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...
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.
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.
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).
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.
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.
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.
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.
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.
Landlords should be pushing for an LVT so that in a downturn that can sync up all at once it is the local government that needs to take that hit. It makes no sense that they currently are the ones to take on society level risks. The LVT is a de-risk to their business. In a downturn they would have no capital losses, and instead only see land taxes fall.
For those that don't know, an LVT causes land prices to drop, where a tax on 100% of the rental value of the land would cause land prices to fall to zero. This would allow landlords who were able to own many more properties, and could use their funds building out extensive retail spaces, and have many tenants pay them rents.
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.
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.
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.
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.
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.
>But homeowners would likely be willing to share value too
No, they wouldn't. That is why property tax rates (and hence land value tax rates) have so many laws capping them and otherwise limiting them for all the important voting blocs (old people, military, big business, etc).
See California prop 13, that voters passed. See Oregon measure 5 and 50, also passed by voters. And politicians wouldn't dare touch these.
>In American cities, there is an issue with value capture. One party creates the value (in this case retailers), another party (landowners or homeowners) captures it.
This phenomenon is not restricted to American cities. It will broadly exist in all human societies with flattened or top heavy population age histograms. The old are the most populous and knowledgeable (and motivated) to structure society so that the non working (themselves) can capture the most value. Hence, the popularity of earned income tax instead of marginal land value tax rates. The goals of the wealthy and the old (and the ones with aspirations to be wealthy) align to support rent seeking policy.
A perennial cause for revolution around the globe.
It’s a bit ironic. In an effort to horde wealth, the wealthy bring about their own ruin. Though I suppose if you die before the revolution that’s alright for you
Revolution has never changed this status quo. Just results in violence, then once the ship rights itself the social order is back to how it was with an oligarchical elite extracting value from labor. In fact I don't think there has ever been a single case of labor unshackling itself from the yoke of the oligarchy.
If there is a natural human condition, it must be this, just because of how sustained this pattern has been over the course of what tens of thousands of years to today, even in the face of modern technology and more universal awareness that this is how the world actually works.
A classic “just do LVT” situation. It’s amusing because Henry George wrote down exactly what to do 130 years ago and we’re still arguing about it. Just read the book people!
> The Hong Kong Mass Transit Railway buys up the land around new station sites before they start building them. This rail-plus-property model makes them one of the few profitable transit services in the world.
I really enjoyed this video https://www.youtube.com/watch?v=k_roPoXi8QI describing more in detail how they did this. It has as much to do with historical circumstance as it does with good decision-making. The MTR is an impressive organization. MTA in NY seems to be taking a few cues, prioritizing in-house expertise.
The most chaotic solution I can think of would be making Felix Margolis, who joins Fannie Mae and Freddie Mac and gives out 30 year tiny interest loans to help first time small business owners buy the property instead of renting it. A beautiful crop of thriving businesses started in 2027 at the low low price of commercial real estate prices climbing imto the stratosphere so no small business started in 2040 being able to rent more than a square foot.
I hear people talk about this all the time and I know I am guilty of it too:
1. Go into a store to check out a product in person or try it on.
2. Leave and buy it cheaper online.
I try not to. Sometimes it's because the store doesn't have the exact color or model I want. Sometimes the point in time when I'm shopping happens to not be when I'm ready to buy and when I am ready, it's a hassle to go back to the store. But sometimes it's just being lazy and cheap.
I'm surprised the article didn't mention an obvious (but extremely difficult) answer:
1. Levy taxes on online retail companies. Scale so that the larger the business is and the greater the fraction of their business is online, the higher the tax.
2. Use that to subsidize or lower the taxes on smaller, in-person focused businesses.
Taxes are the single best lever we have to architect incentivizes to improve the world for the public. It's a shame that government and politics in the US is so broken that we can't really use it effectively.
Always in agreement to such initiatives. I do think a barrier to adoption is the space of possibilities is quite large and generally not well organized around a specific proposal or mandate, so opposition to these initiatives can pick them apart of details. Especially since opposition is usually much more engaged in local governance.
It's somewhat complicated to understand, but I think this is an opportunity for strong communicators to present to a public that is much more receptive toward these ideas.
Readit News
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.
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.
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...
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.
$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.
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.
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.
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.
For various reasons it’s extremely rare for retail businesses to own the buildings they operate out of.
Just like saving a (healthy) life is a good thing, even if you can spin some stories about the dignity of death or whatever.
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.
> 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.
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.
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.
For those that don't know, an LVT causes land prices to drop, where a tax on 100% of the rental value of the land would cause land prices to fall to zero. This would allow landlords who were able to own many more properties, and could use their funds building out extensive retail spaces, and have many tenants pay them rents.
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-...
As a bit of a "cute downtown" junkie, I can assure you that those quaint town stores have crazy prices, but people pay them.
Using all kinds of regulations to ignore the market signals usually points out that you're doing something wrong (not _always_).
No, they wouldn't. That is why property tax rates (and hence land value tax rates) have so many laws capping them and otherwise limiting them for all the important voting blocs (old people, military, big business, etc).
See California prop 13, that voters passed. See Oregon measure 5 and 50, also passed by voters. And politicians wouldn't dare touch these.
>In American cities, there is an issue with value capture. One party creates the value (in this case retailers), another party (landowners or homeowners) captures it.
This phenomenon is not restricted to American cities. It will broadly exist in all human societies with flattened or top heavy population age histograms. The old are the most populous and knowledgeable (and motivated) to structure society so that the non working (themselves) can capture the most value. Hence, the popularity of earned income tax instead of marginal land value tax rates. The goals of the wealthy and the old (and the ones with aspirations to be wealthy) align to support rent seeking policy.
It’s a bit ironic. In an effort to horde wealth, the wealthy bring about their own ruin. Though I suppose if you die before the revolution that’s alright for you
If there is a natural human condition, it must be this, just because of how sustained this pattern has been over the course of what tens of thousands of years to today, even in the face of modern technology and more universal awareness that this is how the world actually works.
I really enjoyed this video https://www.youtube.com/watch?v=k_roPoXi8QI describing more in detail how they did this. It has as much to do with historical circumstance as it does with good decision-making. The MTR is an impressive organization. MTA in NY seems to be taking a few cues, prioritizing in-house expertise.
- I like to shop IRL, and the opportunities to do this pleasurably are going extinct
- I live right by Hayes valley, which they start out with.
- I'm also a member of "The Commons" which they mention at the end. I love what it's trying to do: creating a new social 3rd space in SF.
1. Go into a store to check out a product in person or try it on.
2. Leave and buy it cheaper online.
I try not to. Sometimes it's because the store doesn't have the exact color or model I want. Sometimes the point in time when I'm shopping happens to not be when I'm ready to buy and when I am ready, it's a hassle to go back to the store. But sometimes it's just being lazy and cheap.
I'm surprised the article didn't mention an obvious (but extremely difficult) answer:
1. Levy taxes on online retail companies. Scale so that the larger the business is and the greater the fraction of their business is online, the higher the tax.
2. Use that to subsidize or lower the taxes on smaller, in-person focused businesses.
Taxes are the single best lever we have to architect incentivizes to improve the world for the public. It's a shame that government and politics in the US is so broken that we can't really use it effectively.
It's somewhat complicated to understand, but I think this is an opportunity for strong communicators to present to a public that is much more receptive toward these ideas.