There is a dizzying array of opportunities for local governments, from improving broadband infrastructure to launching small-business training programs. But it is the built environment that needs smart, innovative investment. Downtowns and their small businesses have been decimated not only by the pandemic but also by decades of exploitive tactics of online and big-box retailers.
Time is of the essence in repairing this. In many places, pre-pandemic commercial rents already had escalated beyond the reach of many small businesses. The COVID-19 pandemic has exacerbated this vast divide: According to an April report by the Federal Reserve, roughly 200,000 more businesses permanently closed in 2020 than in average years. Businesses owned by women and minorities have been particularly hard hit: At the end of 2020, 77 percent of Black-owned businesses rated their financial condition as “poor” or “fair,” versus 54 percent of white-owned businesses.
Local governments can do a lot to address this by making affordable commercial space available to small businesses. This approach offers both short-term and long-term benefits, boosting small businesses’ bottom lines now and helping prevent their displacement later, when an economic recovery is in full swing. This would also help stabilize landlords who’ve had a tough year. Additionally, local governments would benefit by growing the tax revenues needed to support education, public safety and other vital services.
There are two primary ways that local governments can do this:
First, they can help small businesses and landlords negotiate leases for vacant space. As the nation emerges from the worst of the pandemic, commercial vacancies are at record levels. Retail vacancies grew by 20 percent between the second quarters of 2019 and 2020. The vacancy rate in shopping malls hit an alarming 11.4 percent in the first quarter of 2021, the highest on record. The hospitality and office sectors have been similarly pummeled.
Local governments can play a vital role in helping landlords and small businesses negotiate leases that work for both. For example, cities can master-lease commercial properties, then sublease space to small businesses — particularly those owned by women and minorities — and absorb any potential losses. Cities and counties can also encourage property owners to offer “percentage” leases, in which a small-business owner pays a lower base rent plus a percentage of gross revenues over a certain minimum. These are usually more affordable for businesses and give both the businesses and the property owners extra incentive for success. Localities can also encourage short-term leases, giving entrepreneurs more breathing room to test the market and fine-tune their business plans.
In all these instances, local governments can offer incentives to commercial property owners, such as counseling for small businesses and support from local financial institutions. So, as small businesses grow, everyone wins. While the city or county might lose money initially, the odds are good that it will earn it back as it gains jobs and increased tax revenue. In the meantime, landlords get more stable tenants and thousands of people gain more control over their economic destinies.
Second, local governments can also buy commercial buildings and transfer them to community land trusts and land banks that in turn can manage the properties in perpetuity and lease space at affordable rates to small businesses, particularly those that meet high-priority needs such as providing healthy food, creating opportunities for disadvantaged entrepreneurs and offering good jobs. This can be a valuable approach in communities where escalating commercial rents have historically been a problem, with small businesses being displaced in favor of national chains. It can also be valuable in food deserts, with a land bank providing the property for new grocery stores, removing some of the risk of market entry. Finally, this strategy can be used to assemble clusters of businesses that provide needed products and services, strengthening one another by generating symbiotic visibility and foot traffic.
A number of land banks and organizations already do this. Historic Boston Inc., for example, has acquired several historic commercial buildings in recent years, rehabilitating and then leasing them to small businesses that not only pay affordable rent but also benefit the community in meaningful ways. A handful of similar community land trusts, from Durham, N.C., to Anchorage, Alaska, have also played active roles in acquiring and managing commercial property for community benefit.
There may be landlords who are unwilling to participate, leaving their properties empty and blighted and depressing the overall commercial district’s prospects for recovery. In these cases, localities might consider a vacancy fee or vacancy tax on these properties, nudging property owners to be more proactive in leasing their space while, at the same time, offering to help property owners find tenants and negotiate realistic leases.
When local governments play an active role in creating affordable commercial space, they are not just benefiting the businesses that move in; they are benefiting the entire community. Commercial districts become livelier and more appealing. Small businesses become stronger. And entrepreneurs have new opportunities to open businesses and build local wealth.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
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