Over the years, Resonance has asked hundreds of workshop groups—real estate or economic developers, as well as tourism organizations—to describe their favorite places. To the surprise of no one, the descriptions are never about iconic landmarks, institutions or attractions. They are always about vibe and feel… of that hole-in-the-wall of a restaurant and the meal they’ll never forget, or a local shop where they found the one-of-its-kind object. They talk about the soul of a city.
But right now, as the pandemic grinds on, the future of Main Streets and commercial neighborhoods across the country, and the restaurants, bars and shops that bring them to life, is in question as with so many aspects of business and life. While many aspects of the way we live, work, play and travel will return to normal in a couple of years, the same cannot be said for many of our Main Streets and commercial districts.
In fact, when we look back at this crisis years from now, small shops and restaurants will likely stand out as having been most impacted.
And not for the better.
While small businesses in the retail and restaurant sectors account for 6.3% of GDP and employ nearly 20 million in the U.S., the restaurant industry as a whole is a catalyst for other jobs: every $1 million spent in restaurants generates an additional 34 jobs in the national economy: think farmers, butchers, purveyors of all kinds, delivery people and various hospitality workers. With restaurants and small retail businesses closed for the most part, it’s easy to see why a record 30 million American and 3 million Canadians have filed for unemployment benefits since mid-March.
Yet while employment is vital, it may not be the most important reason why restaurants and shops are vital to our economy. Resonance research shows a strong relationship between the overall GDP in a city and the number of quality restaurants and shopping experiences—surprisingly, higher correlations than even household income or educational attainment. Quality shopping and restaurants are also highly correlated with foreign direct investment and the number of large companies in a city. That’s not to say that great shops and restaurants cause these things to happen, but few cities seem to prosper without them.
From a financial perspective, the survival of shops and restaurants may also be key to ensuring the pandemic does not lead to another financial crisis. Physical retail and restaurant space accounts for 14.2 billion square feet of real estate in the U.S. – more than 40% of all commercial real estate in the country. If tenants are unable to pay the rent, landlords may not be able to pay the mortgage, sparking a wave of defaults that could ripple through the financial system just as defaults on residential real estate mortgages sparked the start of the Great Recession in 2008.
In short, restaurants and shops punch far above their weight in contributing to the overall prosperity of our cities and the economy as a whole. So what can be done to put our Main Streets and neighborhoods with their small restaurants and shops back on their feet—and make them more resilient to changing threats in the future?
We think the critical care required can come from a variety of organizations—from the operators of these small businesses themselves to the highest levels of federal and state governments to local destination marketing, business improvement and economic development organizations. They can help Main Street recover by ensuring we respond with appropriate financial aid, realizing that the system doesn’t just need to reopen, but requires a complete reboot, and, lastly, work together to reimagine what Main Streets and commercial districts should even look like and how they should be valued in order to ensure their long-term survival.
New York chef David Chang speaks with some authority about the needs of restaurants. The multi-platform restaurateur (Momofuku, etc.), author, podcaster and Ugly Delicious star told the New York Times magazine, “I’m not being hyperbolic in any way: without government intervention, there will be no service industry whatsoever.”
Certainly, financial aid is key right now—both Canadian and U.S. federal governments have created loan and wage subsidy programs for small businesses, which will help both main streets and malls that are experiencing historic rent defaults and vacancies. But wage subsidies for employees that aren’t there, or taking on more debt, is not a solution for many small businesses. As Chang points out, most restaurants don’t own their locations, and so can’t get bank loans at the best of times. His idea is to help restaurateurs by giving more government money to real estate owners so they can then forgive rents for small businesses.
Canada is planning to implement just such a program—it will allow landlords to provide as much as 75% rent relief to commercial tenants for three months. Commercial property owners will be eligible for loans to cover 50 percent of the rent over three months beginning in April; the owner is expected to kick in 25 percent of the rent, and the tenant the other 25 percent. The loans will be forgiven if the landlord agrees to lower rent by at least 75 percent and agrees to not evict a tenant while the program is in place.
Whatever form it takes, it’s clear that financial relief is critical to mitigate the immediate damage, but it’s not a pathway to recovery in and of itself.
