market failure: lack of small local retailers in recent major developments in dc
Post on 04-Apr-2018
216 Views
Preview:
TRANSCRIPT
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
1/19
M. Steenhoek 2009-12-09 1
UAP 5234 Urban Economy and Public PolicyAssignment #2Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
In Washington, DC, recently completed projects with large retail components are
overwhelmingly leased to major national chain retailers. This trend indicates that the
market has failed to provide a proportional and equitable amount of new retail space
suitable for small, local retailers. These local merchants often help define and maintain a
neighborhoods character, stimulate the local economy through community reinvestment,
and provide opportunities for local entrepreneurs. In DC, public policy measures should
be taken to help ensure that these retailers are equitably provided for in the coming
developments, which are posed to redefine many of the citys neighborhoods.
The District is fortunate to have the economic vibrancy required to attract major
national retailers to its inner city neighborhoods, and these national chains continue to
play a catalytic roll in neighborhood redevelopment (see Table 1). However, the city
must take measures support the local businesses that helped build the foundation for the
thriving retail market that exists today.
Major new developments will continue to be built across the city, reshaping and
redefining the neighborhoods in which they locate. The Washington DC Economic
Partnership currently lists 127 proposed new construction projects in the District
representing more than seven million square-feet of new retail space (see Table 3). The
city should create a voluntary incentive package to persuade developers to provide space
reserved for small, local retailers as a policy measure aimed at correcting this market
failure. The DC Office of Planning (OP) has included expand opportunities for small
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
2/19
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
3/19
M. Steenhoek 2009-12-09 3
Major chains have played a critical roll in DCs recent retail developments (see
Table 2). The Urban Land Institutes publication, Ten Principles for Rebuilding
Neighborhood Retail (Beyard, Pawlukiewicz, Bond, 2003), notes the importance of these
major retailers stating that major chains lend legitimacy to the location in the eyes of
other retailers, and they have advertising clout that helps one-of-a-kind stores. In
addition to this function, major chain retailers such as Target and Best Buy can help to
curb the estimated one billion dollars of annual retail leakage that is lost from the District
of Columbia each year (Social Compact, 2008). These major retailers offer an efficient
option for consumers looking for cost effective, predictable goods of moderate quality.
Further, the big box retailers lower consumer transaction costs by offering a single
source for a wide variety of goods. In this capacity, major retailers, who benefit from
large economies of scale, provide efficient and economical offerings to consumers of
varying socioeconomic levels. It should be noted, however, these low costs are also
sometimes achieved by paying low wages and by offering limited benefits to their
employees (Houston, Oden, Spelman, 2004).
Despite the market benefits of these major retailers, the aggregate effect of the
growth of national chain retailers and loss of local unique businesses can have negative
externalities that are detrimental to DCs competitive advantage. If the majority of the
Districts future major retail and restaurant offerings are dominated by the ubiquitous
chain establishments typical of the surrounding area, there will be very little incentive for
suburban residents to come into the city for shopping or dining out. Like most major
cities, the District of Columbias retail strength in the region comes from providing a
variety of unique offerings. Encouraging new developments that strive to promote a
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
4/19
M. Steenhoek 2009-12-09 4
diverse mix of local, unique businesses in concert with major chains will grow the retail
gravity of the District.
Another negative externality associated with the increasing prevalence of chain
retail in DCs new developments is a reduction in the Local Premium. The Local
Premium comes from Civic Economics well publicized report, The Andersonville Study
of Retail Economics, October 2004, which demonstrated that locally owned companies
contribute more to the local economy than their national retail counterparts. This study
found that for every $100 dollars in revenue, local businesses generated $68 of local
economic activity, while chains only generated $43. Additionally, this study found that
local retailers commit more of their revenue towards their payroll, and contribute more to
local charities and fundraisers.
This pattern of community reinvestment creates an efficient positively reinforced
cycle in the local economy, helping it grow and demonstrating the fiscal benefits that
local businesses have to offer. Simply put, local businesses give more back to the
economy of the city. This cycle results in increased tax revenue for the District, which
provides residents with better public services, and a more robust economy. The benefits
to the local economy, in turn, give residents more employment and business
opportunities. In this light, helping to sustain the market share of local businesses is in
the public interest.
The lack of suitable retail space in new developments at rents which are
sustainable to local businesses is an equity issue as well. Small immigrant entrepreneurs
play an increasingly important roll in urban economic growth (Dickler, 2007). By
developing projects that do not provide new retail space which fits the needs of small
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
5/19
M. Steenhoek 2009-12-09 5
businesses, these entrepreneurs face more challenges in starting their business. This
additional challenge may limit their ability to succeed in business and live out the
American Dream. Provisions that develop retail spaces aimed at these small start-up
businesses will help to level the playing field for new entrepreneurs, U.S -born and
immigrant alike, and give them a more equitable chance to succeed. As of 2007,
Washington DC ranked 37th in terms of number of entrepreneurs per capita (Fortune,
2007). Creating development incentives that ensure space suitable for local retailers can
increase the opportunity for entrepreneurs and help DC move up in the rankings.
