Post-COVID city-centres: who should benefit from businesses re-opening – landlords or the businesses themselves?

An issue that has gained momentum over recent years in Montreal is skyrocketing rents for commercial premises, especially in lively neighbourhoods and in downtown. Rent hikes have been driving many well-established stores out of business. A well publicised example occured in early March 2021 when the bookshop S.W.Welch (which features in the film My Salinger Year and is located in the gentrifying neighbourhood of Mile-End) was on the point of being kicked out as the landlord almost doubled its rent.

This type of story has been reported regulary across Montreal, and not just in the most trendy locations. The pandemic has brought this problem to the fore. As Montreal retail streets begin their post-COVID revival, many merchants are hesitating: why bother to rebuild a business if the value created will be creamed off by landlords?

Indeed, neighbourhoods are attractive (and generate income for landlords) because local shopkeepers, cafés and restaurants – as well as property owners and developers – have, over many years, built a community exemplified by a mixture of activities, buildings, occupants and clients.

The generation of land value by community and local businesses: hardly a new idea!

This value – derived from conviviality, social interaction, ‘buzz’… (let’s call it community value) – is not monetised by the shopkeepers, cafés and restaurants, nor by their patrons. In theory it is of benefit to everyone (incuding property owners, but not exclusively) because it makes the neighbourhood attractive and pleasant. But property owners, sensing that a neighbourhood has become attractive, can increase their rents to a point where all community value is transfered to them.

Property owners are the only actors who can appropriate and monetise this community value: indeed, in economics, the term ‘rent’ signifies ‘unearned income‘, or ‘income that is generated through the actions of others and appropriated by virtue of owning a factor of production‘.

As community value is creamed off by landlords, many established merchants cannot afford the rent hikes: it is larger chains, benefitting from branding, economies of scale and specialisation, that move in. If just one or two big chains move in, then community value can usually survive. But two things then happen to kill off a street:

  • other big restaurant, café or retail chains move in, homogenizing the street, and killing off its uniqueness and community value – once the street is dead, chains may move out again (they manage a portfolio of stores across many neighbourhoods and cities, so this is no big deal for them) ;
  • property owners, who observe the high rents being paid by one or two big chains, expect all other premises on the street to generate similarly high rents. This pushes out existing merchants. The premises often remain vacant because there is not an infinity of large chains waiting to move into each neighbourhood.

There is nothing new in this process. Henry George, an economist of the late nineteenth century, analysed it in detail. In his 1871 book Our land and land policy, and later in his more mature writing, such as Progress and Poverty (1891, Doubleday), he outlines it and comes to a simple conclusion: there should be no private ownership of land.

Because the value of land (or, in my example, part of the value of commercial premises) derives from society as a whole then this value should return to society. If rents are paid to, say, the city, then the city can adjust them in such a way that community value remains in the community (e.g. it could require lower rents in recognition of the community value being created). Rents themselves would be paid into city coffers and returned to society by way of enhanced parks, streets, social housing etc… [Note that this argument relies on the distinction between land (the value of which is generated by society) and buildings (the value of which is generated by developers), a distinction more easily made in theory than in practice.]

This may sound absurdly radical or idealistic. Yet even The Economist sees merit in the idea. As an aside, The Economist’s column on Henry George has an interesting history. It was initially dated April 1st 2015, and was probably taken for an April fool’s joke: it has been redated April 2nd!

The case of the changing date

Putting aside The Economist, consider the Duke of Westminster, who owns 300 acres of central London (The Grosvenor Estate). Rather than sell it all off, the Duke and his forebears sold long leases (often 99 years) to developers, and also collected regular ground rent. From a real-estate perspective, the value of a 99 year lease is almost equivalent to full ownership : a building can be built, can generate income, and can be fully written off over this period. But from the Duke’s perspective, every 99 years he (or his family) can sell the lease again: so every 99 years the full value of downtown London (re)enters the Duke’s pockets, and in the meantime leases generate some income.

Imagine if Montreal owned the land upon which it sits (when I say ‘Montreal’, this could be the island’s original indigenous occupiers: the key being that the land is managed and owned collectively). If land were collectively held, the collectivity could either sell 99 year leases to developers, recouping all community value every 99 years, or it could decide to manage the land and buildings more directly.

This will not happen. As The Economist notes, the practicalities of transfering all land into public ownership are insurmountable. Yet Henry George’s ideas can influence policy even if they are not fully applied.

First, they provide foundations for some type of commercial rent regulation. Of course, such regulation must recognise the real costs of property ownership (constructing the building, normal profit for developers, maintenance, remuneration of managers, inflation adjustments : payment, and payment increases, for occupying buildings are completely legitimate); but regulation is a way of acknowledging that many increases in property value are attributable to society at large (including the merchants who invest in their local businesses and the surrounding community) and should not be creamed of by property owners.

Second, Henry George’s ideas provide strong arguments against the outright sale of land held by cities, governments or public organisations. This land can either be used directly (to develop social housing, say), or can be leased to developers on long leases so that, 99 years from now, land reverts back to the public and its (community) value returns where it belongs.

Finally, his ideas provide a rationale for land value capture. Value generated by infrastructure, safe streets, parks and other urban activities – value that is created by the city and by its inhabitants, not by landowners – can justifiably be taxed. The devil is in the details – more about this in another post.

Published by Richard Shearmur

I am a professor at McGill's School of Urban Planning. I perform research on innovation, on how we locate work activities (in a world where people often work from many places), and on urban and regional economic geography. I used to work in real-estate, and teach a course on this. I am an urban planner, member of the Ordre des Urbanistes du Québec and of the Canadian institute of Planners.

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