Sunday, October 26, 2008

Why Proposition T May Not Be Good for Local Shop Owners

One of the curious arguments that I've heard in support of Proposition T is that by capping commercial development in the City we will be supporting Mom and Pop stores. To be fair, this is not the main argument in favor of the measure, but it has been offered as something of an indirect benefit. I assume that the belief is that by limiting new commercial development we will be minimizing the ability of new chain stores to come into the city and effectively put these local shops out of business.

However, I'm not sure I buy this argument. Local stores, such as my favorite second hand bookstore, Kultura Books on Ocean Park at 17th Street (shameless plug, I know, but it's owned by a great couple who really know books, music and art) survive and sometimes thrive because they effectively compete with the chains, either because they've carved out a unique market niche, offer superior service and/or pay cheaper rent. In most cases all three conditions are present.

So how will Prop T effect any of those three criteria? Well, I suspect it will have an affect on rents. Prop T will be of great benefit to existing commercial property owners in the City by limiting future supply. The price of real estate, like every other commodity is driven by supply and demand. Unfortunately, this measure will not affect demand. As a result, a scarcity of commercial space will be created over time driving up commercial rents. Commercial landlords will be handed a gift with this measure. For absolutely no effort, they will see an ever growing rise in commercial rents, merely because they have been freed from competition. Chain stores will still make every effort to come into the City, but they will have fewer options. This pattern of ever rising rents, in cities that have severely limited growth, is common. In this case, it's a sure way to drive out the Mom and Pop's we'd all like to protect.

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