Blame the Banks for All Those Boring Chain Stores Ruining Your City

September 22, 2016 7:36 PM

"The reason your neighborhood increasingly resembles a hometown mall is because somebody’s banker prefers it that way," writes Patrick Clark at Bloomberg.com.

More precisely:

[I]nvestors have bid commercial real estate to record prices and competition in marquee markets such as New York and San Francisco have sent buyers looking for bargains in smaller cities. These out-of-town investors, once they arrive in Cleveland, Nashville, or Milwaukee, have a tendency to rely on relationships with national brokers and large-chain tenants ... A less-than-virtuous cycle ensues: Older shops can’t afford to pay what the new market will bear, so the vintage clothing store gets replaced by the national clothier. And it’s not just that the big chains can afford to pay more—they actually get to pay less than the local store. National retailers are often rewarded for their perceived credit worthiness with lower rents. For the same reason, landlords hoping to sell or refinance a building are more likely to sign those chains to satisfy a potential lender. The reason your favorite pizza place is now a Subway may be tied to perceived credit worthiness, the desire for refinancing, and satisfying lenders that call the shots.

Previously: Why is one of the most desirable neighborhoods in NYC full of shuttered storefronts?

posted by Gerald Bostock (52 comments total)

This is pretty much the situation in my neighborhood in the Lakeview, Chicago. There is possibly at least a 10% retail vacancy rate in the area of the Lakeview/Lincoln Park border , probably higher, and it is one of the densest most affluent areas in Chicago. Some extremely prime high foot traffic real estate is empty and has been for years. It's bad enough that the city had to intervene because some of the vacant stores had windows with thousands of dead flies in them. So they cleaned them up. They're still vacant though. The intersection of Clark and Diversey is pretty high foot traffic and the area median income is around 80K or so but the place looks like it is the middle of a hard recession with all the empty storefronts. There are clearly perverse incentives at play.
posted by srboisvert at 8:20 PM on September 22, 2016 [5 favorites]

Yeah, I have seen this in SF & NYC both. Manhattan is basically made of banks and drugstores these days and it is the most depressing thing in the world.
posted by dame at 8:30 PM on September 22, 2016 [9 favorites]

"I'm at a Walgreens across from a Duane Reade, next to a Starbucks. There's a vape shop across the street, too."
posted by DoctorFedora at 8:33 PM on September 22, 2016 [18 favorites]

meh. I invest in public utility bonds.
posted by mollymillions at 9:07 PM on September 22, 2016 [1 favorite]

It could also be that a majority of ma and pa go-getter-be-my-own-bosses have no idea how to set up and run a business. Is this clock store with no parking a winner? A clock store? A store for clocks?
posted by Brocktoon at 9:13 PM on September 22, 2016 [5 favorites]

I don't sell clocks, I'm a mohel!
posted by i_am_joe's_spleen at 9:32 PM on September 22, 2016 [9 favorites]

Nu, so tell me, what would YOU put in the window?
posted by i_am_joe's_spleen at 9:32 PM on September 22, 2016 [14 favorites]

Reminds me of that recent article about how suburban big box stores are paying the tax rates as if they were empty lots basically as blackmail on these little townships so they don't leave. All of our systems seem massively tangled up and backwards and non-functional.
posted by bleep at 11:48 PM on September 22, 2016 [19 favorites]

Blame the banks, sure, but let's not ignore the citizens. It's a sad fact, but human nature sure does have a way of falling back on comfort and familiarity.
posted by mannequito at 12:01 AM on September 23, 2016 [4 favorites]

They're functioning as intended by our owners
posted by polyhedron at 12:01 AM on September 23, 2016 [2 favorites]

human nature sure does have a way of falling back on comfort and familiarity

One of the reasons why I'm always a little disappointed when I visit a "tourist" destination, like New York's Times Square or Brussels' Grand Place.

I'm lucky that the US towns I've lived in (all three university towns) still have a lot of independent businesses.But rents are increasing everywhere, and some of the businesses that I have fond memories of have closed, to be replaced by chains.