While online retailing has been steadily eating away at the business of bricks-and-mortar businesses for years now, this crisis has been a catalyst for innovation in both the retail and restaurant sectors. Many businesses have already “pivoted”—the pandemic’s favorite word. Shops, even the smallest, highest-touch, most boutique-y have been dragged into the 21st-century world of omnichannel marketing and communication—or they are perishing.
Restaurant delivery, even on the high end, has been trending for years, and the pandemic has turbo-charged it: Many restaurants switched to pick up and delivery by simplifying menus and in some cases even partnering with complementary competitors to offer combined options through one kitchen and pick-up address. Cocktails have arrived in DIY pieces at our doors, injecting some “unboxing” and “experience” into an otherwise forgettable delivery. The pick-up/delivery system has even given new customers a chance to try restaurants whose limited brick and mortar seating made them inaccessible.
There’s no going back to normal after this. The “new normal” for restaurants and retailers will be to create business models that blend physical and digital offerings together. Chang says that he thought the growing delivery trend would shape restaurants over the next decade. “This change is now going to happen instantaneously,” he says. It’s important that BIAs, BIDs and EDOs aid the transition to help owners look at business models that consider occupancy of 50%, and help them prepare for a future where their digital identity and delivery will dominate.
Some states are “reopening” as we write this, and it’s important that BIAs, BIDs and EDOs aid the transition to help owners and the publics they serve to keep safe. In addition, just as local tourism offices and marketing organizations told people to stay well and stay home, they can put their marketing and communications expertise to work to help communicate how local businesses are working to ensure the safety and wellness of the public.
Tourism marketers can also support these businesses by reinstilling pride in local products and people. Visitors to places already know the value of local shops and products—our research shows that “Shops featuring local goods” and “Small boutiques with independent brands” are some of the activities that U.S. travelers enjoy most on vacation. Now’s the time to convince local residents to shop and dine the same way in their hometowns as well.
Tourism marketers should turn their sights (and talents) from visitors to local residents to help raise awareness of the goodness of local products and help shops benefit both from the patronage of future visitors as well as locals who want to keep their main streets alive. There has been much buzz during the pandemic about the end of globalism; we see it as a need to encourage residents (and visitors when they return) to “Act Local”. One pre-pandemic example is the work of Visit SLOCAL in San Luis Obispo, California, who created a “SLO Crafted” brand for producers and purveyors of locally made goods, seeing it as both a means to raise awareness of the region among potential visitors while also investing in and supporting local businesses.
Even with efforts such as these, many restaurants and shops in our cities will probably not return. While some bold young new entrepreneurs will take their place in the months and years to come, it’s likely that we will see a significant rise in vacant commercial space in our neighborhoods and downtowns. Left to market forces, our Main Streets could find themselves largely boarded up, just as they were in many small cities when consumers turned to suburban shopping centers in the 1980s.
Fortunately, there are examples of innovative approaches to urban redevelopment and revitalization that we can look to as models. To revitalize blighted urban neighborhoods in the past, some cities have created non-profit municipal development corporations that have used forms of Tax Increment Financing to borrow against future anticipated gains in property tax revenues to fund redevelopment.
Others have partnered with local corporations and developers to revitalize commercial areas by acquiring and developing land or buildings and leasing them to local entrepreneurs at below market rates. Cincinnati’s Center City Development Corporation transformed the city’s Over-the-Rhine District from a collection of derelict and abandoned buildings into a vibrant collection of local shops and restaurants.
Over the past decade, we’ve been working with the Calgary Municipal Land Corporation to successfully transform the city’s forsaken eastern downtown into a vibrant urban village that has attracted more than $3 billion in investment and is now home to more than 50 small businesses. The common thread in both of these examples is that cities made investments into not only infrastructure and the public realm but commercial buildings themselves. By charging below market rents, they are effectively investing and incubating small businesses to restore and revitalize key neighborhoods.
More cities will need to invest in and create organizations such as these with the financial wherewithal to operate as a “master-developer” at a neighborhood-level scale with a long-term vision (and funding) in order to foster and facilitate their city’s recovery.
We think that, given the importance of main streets and small businesses that cities should, and can, not only help them recover but also help make them more resilient over the long term.