Some of the spillover effects associated with the revitalization and neighborhood
legitimacy that national retailers bring are increased property taxes, and higher, market-
based rents. These externalities pose a threat to the stability of existing local, small
businesses. As property values rise with the perceived improvement of the
neighborhood, businesses will also see their property taxes rise incrementally. Well-
financed national retailers are better positioned to afford these sometimes drastic tax
increases. For a small business, this increased burden may be enough to push them into
deficit operation. The presence of major chains in a retail trade area will lead to
increased market rents (Pratt Center, 2009). If existing small retailers do not have lease
provisions to combat these market adjustments, they may be priced out of the
neighborhood and unable to renew their existing lease. Once rents have been raised to
the national retailer level it is unlikely that the space will be afforded by few businesses
other than a major chain.
Major cities around the country have recognized what is at stake when the
stability of their local businesses are threatened by this market failure and have taken a
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
6/19
M. Steenhoek 2009-12-09 6
variety of measures to combat it. Much of the public policy currently in place or
proposed nationally are defensive in nature. They aim to restrict the market from
allowing major chains to locate in neighborhoods, instead of focusing on creating spaces
dedicated to small businesses and improving small business skills. Examples of these
defensive strategies include San Franciscos Formula Business restrictions, big box taxes,
and store size caps.
The basic premise for San Franciscos policy is that formula retailers must be
reviewed by the Planning Commission and receive a special permit for their business
(New Rules, 2009). The restrictions have caused many chain retailers to shy away from
trying to locate in some of San Franciscos neighborhoods. This does achieve the citys
goals, but it is leaving many inefficient empty storefronts with landlords bearing the brunt
of the burden (Duxbury, 2009).
Los Angeles and Chicago have looked into the use of an additional tax
specifically for big box stores. These policies would shift the tax burdens as a way to
address concerns about the negative impact on the local economy (New Rules, 2003;
Baiman, Weiske, 2004). Another common technique is the creation of caps which restrict
maximum store size. These are currently utilized in more than thirty American cities
(Weiner, 2008). Clearly, the increasing presence of national chain retailers is a point of
concern for major cities across the country.
Washington, DCs current public policy for the stimulation and support of small
businesses focuses around three basic tenants: technical support through the DC
Department of Small and Local Business Development, targeted infrastructure and
storefront improvements through reSTORE DCs DC Mainstreet Program, and Enterprise
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
7/19
M. Steenhoek 2009-12-09 7
Zone (EZ) incentives. The EZ incentives include tax-exempt bond financing, capital
gains tax exemption, and DC employment tax credits (District of Columbia, 2009). This
package is aimed at supporting the retailer by reducing their tax burden, connecting them
with government resources, increasing their business skills, and beautifying retail
corridors.
Additionally, the District has successfully used Tax Increment Financing (TIF)
funds to help stimulate economic development in the city. This money has often been
allocated towards projects that have major retail anchors and are seen as neighborhood
revitalizers. DC USA and Gallery Place are prime examples of this. These projects
collectively received over 120 million dollars in TIF funds, are anchored by multiple
formula businesses, and have minor, if any, small local retail requirements (Washington
DC Economic Partnership, 2009a). DC USA is required to provide 3%, or approximately
15,000 square feet, of retail at below market rates for qualified local retailers.
City Center DC and the Southwest Waterfront are two examples of major
proposed projects with local or unique retail requirements. Both are major projects which
involve significant land transfers from the city and include TIF financing components.
The creation of a voluntary incentive program would help create local retail leasing
requirements in projects of all sizes, even those that are completed by-right on private
land.
In order to combat the market failure described above, the city should develop a
program whereby willing property owners and developers can enter into a voluntary
agreement to provide retail space that is dedicated to qualifying small local businesses.
The primary tool which should be used is land-use regulation modifications. These
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
8/19
M. Steenhoek 2009-12-09 8
modifications will allow for a project which provides retail space specifically designed
for small local retailers to be developed at an enhanced density. Other tools, such as TIF
packages and tax abatements, can be used for projects where land-use modifications are
not appropriate.
By entering into an agreement with the city, developers would be granted height
limit relief or an increased Floor Area Ratio (FAR). The limits of these zoning
modifications would vary based on location, existing adjacent land uses, and base zoning.
This method would mimic techniques being used for mandatory inclusionary zoning
(MIZ) for affordable housing. MIZ gives additional density is given to residential
projects for providing affordable and workforce housing units. However, unlike MIZ,
this voluntary program would work to create dedicated retail space and should be
analyzed on a case-by-case basis.