I've yet to meet anyone who claims to want this; everyone says they want independent businesses. Yet no one is really doing anything about it.
posted by Kutsuwamushi at 1:19 AM on September 23, 2016 [6 favorites]

I just moved into an Artsy Small City north of Boston. We have an arts college downtown, which might help sustain small indie shops as well as a local theater which was rescued from the chopping block recently. But i do see a tendency to rent to Dunkin Donuts, mobile phone shops, and nail salons all over Massachusetts.
posted by Sheydem-tants at 3:56 AM on September 23, 2016

Situation is the same here in Berkeley (so disheartening to see the once-vibrant Solano Ave with so many empty storefronts). Ugh, I thought Berkeley landlords were somehow more greedy than others. Now that I know it's true all over the US, it only makes me more depressed. The pull quote says it all, it's because a banker wanted it that way.
posted by Pocahontas at 4:25 AM on September 23, 2016 [2 favorites]

Blame the banks, sure, but let's not ignore the citizens

I don't know see why the banks would be blamed at all. People like chains, making them less risky. Banks just quantify that preference.
posted by jpe at 5:20 AM on September 23, 2016 [6 favorites]

the premise of the pull quote doesn't actually apply to most of non-midtown manhattan. I can't speak to who owns what in in SF or Chicago, but I'd guess the same is true there.

This is really what's going on :
When Levinson researched the phenomenon, he was told landlords would rather hold out for a better price than sign a deal at a lower rent and be stuck with it for a typical term of 10 years.
posted by JPD at 5:23 AM on September 23, 2016 [4 favorites]

I've heard one of Austin's city council members zero in on this as a reason that Austin's 'weirdness' is eroding (whether that's true or not is another topic). Basically, banks want to see the safest of safe bets when development projects are brought to them. If the city can encourage banks to at least pick local safe bets, or nontraditional safe bets, everyone can benefit. It rang really true to me, but we'll see if that goes anywhere. I doubt banks are particularly open minded.
posted by lownote at 5:30 AM on September 23, 2016 [5 favorites]

Two things. First, awesome to see Stacy Mitchell of the Institute for Local Self-Reliance basically driving this story. That is a fantastic, data-driven organization that belongs on the radar of anyone interested in localism and planning issues. They have been working to highlight the importance of maintaining locally owned banks in a community for just this very reason: locally owned banks invest locally (as well as the reason that they tend to serve their customers better). You can see some of that work at the directly Bank Local, which shows you local banks near you and compares their account terms.

Second, there is a bigger problem looming behind this problem. We're about 10 years out from having the overwhelming majority of retail transacted online (and maybe delivered by drones, but we'll see). What has been framed as the Amazon and Empty Storefronts problem is a threat for big boxes as well as community downtowns. Planners are now discussing what will happen when we really just don't need shops in downtowns anymore. Sure, there will always probably be a place for browsing in gift shops and boutiques, but even they don't have much that can't be found online, so they end up functioning as showrooms, and that isn't sustainable for owners paying for brick and mortar. Also, how long will shopping remain a big leisure activity? That may be something that fades in importance with the passing of the next generation or so. How many restaurants, coffee shops, and cinemas can a downtown hold before saturation happens? One of the knotty problems in community planning right now is figuring out ways to creatively reuse and redevelop downtown spaces around non-retail industries, because that sector is pretty clearly going to collapse too, though it's not something you're hearing much about in the popular press yet.
posted by Miko at 5:46 AM on September 23, 2016 [44 favorites]

Blame the banks, sure, but let's not ignore the citizens

I don't know see why the banks would be blamed at all. People like chains, making them less risky. Banks just quantify that preference.

