Tuesday, January 8, 2008

Downtown Business

The exit of a storied downtown clothier was featured on the front page of The Capital recently:
The landmark business that for more than half a century tailored uniforms
for Naval officers and formal suits for generations of Annapolitans will close
this month under the shadow of declining profits, parking woes and increased
competition from retail stores outside the city.

Johnson's On The Avenue has operated from its two-story red brick
building only a block from the State House since 1952. For decades it served
midshipmen and admirals with uniforms, custom-designed caps and officer swords
and lobbyists and other customers with men's and women's specialty
clothing.
Despite the fact that I made this observation before, I am prepared to make a stunning admission: I don't know what to do about this. I don't even know if anything can be done.

Is There Really A Problem?

The answer may surprise you. When I saw the original article in the paper, I had to fight the temptation to make a "drive-by" post criticizing something, then moving on. Yes, many businesses are failing or leaving downtown. But, is this happening any more than usual? Moreover, is there less turnover than with businesses at the mall?

A good friend who went to UMD with me has turned himself into a real estate mogul in, I dare to say, the state of Maryland. I respect his opinion very much, and when it comes to real estate, I would no sooner doubt his opinion than I would that of Walter Williams, which is to say I would need an authenticated telegram from Heaven informing me that said opinion was hijacked by evil spirits. My friend would argue that there isn't a structural problem, or at least not as big of one as people might believe.

We need to distinguish vacancy from turnover. There is always turnover, because there are always people with a surplus of money and a deficiency of luck or innovation that open doomed businesses. Replacing under-producing businesses is vital, and normal. The unique nature of some failed businesses relates to the age of the buildings, and investment strategy. The old buildings were not retrofitted with sprinklers, allowing fire to destroy several businesses. Hurricane Katrina ended other business ventures, as several places without insurance decided it was not worth the effort to rebuild.

None of those issues have anything to do with the mall, and are somewhat more easily dealt with. However, you could make the argument that such things do not explain the entire situation, and you could also argue that the type of businesses downtown are important; downtown, after all, is supposed to sustain daily life for nearby residents, right? With this in mind, let's continue.

Parking.

So why didn't business owners prepare for emergencies? Why didn't they install sprinklers or get flood insurance on their own? Surprisingly enough, because of parking. Theory would explain this, and my friend the mogul verifies its practical truth from experience as a commercial landlord. Downtown is not good for vehicle traffic. You can approach from 3 sides: the Eastport bridge, Rowe Blvd, or the Naval Academy bridge--with all three routes dumping cars into a very concentrated area. The streets are somewhat unorganized, and parking spaces limited. This problem makes businesses less profitable. Reduced access means that business owners can expect lower profits, and it is not a good business decision to invest in sprinklers and pay for flood insurance. The mogul guarantees that addressing this problem would reverse the trend, and has repeatedly suggested to me that many businesses would pay for their own sprinklers if even 1 more parking garage were built. Where? How about at the site for the sailing hall of fame?

Parking also deters from downtown business in a more general way. If people want to shop at peak times, they will stay away from downtown. I know I would.

The Cost of Rent and the Types of Stores.

It can be safely assumed that unaffordable rents are a main contributor to the failure of most businesses downtown. In the truest sense, high rents are the demise of all businesses (unless they own the property)--if rent was $0, any business could succeed as long as it covered variable costs, which is a relatively easy thing to do. Anecdotally, many downtown businesses have complained about this, but let's look at some data.

If you believe this source is appropriate, here are the industries that produce the highest sales per square foot of retail space, observed from the neighborhood level:

1. Drugs
2. Food
3. Jewelery
4. Liquor
5. Food Services (I don't know how this differs from #2)
6. Gifts/Specialty

Notice any familiarities with our downtown? All of these sectors (and not too much else) can be found on the Main St. corridor. For me, seeing the highest per square foot industries all grouped together is a sign that only such industries can afford to pay the rent.

So how much is the rent? For those unfamiliar with the costs businesses face, the numbers are staggering. For ground level retail space in a newer building, think $50 per square foot per year. For second floor space or office space, the number is closer to $25-$30. I would be surprised to find any downtown businesses that paid less than $5000 per month in rent; I would guess the median rent to be around $15,000 per month; and I have heard numbers for some of the bigger restaurants of over $30,000 per month. You have to sell a lot of crab cakes just to break even!

The problem with the type of stores downtown are that they are what I would refer to as support stores. To elaborate, if I go shopping, it is usually for clothes or food. So, I go to the best place to buy these things, then may stop for a coffee or a bottle of wine on the way home. It actually doesn't matter what the main shopping goal is--the point is that your destination is not the liquor store or restaurant. Downtown simply can't support a supermarket or a big retailer, which is where people want to get their food and their clothes. The clothing stores downtown are small, have limited selections, limited sizes within those selections, and tend to be expensive. That is fine on occasion, but all the time for the average family. And I don't know if anyone can do anything about this.

