Saturday, August 23, 2008
Residential Up, Retail Down
The desire of urban planners is for close-in development to consist of multi-level residential units placed on top of retail stores, thus making neighborhoods "walkable" and reducing vehicular traffic. Nice pipe dream. While the apartments fill up, the vacancy rates on the ground floor remain high. The problem cannot be placed solely on the shoulders of the idealists that often require this type of design. Property owners still ask for exorbitant rents from businesses, often twice per square foot than the residences. And with no anchor stores as a drawing power, these stores must rely on fewer customers to help pay the rent. But the owners have forgotten Business 101. Rent is the highest fixed expense of most retail operations. Reduce the commercial rent and entice the retail establishments. Offset this with slightly higher residential rates. Apartment dwellers are more likely to pay the higher rent given the convenience of a nearby cleaners, ice cream parlor, coffee shop, sandwich shop, pizza parlor and perhaps a bar. But property owners, geniuses all, would prefer to ask for higher commercial rates and collect zero rent from vacant stores than reduce rates and actually produce income.