If Patricia Clark really thinks there's an unmet demand sufficient to sustain these shops, she's free to start lending money herself. Or put together a collection of individuals who support such shops to do the same. It's called a community bank. FDIC has all sorts of resources.
posted by leotrotsky at 6:08 AM on September 23, 2016 [4 favorites]

so what you're saying is that we are already well on our way to the Shoe Event Horizon
posted by DoctorFedora at 6:12 AM on September 23, 2016 [5 favorites]

Second, there is a bigger problem looming behind this problem. We're about 10 years out from having the overwhelming majority of retail transacted online (and maybe delivered by drones, but we'll see). What has been framed as the Amazon and Empty Storefronts problem is a threat for big boxes as well as community downtowns. Planners are now discussing what will happen when we really just don't need shops in downtowns anymore. Sure, there will always probably be a place for browsing in gift shops and boutiques, but even they don't have much that can't be found online, so they end up functioning as showrooms, and that isn't sustainable for owners paying for brick and mortar. Also, how long will shopping remain a big leisure activity? That may be something that fades in importance with the passing of the next generation or so. How many restaurants, coffee shops, and cinemas can a downtown hold before saturation happens? One of the knotty problems in community planning right now is figuring out ways to creatively reuse and redevelop downtown spaces around non-retail industries, because that sector is pretty clearly going to collapse too, though it's not something you're hearing much about in the popular press yet.

This is such a great point, and I'm wondering why I haven't seen it discussed more. Maybe because it's just so big and daunting. Once folks figure out how to do clothing stores online that match the in store experience (maybe with consistent measurement and sizing?) that'll be the last shoe to drop.

Do downtowns simply wither, or get converted into some other kind of public space? Given what I've seen so far, it's going to be more of the former. Which is depressing. Let alone the massive concentration of wealth that'll happen when it's basically just Amazon left.
posted by leotrotsky at 6:13 AM on September 23, 2016 [4 favorites]

big boxes & malls actually die first in that scenario, so it may actually help downtowns in that scenario - at least in medium term.
posted by JPD at 6:18 AM on September 23, 2016

big boxes & malls actually die first in that scenario, so it may actually help downtowns in that scenario - at least in medium term.

Why? Because margins are tighter? Because they're usually publicly traded (Simon, Walmart) and so more sensitive to declining profitability?
posted by leotrotsky at 6:19 AM on September 23, 2016 [1 favorite]

I don't know see why the banks would be blamed at all. People like chains, making them less risky. Banks just quantify that preference.
Chains are less risky because they are wealthier and can better survive fluctuations in demand. That is the risk banks quantify. They can borrow more cheaply, and even buy rather than rent.
posted by LarsC at 6:23 AM on September 23, 2016 [5 favorites]

This completely explains the wackadoo transition I've seen on the Southport Corridor since moving here 9 years ago. Independent shops, and the dodgy -- but useful! -- laundromat have been replaced with upscale stores: J. Crew, Gap, Lululemon (which resides where WaMu died, RIP), Lush -- and coming soon, Amazon Books in the Irish pub that's been shuttered since January (I miss cheap burgers on Thursdays). There's rumor of a freakin' Capitol One Cafe moving into a former hair salon.

We've gotten two decent restaurants out of the transition (Corridor Brewery, I love you), but it's just nuts when there are 3 stores selling yoga pants.
posted by gsh at 6:24 AM on September 23, 2016 [1 favorite]

Particularly painful: Boston's Old Corner Bookstore, which I walked by yesterday and saw is now a Chipotle.
posted by Miko at 6:39 AM on September 23, 2016 [4 favorites]

The Amazon thing is not everywhere. We are spoiled by all the things available via Amazon. I was initially freaked out when searching Amazon Australia and already figuring out how to shop for certain things. Amazon UK is the same.
posted by jadepearl at 6:53 AM on September 23, 2016

That's why the future is independent-looking stores that are actually owned and operated by big companies....
posted by miyabo at 8:27 AM on September 23, 2016 [4 favorites]

When Levinson researched the phenomenon, he was told landlords would rather hold out for a better price than sign a deal at a lower rent and be stuck with it for a typical term of 10 years.

Eh, this made sense as a decisive consideration in 2008. Not so much now. Especially not when some of the same storefronts have been vacant for several years.

I expect taxes play a large role here, probably in the form of BS expenses claimed for the empty buildings to exaggerate losses for deduction purposes.
posted by praemunire at 8:41 AM on September 23, 2016 [4 favorites]

I've always been curious what would happen if localities could pass measures that would tax vacant storefronts at an increasing rate based on how long they'd sat empty. I may be misinformed, but I think that it's a little unfair to blame landlords overpricing property exclusively on the banks - it's a problem, but a separate issue than the meat of the article.