Creating retail space designed and reserved exclusively for small local retailers
through density incentives is an efficient policy which will not require the temporary loss
of any tax revenue for the District through TIF bond repayment or tax abatements. In
fact, it will create more residential or office space in the city which can further spur
revitalization and increase the citys tax base. To enact these changes, the developer and
the city must work together to reach an agreement in the early planning stages of a
project. This will allow the design to efficiently incorporate the revised land-use
regulations. The increased tax revenue from the density bonus and the Local Premium
associated with the local retailers should exceed the additional costs of administration
borne by the District.
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
9/19
M. Steenhoek 2009-12-09 9
In order to structure this voluntary program, the Office of Planning (OP) should
create an overlay zoning map that gives easy-to-understand, basic parameters for the
extent of the permissible land-use modifications. Focusing maximum additional density
increases along predetermined growth corridors, in developing areas such as NoMa and
the Southwest Waterfront, and in underserved neighborhoods, will allow OP to create a
voluntary incentives system that will result in the creation of dedicated local retailers in
the areas which need it most. These guidelines would give developers a framework to
work within, allowing the projects to be developed as if it were a standard by-right
development and not open to additional requirements or reviews. Basic guidelines
regarding required leasing terms should also be provided. Long leases with flexible
renewal terms should be encouraged in the program to help stimulate neighborhood
stabilization and to give local retailers the latitude to grow as needed.
The increases in FAR or height should be tied to the percentage of the building-
footprint dedicated to small local retailers. In setting the standards this way, small
projects are equally encouraged to participate in the program. Additionally, the bonus
FAR calculations should be use-specific. The economics of a density increase vary from
office to hotel to residential; this should be accounted for when determining the proper
density bonus rate.
The guidelines should be crafted with significant input for area developers and
groups such as the DCBIA. Crafting the guidelines in a vacuum will be detrimental to
the success, understanding, and voluntary acceptance of the program. A collaborative
public-private effort in crafting the policy will help to ensure that both sectors concerns
are addressed.
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
10/19
M. Steenhoek 2009-12-09 10
Strict timeframes should be applied to this review and approval process to
increase the dependability of the process. This will help limit uncertainty about the risk
of financial loss or prolonged delay due to untimely rulings by the city. Providing a
system that is fair, predictable, and expeditious is vital to enticing private developers to
voluntarily enter into agreements with the city.
As a complement to this program, the DC Department of Small and Local
Businesses Development (DSLBD) should create a streamlined certification process for
retailers that wish to be considered as potential tenants for the dedicated retail space. To
organize these qualified tenants, DSLBD should maintain a database that is accessible to
the public. The DSLBD should prequalify retailers and provide certification as a
standard component of the business licensing process. The database should be an active
tool for developers and retailers looking to match spaces with services. Qualification for
certified small local retailer status should be based upon number of existing stores and
primary business location.
Creating a development environment where it is profitable for developers to
provide appropriately sized spaces to local retailers will create more equitable
development patterns which, in turn, help to support local entrepreneurs and stimulate the
citys economy. Additionally, this influx of local retail options will help maintain and
develop the individual character of the neighborhoods and develop the citys competitive
advantage as a center for unique specialized retail options. The requirement to lease
space to local qualified tenants will necessitate rates that are sustainable to local retailers.
This will help local businesses to compete with major chains in terms of prices, while still
providing living wages for their employees.
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
11/19
M. Steenhoek 2009-12-09 11
The use of development incentives that are flexible enough to allow for major
retailers to locate in the District, while still providing for small local retailers, will avoid
the negative repercussions associated with formula business restrictions and store size
caps used elsewhere. This aspect of the voluntary agreement program will help curb
retail leakage, and keep sales tax revenue in the city. Increasing the density of projects in
focused areas of the city will help bring more residents and employees to parts of the city
that are not developed to their maximum potential. The increased population in
neighborhoods has positive spillover effects of enhanced vibrancy and safety.
One of the major challenges associated with the provision of retail space reserved
for local small businesses is the connection of small retailers with the developers. The
DSLBD database would be key in helping to connect the respective parties, while also
serving as the basic tool used by the city to ensure developer compliance. Developers
will be required to keep the city apprised of all changes to the retail mix and prove that
the terms of the agreement are being met.
Sunset Clause provisions should be incorporated into the agreements to help
curb developer concerns about extended periods of vacancy in the event of a lack of
qualified tenants. This clause would provide temporary relief from the agreed
requirements if a developer can prove that they have actively marketed the retail space,
with reasonable lease terms, and have been unable to find a qualified tenant for the space.
This clause provides an important safety net for property owners.
