatively low price given the turnover.
I'll give you another real world example of this distortion: NYC"s so-called "zombie stores" [1].
I keep thinking about a statement made by Xi Jinping in 2016: houses are for living, not for speculation [2]. Many China critics liked to point to the Evergrand collapse as some gotcha but what really happened is that the CCP intentionally just popped the real estate bubble, taking the position that affordable housing was more important than inventor returns.
Why do I bring up housing? Because as intentional policy decisions increase the cost of construction, it also makes commercial real estate more expensive. Even if you ignore the increased construction cost, every commercial space becomes more expensive because it's an opportunity cost to not build housing there in a speculative market.
Increased rent and increased property costs are an input into everything you buy and are killing the businesses people seem to like and the so-called "third spaces" a lot of people talk about.
And why? Because a plurality of Americans (if not an outright majority) see themselves as "temporarily embarrassed millionaires" [3] and future real estate moguls.
[1]: https://www.nytimes.com/2024/08/06/nyregion/pharmacies-vacan...
[2]: https://en.wikipedia.org/wiki/Houses_are_for_living,_not_for...
[3]: https://www.goodreads.com/quotes/328134-john-steinbeck-once-...
The physical store is not the "means of production" in urban areas, but a closer analog is the piece of paper that allows a given square foot of floorspace (for any use) the right to exist within the city for a given period of time. You could call this piece of paper a floorspace factory, since it's the limiting factor. Somehow we have decided it's best to have as few floorspace factories as possible.
Land (or in modern terms, location value) has been seen as a means of production along with labor and capital since Adam Smith.
Yes, but back then you could build largely what you wanted to on the land. Now you can’t. The pieces of paper are more limiting than the actual land.
Stop densifying cities and start building out suburbs where the land is cheap.
Using all kinds of regulations to ignore the market signals usually points out that you're doing something wrong (not _always_).
Too late in certain markets like LA. They already built out all the flat land for the most part by the 90s. Only way to go now is to go up. There is no more land to go out. Look at the satellite map, development from ocean to mountains.
Except regulations are what got us here in the first place? At least in the US, zoning is a recent invention with racial motivations. Cities want to be dense because that is the cheapest way to build. That is why basically every city older than a 100 years old that hasn't been wrecked by zoning is dense. Suburbs are an unnatural product of abundant land in the US, the invention of automobiles, and zoning.
It's environmental as much as it is zoning that drives the development you see.
You literally can't build the kind of "concrete jungle" that you used to be able to because of environmental.
Like a store with a few parking spaces up front, the building and an alley around the back to one parking space (for the staff) and the dumpster is literally illegal without a multimillion dollar stormwater treatment system or a bunch of extra land (i.e. suburban sprawl).
This is also why you only ever see <low number> family houses on 1/16th to 1/8 acre (depending on the sqft of the house + parking) and the it jumps right to N-over-Y megacorp apartment blocks (maybe with retail on the bottom).
...that's a pretty disingenuous take on zoning, which has many other motives beyond racism.
For example zoning keeps industry away from residential, preventing disasters like the West Texas Fertilizer explosion.
It's funny that people always bring this up, but I don't see what centrally planned mandatory setbacks, height limits, and parking mandates have to do with preventing industrial accidents.
Must we have extremes? I could live near ”no explosives” zoning, while still allowing at lot more than is typical today.
The state claims jurisdiction on pretty much all the "seriously heavy" industry people like to trot out as though it would be in your back yard if not for zoning. The local towns don't get much of a say and even when they do the projects are high dollar enough that if the town won't grant it then they'll win on appeal and it'll be no big deal.
Aaaand, the real kicker is that the towns typically can't fight too hard because a lot of zoning provisions they'd use are not up to the legal standard it takes to do battle with a megacorp and they'd rather keep them on the books as they are than have the megacorp's lawyers pick them apart.
So you can still have Chernoybl in your back yard with zoning.
Zoning is about 100 years old, and it's not the reason Manhattan doesn't have enough groceries. And ultimately, market forces almost always win over regulations.
Reformulate the question: why do people tolerate living in dense tiny apartments, without easy access to necessities like childcare and grocery stores?
You don't need tiny apartments to have density. You can do it with smaller single-family houses on smaller lots, narrow one-way streets, and alleyways for parking instead of driveways and garages. This is how the pre-war streetcar suburb of Riverdale, Toronto is designed [1] and it has much higher density than the rest of the city.
[1] https://www.youtube.com/watch?v=MWsGBRdK2N0
> You don't need tiny apartments to have density.
Sure, it starts with "just do row houses" and "missing middle" and in two generations it becomes "we should allow SROs".
> [1] https://www.youtube.com/watch?v=MWsGBRdK2N0
That's a propaganda channel that "conveniently" ignores everything against their narrative.
These kinds of density still require cars. Unless you want to have a stay-at-home spouse who can do full-time housekeeper duty (like in that Toronto neighborhood).
Manhattan doesn't have enough groceries? Do you have a source for that? Everywhere in the city I go has plenty of grocery stores.
On paper though, if the area becomes nicer, they should be raising their prices to reflect that. The landlord asking for a larger cut because the value of the storefront has increased, should be a signal to raise your prices to pass the cost along.
As a bit of a "cute downtown" junkie, I can assure you that those quaint town stores have crazy prices, but people pay them.
That works if you sell something exclusive. It is less easy if you sell things that are for sale on Amazon.
Unfortunately city planners are the original "scientific" central planners and they have decided that legal floorspace (residential, commercial, retail, all of it) should exclusive & scarce, with predictable results.
It is difficult to simply raise prices when your business is not a necessity but a luxury, because there is a tipping point where customers will decide they can just do without whatever you have on offer. Customers can be awfully price sensitive beyond even what would be economically rational. They might balk at a pint of beer going up by $3 while they pull down four or five figures of income a month.