I'd agree that a substantial part of the problem is the consumers, just like they share some of the blame for the dearth of stores after Walmart moved into small towns. One of my favorite family owned restaurants finally succumbed recently. It has always been kind of on the margin of making it or not (see yesterday's fpp about that), but I strongly suspect that Chipotle opening up across the street was one big things putting the nails in the coffin. Chipotle would reliably (prior to the recent scares) be packed while several of the locally owned restaurants nearby withered.

Consumers have pretty reliably been shown to prefer to spend most of their money at the cheapest possible store if at all possible, so it's only natural that short of other factors (like localities providing incentives) that banks are going to be friendlier to safer bets.

I'm curious at what point the market will simply over-saturate with nearly identical "safe" stores though - there's a CVS, Walgreens, and Riteaid all within 1 mile driving distance on a single road from me and they're building another Riteaid two miles down the same road. At a certain point, there's only so many consumers for such products.
posted by Candleman at 9:32 AM on September 23, 2016 [4 favorites]

We're about 10 years out from having the overwhelming majority of retail transacted online

What are your sources for this? The internet tells me that 94% of US retail sales are brick-and-mortar; online transactions may be increasing rapidly, but there's a long way to go before that situation is reversed. Online retail isn't an option for everyone (87% of Americans say they have internet access, but home broadband access has plateaued at around 70%, and about a quarter of US adults don't have a credit card). And there are whole sectors where it's hard to imagine online taking over in the next decade, especially if we're counting service-oriented businesses like restaurants, coffeeshops, or salons. Or groceries -- tons of room for online growth there, and lots of companies trying to make it happen, but I doubt anyone outside Silicon Valley seriously expects it to become the dominant channel in the next decade. If I had to guess, I'd expect online sales to continue to grow relative to brick-and-mortar, but eventually level off rather than becoming an overwhelming majority of transactions. But I don't know much about retail, and it sounds like the urban planners you're talking about are pretty sure this is where things are headed. I'd love to hear more about that.
posted by Gerald Bostock at 9:37 AM on September 23, 2016 [4 favorites]

Why? Because margins are tighter? Because they're usually publicly traded (Simon, Walmart) and so more sensitive to declining profitability?

Retail leases are bananas. So a few things that the average person might not realize:

1. Very normal for a portion of the rent to be tied directly to sales. This is to put pressure on landlords to not be slumlords. They need to keep up the property, and have an interest in keeping the common areas as nice as possible.
2. There is usually a clause that allows either party the ability to back out of a lease if sales do not meet some threshold.
3. For malls, there is usually a clause that allows the tenant to back out if a percentage of the mall becomes vacant. This creates an ugly collective action problem that can clear out a mall quickly.

Additionally, each of these companies have a large portfolio. So even in good years, it makes sense to look at your stores and cull those that are underperforming. So they're not just competing against other stores in your area, but also competing against other areas.

The typical retail experience that shoppers expect comes with super high overhead. The longstanding mom and pop shops are able to provide a comparable retail experience because they've had decades to slowly invest. But look at the christmas/halloween/puzzle pop-ups that are common in dying malls. They're not particularly enjoyable for most shoppers.

Which goes back to Miko's point about community planning. Retail used to be about getting the things you need. Now it's more about the experience. Even shopping for clothing is more about the showroom experience, with the ability to purchase at store being a nice bonus. Eventually the items themselves will be moot, and we'll decide where to go simply based on whether or not it's a pleasant experience.
posted by politikitty at 10:13 AM on September 23, 2016 [10 favorites]

Why? Because margins are tighter? Because they're usually publicly traded (Simon, Walmart) and so more sensitive to declining profitability?

Big boxes are less flexible from a cost perspective in a downturn. The have lower average costs/sq ft, but also less flexible average costs/sq ft.

ETA - big boxes also don't normally have the kind of revenue links descriped by politikitty - which is actually good in a downturn.
posted by JPD at 10:47 AM on September 23, 2016 [2 favorites]

A new report from Forrester, titled “U.S. Cross-Channel Retail Forecast, 2015 To 2020,” predicts online sales will grow by an average annual rate of 9.32% over the next five years.