An additional challenge associated with the provision of increased density in
exchange for the development of dedicated retail space is the fact that not all areas which
would benefit from an influx of local retailers are architecturally appropriate for
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
12/19
M. Steenhoek 2009-12-09 12
increased density. Historic districts and primarily residential areas are an example of
places where increased density may not be suitable. In these areas, the city should
consider the utilization of TIF financing and tax abatements as incentives to entice
developers and property owners to voluntarily enter into agreements with the city. These
methods will not impact the physical massing of the projects but will detract from the
citys tax roll.
Success for these policy measures can be determined based on the number of
developments that enter into the voluntary agreements as well and the vacancy rate of the
dedicated components. If successful, this voluntary program will provide more equitable
and competitive market for local retailers, create increased local and national retailing
options for consumers, stimulate further economic development, minimize the loss of
local community character, create an environment of success for local entrepreneurs,
reduce the amount of retail leakage from DC, and help keep more money in the local
economy.
New developments will continue to change the neighborhoods of the District of
Columbia. It is vital that the local-to-national retail disparity exhibited in recent
developments does not become the sole model of development for new retail in DC. A
carefully crafted voluntary program, which offers increased density in exchange for
dedicated space for local retailers, is an efficient public policy measure that can help to
correct this market failure by steering future developments down a more locally
sustainable and equitable path that increases the citys competitive advantage in the
region.
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
13/19
M. Steenhoek 2009-12-09 13
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
14/19
M. Steenhoek 2009-12-09 14
Table 2 (1 of 3)
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
15/19
M. Steenhoek 2009-12-09 15
Table 2, continued (2 of 3).
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
16/19
M. Steenhoek 2009-12-09 16
Table 2, continued (3 of 3).
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
17/19
M. Steenhoek 2009-12-09 17
Table 3
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
18/19
M. Steenhoek 2009-12-09 18
References
Baiman, R., Weiske, D. (2004). The Estimated Economic Impact of a Chicago Big Box
Living Wage Ordinance. UIC Center for Urban Economic Development.
Retrieved from: www.uic.edu/cuppa/uicued
Beyard, M.D., Pawlukiewicz, M., Bond, A. (2003). Ten Principles for Rebuilding
Neighborhood Retail. Washington, DC: ULI the Urban Land Institute
Civic Economics. (2005). The Andersonville Study of Retail Economics.
Retrieved from: www.andersonvillestudy.com/
Dickler, J. (2007).Immigrant Entrepreneurs Ignite Economy. CNN Money.
Retrieved from: http://money.cnn.com/
District of Columbia Deputy Mayor for Planning & Economic Development. (2009).
Retail Incentives. Retrieved from: http://dcbiz.dc.gov/
District of Columbia Office of Planning. (2008). 2008DC Retail Action Strategy.
Retrieved from: www.planning.dc.gov
Duxbury, S. (2009). Chain-store Rule Rattles San Francisco Retailing.
San Francisco Business Times, June 29th, 2009. San Francisco, CA
Fortune Magazine. (2007).Everybody Wants In, 2007. CNN Money/Fortune Magazine
Retrieved from: http://money.cnn.com/
Houston, D., Oden, M., Spelman, W. (2004).Big Box Retail and Austin: An Independent
Review Civic Economics/UT-Austin. Retrieved from: http://www.liveablecity.org
Miara, Jim. (2007).Retail in Inner Cities. Urban Land Magazine, January 2007
Retrieved from: http://www.icic.org/
-
7/29/2019 Market Failure: Lack of Small Local Retailers in Recent Major Developments in DC
19/19
M St h k 2009 12 09 19
New Rules Project. (2003).Los Angeles May Require Big Boxes to Pay Higher Wages
Retrieved from: www.newrules.org
New Rules Project. (2009). Formula Business Restrictions San Francisco, CA.
Retrieved from: www.newrules.org
Paul, Sandy. (2009). The State of Retail in DC, April 24, 2009. Delta Associates.
Retrieved from: www.wdcep.com
Pratt Center for Community Development. (2009). Saving Independent Retail: Policy
Measures to Keep Neighborhoods Thriving. Retrieved from: www.prattcenter.net
Social Compact. (2008). Washington, DC Neighborhood Market DrillDown
Retrieved from: http://www.socialcompact.org/
Washington DC Economic Partnership. (2009a).DC Development Report 2008/2009
Edition. Retrieved from: www.wdcep.com
Washington DC Economic Partnership. (2009b).Development Activity.
Retrieved from: www.wdecp.com/development/search
Weiner, Vicki. (2008). Preserving Local Retail: Issues & Strategies, Presentation for the
APA Metro Chapter Zoning Committee. Pratt Center for Community
Development. Retrieved from www.prattcenter.net
top related