1. Economics
August 24, 2020

The coronavirus has effectively stalled a movement to tackle North America’s retail vacancy crisis

By Emma Jacobs

Before the onset of Covid-19, Ali Carter, the head of economic development in Arlington, Massachusetts, was fielding regular calls from around the country. She had presented at an industry conference in late 2019 on the town’s requirement that property owners register commercial storefronts that remain empty for more than 3 months, with a $400 fee re-incurred annually if the vacancy drags on.

Cities across North America seemed to see themselves in Arlington, a 45,000-resident streetcar suburb outside Boston. Despite strong housing markets, many found themselves with a glut of empty spaces on commercial corridors – peaking at 17 on a single Arlington block – and a suspicion that certain landlords were not trying hard enough to fill their spaces.

“It’s a problem that exists everywhere,” Carter says, and one as evident to city residents as to city employees. “People see an empty store and they think their whole neighbourhood’s falling apart.”

By March of this year, legislators had proposed similar programmes, sometimes called storefront vacancy taxes, in places such as Boston, New York City, Kingston Common in the Hudson Valley, as well as the Canadian cities of Toronto and Vancouver. In February, Blaine, Washington, supervisors approved a vacancy tax programme for the city’s central business district. In March, voters in San Francisco – which already had a poorly enforced registration scheme for vacant properties – passed a ballot measure to impose a commercial vacancy tax targeting more than a dozen neighbourhoods.

Even before the onset of the coronavirus, some observers cautioned that landlords holding out for above-market rents were just one factor behind the proliferation of empty commercial spaces.

“We simply overbuilt retail through the 1990s and 2000s,” says Stacy Mitchell*, co-director of the Institute for Local Self-Reliance.

Online shopping exacerbated weaknesses in the real estate market. The coronavirus crisis sent them into overdrive.  

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It’s hard to predict how many businesses will ultimately succumb to the coronavirus, says Chris Zimmerman, vice president for economic development at Smart Growth America, which advocates for sustainable – generally denser, mixed-use – urban development.

“Small business is the most vulnerable,” says Zimmerman, noting the city where he lives, Arlington, Virginia, created an emergency grant programme for small businesses using local funds and money from the federal CARES act.

“About half of those who are eligible who applied are getting it,” Zimmerman says.

Food and drink businesses, previously the bright spot on the commercial streetscape, have been some of the hardest hit by the shutdowns and social distancing requirements. In March, just weeks into the pandemic in the US, the National Restaurant Association estimated the crisis had already shuttered 3% of American eateries for good. A survey of members in May found that 75% did not expect their restaurant to operate at a profit within the next six months.

For retail, changes to some people’s buying habits may not be reversible.

“They start ordering all kinds of stuff online that they weren’t ordering before and some of that will return to the stores when the stores open again, but a lot of it won’t,” says Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University’s Graduate School of Business. “There are some underlying structural changes here that will be much more long lasting than the crisis itself.”

Absent another major aid package, US cities will almost certainly be left with far more vacant storefronts than they had going into the crisis, and which property-owners will have more trouble filling.

In acknowledgement of this new reality, San Francisco’s supervisors decided in June to postpone implementation of its newly approved vacancy tax until 2022. The development of Blaine, Washington’s downtown plan went on hold. And in Arlington, Massachussetts, as of 1 June property owners may now request a waiver for the annual vacancy fee if they can demonstrate a direct impact of the Covid-19 pandemic to their difficulty retaining or attracting tenants.

‘Somebody needs to take a loss’

The gaping holes in city budgets will make traditional economic development tools cities have, like property tax breaks, more painful to deploy.

Another strategy is re-zoning, though this runs the risk of shuttering buildings off at street level if the uses are private.

Then, there are incentives cities can create for landlords to fills spaces in other, temporary ways. When Arlington, Massachusetts, first enacted its fee for property owners of vacant storefronts in 2017, the bylaw included a waiver for spaces used, or “activated” in economic development parlance, in other ways, such as a pop-up shop or artist installation.

Brooks Rainwater of the National League of Cities, an association of American cities and towns, notes that pop-ups in vacant properties had become increasingly prevalent prior to the pandemic.

“A good short-term fix is just really thinking about how you can populate these spaces without maybe signing a long-term tenant,” Rainwater says, “just because there are so many reasons that it’s valuable for the city to not have this vacant space.”

Vancouver City Councilor Michael Wiebe, who had previously proposed a vacant storefront tax, says he still would like to see a registry created to collect information that will help the city figure out how to use those spaces better.

As vacancies multiply and Covid-related regulations remain in place for the immediate future, Wiebe says his city is focused on allowing businesses to expand onto the sidewalks. “We’re allowing businesses to use the area in front of a business that’s closed to put some chairs,” Wiebe says. “So if it’s a restaurant or cafe, they can actually take over the area in front of the business that’s closed, to help them with social distancing, and we’re also seeing some take over those spots to help put a couple extra tables or just kind of expand temporarily.”

In the long-term, Wiebe says, he’d like to see the city use vacancy registration data to inform further reforms.

“What are the opportunities to change licensing and permits?” he asks. “Because one of the big issues is you can’t just put a certain type of business into a space, here’s all these rules and regulations and permits necessary and it can be very costly […] So we’re going to have to figure out, the city, how we can relax those type of applications and uses to better use our space?”

One inevitable outcome of the crisis, Van Niewerburgh predicts, is that rents will eventually fall. 

“Somebody needs to take a loss,” he says, which may come in the form of foreclosures or fire sales of distressed properties.

“If the person who currently owns the asset loses that asset and it gets sold at a deep discount, now there’s a new owner who could charge much lower rent,” Van Niewerburgh says.

In both the short and longer-term, cities will likely have to start looking at ways to potentially encourage different types of uses for some of its commercial spaces, perhaps for other professional services.

“We need to be more creative,” says Zimmerman of Smart Growth America. “We need to think about other kinds of things that energize and activate a place and create experiences that aren’t dependent on retail commerce, that you know, Amazon and others are sucking up so much of.”

“That’s a tougher question,” he acknowledges. “I don’t think people have figured that out yet, but I think that’s going to be part of it.”

*Correction: An earlier version of this article misspelled the name of the co-director of the Institute for Local Self Reliance. She is Stacy Mitchell, not Stacey Mitchell. 

Emma Jacobs is a freelance journalist currently based in Montreal. Follow her on Twitter.  

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