While data from the Commerce Department on Friday showed overall retail sales rose 1.3% in April from a month earlier, the category that includes shopping on Amazon.com Inc. and rival websites and apps grew 2.4%. And in the past year, Internet and catalog sales have grown more than three times as fast as overall sales, up 10.2%. Department-store sales, meanwhile, sank 1.7% over the past 12 months.


I'm not saying anything truly controversial. I'm not going to go crazy digging up links, but you can search around for forecasts and analysis. Most of the forecasters I have read and listened to say the shift will probably happen quickly and probably have a lot to do with mobile adoption rates (doesn't matter if you have a credit card if you have PayPal or a checking account, and as data security improves so will confidence). It seems clear that the vast bulk of growth potential is online - we are only at the beginning. Right now the talk is about how to combine ecommerce and retail (like, the downtown Amazon fulfillment center model - hey, it's Montgomery Wards for the 21st century) but the future of that does have a lot to do with downtown traffic, rents, fuel prices and the like.

posted by Miko at 4:05 PM on September 23, 2016 [3 favorites]

reason your favorite pizza place is now a Subway may be tied to perceived credit worthiness

Subway franchises are perceived are being especially credit worthy, seriously?
posted by ryanrs at 6:11 PM on September 23, 2016

Subway franchises are perceived are being especially credit worthy, seriously?

Yes. The costs for opening and operating a Subway are pretty well established, the Subway organization does its own vetting of franchisees, and they have well-established processes for running the restaurant. An independent restaurant could easily just be a couple of dreamers with not enough money and not enough know-how, and the landlord (and the bank) isn't in the restaurant business, so they don't have the know-how to evaluate the viability of a new restaurant concept and team.
posted by jimw at 9:52 PM on September 23, 2016 [1 favorite]

As one of those crazy people that owns an independent retail business, I think Miko is absolutely correct in identifying online sales as the underlying larger problem. I think the question is how long stores like ours will be viable, not whether they will be long-term.
posted by jimw at 10:48 PM on September 23, 2016 [3 favorites]

How many restaurants, coffee shops, and cinemas can a downtown hold before saturation happens?

Suburban living collapses into downtown living. Downtown becomes mostly residential, filled with multistory, multifamily homes upstairs and the service industries on the sidewalk level. Coffee shops, restaurants, cinemas, pubs, and laundries are on every block, downstairs from everyone, because everyone drinks almost all of their coffee socially somewhere downstairs, everyone eats almost every meal at a restaurant (and no one has much food or even a real kitchen at home), no one has a big screen at home because people arrange to get together and watch downloaded movies at communal big screens, etc. If you have a car, it leaves you at the front door and parks itself in a garage or lot some distance from home, not in prime downtown real estate. For a garden, you have a plot in the community gardens. For a yard, you have the public park. For a porch, you have your balcony upstairs and the stoops and shops and benches at ground level. Most people live life more socially than they do now.
posted by pracowity at 9:03 AM on September 24, 2016 [3 favorites]

“You pull on this thread and pull it all the way back, where do you end up?” asks Mitchell. “The global financial system, where so many problems originate.”
posted by doctornemo at 11:22 AM on September 24, 2016

Why? Because margins are tighter? Because they're usually publicly traded (Simon, Walmart) and so more sensitive to declining profitability?

I think that downtowns will survive over malls because they are used to it. Downtowns have survived competition from malls for 4 decades. They learned how to adapt. Malls have rarely had to deal with a withering base. Those that have have become abandoned and were demolished. I have seen very few malls adapt to a shrinking base (except to become junk/antique malls)
posted by RalphSlate at 9:22 AM on September 25, 2016 [1 favorite]

It's not that the banker wants it that way, its reality that a Darden restaurant is less likely to break their lease than a random independent restaurant. Darden is well capitalized, and won't shut down because of a divorce or a personal tragedy or the realization that retail is incredibly grueling. The landlord wants expected rents of $x and it can get those by charging a big chain a tiny risk premium over that, or by charging an indie tenant quite a bit more.