The Mall Argument.

The classic argument, or excuse depending on how you feel, is that downtown businesses can't compete with the mall, or other surrounding destinations that enjoy better accessibility, convenience, and user-friendliness. However, there is reason to believe that malls don't have a particular inherent advantage.

A recent survey in The Economist details the continued downfall of malls:

By the 1990s malls were in trouble. Having bred too quickly, they began to
cannibalise each other. (Turn left out of Southdale's car park and the first
building you pass is another shopping mall.) Discount shops, factory-outlet
stores and category killers like Toys “R” Us ate into their profits. As
middle-aged shoppers began to disappear, the teenagers who had inhabited malls
from the beginning became more noticeable, which only made things worse. In 1998
Good Housekeeping ran a story entitled “Danger at the Mall”. Indoor shopping
malls are now so out of favour that not one will be built in America before 2009
at the earliest, according to the International Council of Shopping Centres.
Rather interestingly, the story attributes some of the early success of malls to racial isolationism. Blacks from the south were moving northward into cities, causing whites to seek suburbs. Malls created the benefits of a downtown without the dangers (of being harassed by blacks, so the thinking went). To try and relate this notion to our downtown--people don't avoid downtown because they are afraid of rif-raf. There has been a shooting in the mall more recently than there has been a shooting in Ward 1! Rather than compete with downtowns, malls are being built to mimic them:
Every new shopping centre built in America next year will be roofless (and
several traditional shopping malls will tear off their roofs). Open-air centres
will appear not just in temperate places like southern California but also in
muggy Houston and frigid Massachusetts.
The point that I'm getting at here is that malls don't have a natural advantage. Downtown Annapolis is a more attractive place to go than the Annapolis mall, provided there are things there that people want to buy.

A Look At Zoning.

I found a really good article on the internet yesterday, but had to restart my computer, and I can't find it today. This makes me really mad because I just searched for it for half an hour. Anyway, the point of the article was to have zoning with minimal setbacks and high building density, which encourages foot traffic. There were other points, but I remember thinking that the Annapolis downtown had all of the things that the article recommended.

Now, let's talk about historic district zoning. What a pain in the butt it must be to conform. I cannot imagine how much these requirements add to the cost of investing in physical structure, which is not to say the requirements are bad. On net, historic zoning requirements are probably a wash. Yes, they add cost to businesses. However, seeing that people do not go downtown (for the most part) to buy the staples of daily life, the ambiance must be that much more attractive for visitors, and historic requirements ensure such an attraction.

Zoning is the most direct way to affect the types of businesses that go downtown, and I really hope the city doesn't try to zone in any specific businesses. First of all, how would they do it? Would Main St. and Dock St. become their own zone? Would only a certain percentage of space be available to bars? And what of the others? Even if you successfully determined which properties could be used for certain things, you would drive down the rental value of that property dramatically--rent control would be unavoidable, even in this indirect way.

Rent Control.

If rent is the problem, you might be wondering, why doesn't the city implement a maximum rent? This is a bad idea. With rents artificially low, landlords will expect less profit. They will be less likely to invest in infrastructure improvements and the quality of the buildings will suffer. There will be no desire to build new properties, and with demand for retail space outpacing supply, landlords wouldn't have to worry about attracting new tenants; the above effects would compound.

Plus, when the higher-ups realize that rent control is bad and choose to deregulate, there would be massive business turnover as the market sorts out the true market-rate rent.

Business Improvement District.

BID's are basically groups of geographically related businesses that band together and form a self-taxing organization. All businesses contribute to the organization, and the money is spent on marketing, building improvements, etc.

There is much precedent for this--an internet search for BID's will show you pages and pages of downtown BID's. New York City has 57 different improvement districts. For Annapolis, I can't see how it would hurt, but I don't know how much it would help. While the need for cosmetic maintenance downtown exists, it is not as important as the major transportation issues. You need tax money from major sources to fix this, and extra contributions from a handful of downtown businesses wouldn't get you very far when the cost of a parking garage is roughly $15,000 per space.

Government Sponsored Economic Development.

Don't get me started.

Conclusion.

Downtown businesses face many struggles; some are unique, others are not. Rare events such as fire and natural disaster, when combined with natural business turnover, probably cause an overstatement of the trouble downtown businesses are in.

Competition from the mall surely affects downtown businesses, but does not prevent success of businesses downtown. There are undoubtedly businesses downtown right now that are making money--you simply need the right strategy.