One of the first steps to reimagining Main Streets and commercial districts will be to rethink the way in which restaurant, shops, and the spaces they occupy are valued—not emotionally, but financially. In most cities property taxes are much higher on commercial real estate than residential real estate. That in and of itself isn’t a problem, but skyrocketing real estate values in many cities have led to significant increases in the appraised values of commercial properties, which often get passed on by building owners in the form of higher rents to the tenants that occupy them.
That might not be a problem for a Fortune 500 company occupying Class A office space, but for restaurants and shops it’s a different story. They often occupy older single or two-storey buildings whose appraised land values (and corresponding property taxes and rents) have skyrocketed based on their potential value to be developed into denser mixed-use or high-rise developments. As a result, the small business owner is paying more rent as the property becomes more valuable for uses that don’t include them. In effect, the small businesses that often make a neighborhood desirable, and more valuable, are being penalized for their success. A first step to reimagining Main Street would be to rethink the way commercial properties are valued and taxed—based not on the value of potential future development, but on actual current uses.
The second step to reimagining Main Street will be for cities to rethink density and zoning in their commercial areas. If Amazon and other online outlets capture an ever-growing share of our wallets, it’s obvious that bricks-and-mortar retailers will have to serve a growing number of people in order to survive. The best way to substantially increase footfall on our Main Streets and commercial corridors is to increase the density of people working and living above or around them.
But for most of us, the very words “Main Street” conjure up images of quaint streets made up of eclectic two- or three-storey buildings. That kind of traditional density will no longer be sufficient to support a Main Street’s small shops and restaurants. Cities will have to reconsider area plans and zoning to allow more density to be developed in terms of residences or offices either above the shops and restaurants, or on nearby streets around them. Simply put, a post-COVID Main Street will not exist or thrive without more density above or around it.
The next, and perhaps most powerful way to reimagine Main Streets, lies within an Excel spreadsheet. Developers need to rethink the mixed-use development financial model itself and consider restaurants and retailers as more of an amenity than a rent. Many cities have zoned new construction as “mixed-use”, intending that street fronts would be populated by the kind of shops and restaurants that bring places to life, adding value all round. Developers counted on rents from the ground floor commercial spaces to create a long term annuity and return on their investment. They did so just as online retail began to rocket, and without considering the precarious financial nature of the businesses they rented those spaces to. Small shops were essentially expected to take on the risks of long-term leases and a disrupted retail landscape.
If shops and restaurants are considered amenities, how are those paid for? Residential amenities like gyms and party rooms are already part of the rent or paid for by the purchasers of condominiums. Why couldn’t “commercial amenities” like shops and restaurants be paid for (or subsidized) more directly by the residents and companies that occupy the spaces above them—who value having quality shops, restaurants and bars below? For example, the value of the ground-level commercial space in a residential building could be captured as part of the sale of the residences above and ownership and curation of that rent-controlled space could belong to the homeowners, thereby also fulfilling the community contribution demands cities often make of developers as part of the approval process.
To manage this transformation of Main Streets into multi-layered, mixed-use districts, cities and their business improvement districts and associations will need to step beyond their traditional “Clean and Safe” mandates into leadership roles that include placemaking and development. Perhaps the ‘Business Improvement’ of the future means turning a fresh eye on the potential of streets, considering them as possible homes to innovation districts or clusters of startups as well as commercial corridors. It’s a lot of heavy lifting, that will include changes in zoning, strategic post-COVID density, and innovative partnerships to create a mix of uses that results in streets that are lively, with people spending day and night.
Much is being made, at this point in the pandemic, about the changes coming to all aspects of our worlds. The pandemic is a catalyst for new ways of thinking about Main Street, as it is about so much of city life. For the most part though, life will likely return largely to the way it was before the crisis. We will travel again. We will gather for concerts in the park. We will go back to the office. But for the restaurants and shops that make up the Main Streets and neighborhoods we love, the change has already happened. At Resonance, we know that restaurants and shops are a key part of the software that makes a vibrant city hum and we welcome the challenge of creating future-proof Main Streets and commercial districts.
To learn more, please join us on May 13th for our free “Saving Main Street” webinar, which you can register for here.