That sucks, since it means the bar for success is lower for the chain which is a bit of a vicious circle, but I haven't seen a good solution to the problem.
posted by whisk(e)y neat at 3:37 AM on September 26, 2016 [2 favorites]

Well, local banking is the solution. Risk is amortized across the catchment area for the whole bank, rather than by single sector.
posted by Miko at 4:42 AM on September 26, 2016

Its naive to think a community bank will have different underwriting behavior than an national bank.
posted by JPD at 2:19 PM on September 26, 2016 [1 favorite]

I don't "think" it, I know it, and I refer you to the link in my first comment.
posted by Miko at 6:43 PM on September 26, 2016

I can find lots and lots of community banks that would rather lend to a subway than a startup sandwich shop.
posted by JPD at 1:16 PM on September 27, 2016

Looking at your first link, I'm not sure you can make that assumption.

Sure, local banks supply lending for a majority of small businesses.

But that doesn't mean that more local banks will lead to more small businesses. Small businesses turn to local banks because commercial banks have the luxury of turning away their business.

If local banks gain a larger share of the industry, it's just as likely that they'll use that prestige to gain bigger and safer customers.

It's easy to use one vendor for all your banking needs. But it's also easier to use one real estate or utility company for all your business needs. And my employer (with a sizable lease portfolio) has no issue branching out on those vendors. I saw an old lease that was with a couple, rather than a Real Estate company. If commercial banks aren't able to be competitive against local banks, setting up a local business account isn't a huge burden.
posted by politikitty at 2:15 PM on September 27, 2016

ISR on Banking
ISR posts on Community Banks

Although small and mid-sized banks ($10 billion or less in assets) control only 22 percent of all bank assets, they account for 54 percent of small business lending.

Smaller, regionally focused banks may be better because they know local market conditions. They often provide more one-on-one access to a loan officer and put more emphasis on a borrower’s character rather than just applying a credit-score model. And they can be more flexible during tough times, such as covering overdrawn accounts without imposing stiff penalties.

According to Harvard’s Kennedy School, community banks account for more than half of small business loan volume and nearly half of commercial real estate lending. It’s not an exaggeration to say that the health of hometown economies depends on having healthy community banks engaged in robust, properly underwritten small business loans.

...while community banks comprise just 20% of the banking industry's assets, institutions with less than $10 billion in assets provide nearly 60% of the industry's small-business loans.
posted by Miko at 2:30 PM on September 27, 2016

I was directly referencing those facts. Sure, local banks supply lending for a majority of small businesses.

But even the ISR states they only may be better. It's not evidence that increasing small banks will increase local lending. Instead they might be taking on as much local lending as they think the market will bear. Becoming a larger part of the market could lead to poaching commercial bank clients instead, with local lending staying flat.
posted by politikitty at 9:42 AM on September 28, 2016

Could lead to, but at present, it isn't leading to that. And in practice, local-first groups all over the country are working with local banks on enhancing and aligning lending practices with community development goals. It isn't just an accident, it is often expressed directly in a bank's core statement of mission.
posted by Miko at 11:55 AM on September 28, 2016

You aren't hearing what you are being told. Community banks lend to small businesses because they have negative selection. They can't compete with larger banks on more profitable relationships.
posted by JPD at 11:59 AM on September 28, 2016

You aren't hearing what you are being told.

Wow, way to mansplain.

Let's assume that I speak English and that I am capable understanding the point of view you are putting forward. However, I find it reductive. I am not convinced of your credentials in this field. Given my experience in local-first community development, I am rejecting your thesis. The niche many local/community banks occupy is largely one of non-competition with larger bank. That is one reason local banks are more supportive of locally and independently owned businesses. That is their market.
posted by Miko at 7:21 PM on September 28, 2016 [1 favorite]

Another reason, of course, is that many of them were set up specifically to provide loans to low/moderate income communities.
posted by Miko at 7:30 PM on September 28, 2016

You may reject my thesis, but that doesn't mean you aren't wrong.

There are some small minority of community banks that are willing to function as a tacit subsidy to local business - sure. But the vast vast majority do not function that way. They are profit motivated.
posted by JPD at 3:27 AM on September 29, 2016