Government involvement in the issue is appropriate, but only in the traditional ways. More specifically, a Department of Economic Affairs will not help downtown businesses. Any representation of downtown as a whole can be accomplished by a BID.

Certain businesses will foreseeably always do well downtown: restaurants, bars, jewelery, and novelty. Attracting larger supermarkets or department stores that many citizens patronize would require space that downtown Annapolis just doesn't have.

The strategy for downtown business development, and for the rest of the city for that matter, should be:

1. Lower property taxes as much as possible to increase return on investment and lower commercial rents.
2. Streamline permitting process to facilitate risk-taking by entrepreneurs.
3. Ensure clear zoning laws to aid with business feasibility decisions.

Additionally, the city needs to determine its vision for downtown. A downtown that truly competes with the mall would require making downtown a shopping destination. If this is a priority, than ease of transportation and parking space creation are important, and costly, priorities. If downtown is to be a lifestyle center for nearby residents, then focus should be on pedestrian-friendly development. To be successful, such initiatives would have to drive down rents enough to attract a wide range of businesses, an outcome that is unlikely with the private market and disastrous if achieved through government price control.

The fact is: downtown is used by different groups of people--local residents, shoppers, and tourists. The city government cannot possibly interpret the exact mix of user demands, and if it stays out of the way, the private market will sort it out well enough.

13 comments:

Anonymous said...

Nice post. Very comprehensive.

Anonymous said...

If I may oversimplify...

I can go to the mall or Harbor Center after dinner, say 7pm, and shop to my heart's content. Neither location is particularly convenient nor appealing.

But they are OPEN.

Annapolis is a retail ghost town after 5pm, with very few exceptions. Hell, go to Maryland Avenue at 4pm on a Tuesday and you will be dodging tumbleweeds.

Frankly, I don't want to hear the sob stories from the downtown merchants. If you face challenges from large retail competitors, meet the competition with an adapted business model. You won't be able to compete on price, so offer me something unique and, for God's sake, be OPEN!

Tim

Anonymous said...

Part of the problem with downtown is that businesses who cater to local residents won't get sufficient business to survive. And, those that cater to tourists have a seasonal business that also suffers from a lack of parking. I know Paul Foer (and the Mayor) would like to further limit cars downtown, but that denies the reality that people come to shop in their cars. If people had to park at the stadium to go shop at the mall, you'd see them go out of business too. There should be a 3 or 4 story garage at the Green street lot. You need to make it easier for people to go downtown, not harder.

Bob McWilliams

PAUL FOER said...

Bob
I don;t know why you choose to write about me in a comment here, but thanks for the help in promoting my vision. Your comments are right that I would like to limit cars downtown, but if you were open minded enough to understand (well- we can all fantasize) you would realize that making more room for people and for commerce as opposed to making more ugly buildings for cars to sit all day long, would be good for business.

Many economists, planners, civic activists and business leaders recognize this more and more. Examples of success in this area abound. And Annapolis' roads and downtown do not lend themselves to any more garages--which cost huge amounts of money by the way. Over $20,000+ to build and more ongoing to paint, repair, light, keep secure etc.
However, you are incorrect about the Mayor in this regard because she and others rolled over as the State built a new garage. She made it free for residents to park in downtown garages. That brings more cars. Placing my ideas in association with her actions is misguided.

After all, with the exception of a few banks and pharmacies, one never drives into a store to exchange dollars for goods and services. It is people who walk in to buy things. People are good for business. Not cars. More cars often translate to fewer people in fact. Cars take up valuable space where people could be attracted to congregate, interact and buy goods and services. The most efficient way to exchange goods and services is through density and walking. It's worked for thousands of years and hopefully, will continue to function as such. Cars? Their days are numbered in cities. This is increasingly evident to most folks who study the situation.

Anonymous said...

Paul:

I'd be happy to write in your Blog too; makes no difference to me.

Coming from a small town, I do have great appreciation for places that are oriented toward people, rather than cars. I specifically like Annapolis, because it has sidewalks, unlike many subdivisions that were styled more to accomodate cars.

Nevertheless, it's a reality that if people can park their car right by the place they want to visit, they'll just pass you by. As a result, I think we need to recognize that fact and do what we can to minimize the visual impact of needed parking. Green Street is an obvious place to put a garage. If you front it with retail, it might make a nice addition.

As for lumping you in with the Mayor, it's no secret that she too, would like to limit automobiles. I don't think people are even aware that they can park at the State garage. If you asked people why they don't shop downtown, I'm sure the number one answer would be; there's no place to park.

