6 Things Cities Can Do When Commercial Space Becomes Unaffordable

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As rents are skyrocketing in cities around the country, smart city policy has an important role to play in keeping commercial space affordable and appropriate for local entrepreneurs.

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In Boston’s innovation district, the support infrastructure that young companies need to grow – including incubators and accelerators, as well as law, design, advertising, and other professional services firms – provides the healthy ecosystem necessary for innovative companies to thrive. However, the cost of rent is increasing in the district as high-end new developments crowd out early stage entrepreneurial activities. (Getty Images)

All joking aside, the rent really is too damn high. That’s the sentiment of many business owners across the country who faced double-digit rent increases over the past year. According to the Institute for Local Self-Reliance (ILSR) the price of retail leases spiked by as much as 26 percent in some cities. This issue is also widespread, with nearly 70 percent of cities indicating in our recent local economic conditions survey that commercial property values had increased.

Although improving property values is a sign of a strengthening economy, it is also a double-edged sword with serious equity implications. At best, businesses cut inventory or minimize staff to absorb higher rental costs, and at worst, they relocate to a different neighborhood or go out of business entirely. Due to their thinner profit margins, local businesses and startups are more likely to be negatively impacted by rising rents.

So what exactly is causing this problem in the retail market, and what are cities doing about it? That’s the exact question ILSR answers in a new report on affordable commercial space. The publication explores both the causes of the problem and potental policy solutions, and it serves as a helpful guidebook for mayors and their economic development teams.

“As rents are skyrocketing in cities around the country, smart city policy has an important role to play in keeping commercial space affordable and appropriate for local entrepreneurs,” said report co-author, Olivia LaVecchia. “By maintaining a built environment where locally owned businesses can thrive, cities can also advance other important goals, from expanding jobs to reducing inequality.”

The ILSR research explains how the lack of affordable retail space is caused in part by the physical restrictions of most cities’ commercial building stock. Newer developments tend to include large-size commercial space that is often too big (and expensive) for a what a small businesses realistically needs to lease. There is also more competition from national chains for downtown commercial space, as these larger-format stores are now moving into more urban markets after establishing themselves in the suburbs.

The good news is that municipalities can take the reigns of several policy levers to help ensure small business owners have a fair shot at leasing space in high-demand commercial corridors. These policy strategies leverage a city’s powers with the zoning process, property taxation, and subsidies. The policy recommendations for local government outlined by ILSR are:

Support lease-to-own programs. Small business owners often confront affordability obstacles when renewing their leases because this is the point in time when landlords can drastically increases rental prices. These hurdles can be avoided by helping more local businesses own their commercial space. The Buy Your Building Loan Fund in Salt Lake City helps provide businesses with the financing needed to transition from leasing to owning.

Incentivize landlords to use fair, affordable leasing terms. Another vehicle cities can use to help maintain affordability is property taxes. Property tax credits for landlords who offer affordable lease terms (like a long-term lease, incremental rent increases, and the ability to negotiate lease terms within a realistic timeline) may help keep prices steady.

Prevent commercial vacancies. Buildings that remain vacant are not only eyesores but also drive up the price of real estate in the larger area, especially in hot markets where demand exceeds supply. San Francisco has taken aim at this issue by fining building owners who allow their property to be empty for more than 270 consecutive days.

Leverage zoning powers to preserve small-size retail spaces. A city’s zoning code can be used to proactively preserve affordable retail space, particularly if the regulations protect historic districts from redevelopment, require diversity in square footage, or prohibit the conglomeration of several small-size spaces into a larger one. In Phoenix, for example, the city’s Adaptive Resuse Program waives permit fees and fast-tracks approvals for projects that will adapt historic buildings for future use by local small businesses.

Encourage (or legislate) set-asides for affordable commercial space in new developments. When a new development project is up for approval, the city can encourage or require that the developer devote a percentage of total commercial units at an affordable, or below-market, rate to businesses. Both Austin and Minneapolis utilize this approach on a case-by-case basis, while Cambridge, Mass., has legislation on the books mandating new real estate developments incorporate space for startups and new entrepreneurs.

Lead by example as a fair landlord. Cities are landlords too and can set the tone for keeping commercial space affordable and accessible to businesses of all types and sizes. One of the more recent examples of this in practice is Seattle’s renovated King Street Station. City leaders are prioritizing local businesses for the station’s updated retail space.

All of these strategies are ripe for replication in cities looking for ways to mitigate rising commercial property costs and maintain a strong economic base of local businesses.

About the Author: Emily Robbins is Principal Associate for Economic Development at NLC. Follow Emily on Twitter @robbins617.