Bob McWilliams

PAUL FOER said...

Bob What you seem not to recognize is that it is not parking that is in short supply, but cars that are in too high a demand. We address this by limiting cars and making it more attractive to people, not by taking up valuable space with pavement that either sits empty (no value but high cost) or just stores cars all day, which means that space cannot be used to transact business. There just is no room for garages or more cars on roads, as there is no more room for more roads either. To make downtown work, bring in people with lots of opportunities for them to spend money in more places, open more hours. Building garages does just the opposite--and wastes huge amounts of dollars. Look at what has happened in Paris, London and is about to happen in New York. Do you wish to keep applying 1950's-Eisenhower-McCarthy era solutions to 21st century challenges? Or did I already know the answer to that one?

Anonymous said...

People like to drive their own cars; that's all there is to it. If a lack of parking isn't the problem, then why does the downtown retail struggle, while the Mall, with it's 4 new parking garages, is doing just fine. And, when asked why they don't shop downtown, the first thing you hear about is parking. Given all that, I'm don't really see how you can conclude that parking isn't in short supply.

Also, what the heck does McCarthy have to do with shopping in Annapolis. I'm surprised a Hitler analogy wasn't used to have even more impact.

Bob McWilliams

paul foer said...

Bob:

I was speaking of the 1950's. How could I have used a Hitler analogy? He and his "thousand year Reich" came to an end in Berlin in April, 1945 just 12 years after coming in to existence.

Scott Bowling said...

I am not sure if there is a limit to the amount of responses one can make to a particular post, but I thought I would try anyway ...

There are many reasons that downtown business' struggle, however, Bob McWilliams is correct in pointing out that if adequate and convenient parking is not available, people will not stop nor go out of their way to shop and patronize most downtown businesses on a regular basis. There are countless illustrations of this point that are irrefutable. The Annapolis Mall is one that has adequate and convenient parking and is thriving ... the Festival of Riva is another that always seems to be busy, and yes, they too have adequate and convenient parking for their customers ... The Harbor place on Route 2 is certainly never empty and has been rated by some business publications as one of the most successful retail centers in the Baltimore Washington Area. Sure they have Whole Foods, Barnes and Noble, and other interesting shops, but they also have adequate and convenient parking ... Last and certainly not least, look at the newest monstrosity under construction, the Annapolis Towne Center at Parole ... All you see is parking garages, and what appear to becoming well lit parking areas.

I think the point is clear; adequate and convenient parking brings customers, which leads to thriving business.

PAUL FOER said...

Hmmm...Scott, so what you are saying is pave downtown over with garages? And you are saying our roads can handle this? And you are saying people can get in and out smoothly when that is done? And you are saying that we should not have downtowns because you are saying make them like shopping malls, and basically destroy the charm and character by building garages everywhere. And you are saying there is adequate and easy parking at the Harbour Center? And you still have not responded adequately to my claims that what makes our downtown special and attractive and different AND COMPETITIVE is that it is not a shopping mall! So if we turn it into a shopping mall, then what do we have? Look at the most famous and profitable shopping downtowns and you'll see that it is not parking that makes them work!
A parking lot is not a destination. Downtown is the destination. Taking rare and valuable places where business could transact and where people could gather and exchange good and services and turning those places into parking lots which are far from highest and best use is not the answer.
Think of all the attractive and livable and thriving cities around the world. What makes them that way? It's not cars. It's people--and the lack of cars. There are many solutions and many alternatives to the car--alternatives which in fact work better in our city that was designed for carriages and horses and people.

Scott Bowling said...

I am in no way suggesting that we pave over downtown with Parking garages. As I said in my initial comment, "there are many reasons that downtown business' struggle", and as you know I have always been a strong proponent of "responsible development".

Personally, I am someone who would prefer to shop at the unique store or boutique within a local downtown area, rather than going to the many malls or giant shopping centers within a major metropolitan area that all seem to have the exact same variety of stores.

Having said this, I recognize that it is not always the most convenient thing to do, however, realizing time after time the benefit and pleasure that I personally receive from visiting and patronizing local shops around Annapolis, Cape Cod, Providence, etc ... I am willing to endure the parking challenges and persevere.

This is not the attitude of the average resident, shopper, nor tourist in most cities, and we in Annapolis need to do more to make downtown more parking friendly, so that one hurdle that consistently faces our downtown businesses is minimized.

Let me also be clear in stating that I am not advocating any additional tasks forces, parking authority executives on City Payroll, nor further government intervention.

Scott Bowling said...

One last thing, horse and carriages are gone and a thing means of transportation that no longer exists ... cars are here to stay, and we all need to adapt, or cross the bridge and get over it!

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