Struggling(?) Downtown Annapolis Businesses

The exit of a storied downtown clothier was featured on the front page of The Capital recently:

The landmark business that for more than half a century tailored uniforms
for Naval officers and formal suits for generations of Annapolitans will close
this month under the shadow of declining profits, parking woes and increased
competition from retail stores outside the city.

Johnson’s On The Avenue has operated from its two-story red brick
building only a block from the State House since 1952. For decades it served
midshipmen and admirals with uniforms, custom-designed caps and officer swords
and lobbyists and other customers with men’s and women’s specialty
clothing.

Keep reading below the fold or click HERE to see the full post, and if not, hopefully my conclusion will suffice:

Downtown businesses face many struggles; some are unique, others are not. Rare events such as fire and natural disaster, when combined with natural business turnover, probably cause an overstatement of the trouble downtown businesses are in.

Competition from the mall surely affects downtown businesses, but does not prevent success of businesses downtown. There are undoubtedly businesses downtown right now that are making money–you simply need the right strategy.

Government involvement in the issue is appropriate, but only in the traditional ways. More specifically, a Department of Economic Affairs will not help downtown businesses. Any representation of downtown as a whole can be accomplished by a BID.

Certain businesses will foreseeably always do well downtown: restaurants, bars, jewelery, and novelty. Attracting larger supermarkets or department stores that many citizens patronize would require space that downtown Annapolis just doesn’t have.

The strategy for downtown business development, and for the rest of the city for that matter, should be:

1. Lower property taxes as much as possible to increase return on investment and lower commercial rents.
2. Streamline permitting process to facilitate risk-taking by entrepreneurs.
3. Ensure clear zoning laws to aid with business feasibility decisions.

Additionally, the city needs to determine its vision for downtown. A downtown that truly competes with the mall would require making downtown a shopping destination. If this is a priority, than ease of transportation and parking space creation are important, and costly, priorities. If downtown is to be a lifestyle center for nearby residents, then focus should be on pedestrian-friendly development. To be successful, such initiatives would have to drive down rents enough to attract a wide range of businesses, an outcome that is unlikely with the private market and disastrous if achieved through government price control.

The fact is: downtown is used by different groups of people–local residents, shoppers, and tourists. The city government cannot possibly interpret the exact mix of user demands, and if it stays out of the way, the private market will sort it out well enough.

Despite the fact that I made this observation before, I am prepared to make a stunning admission: I don’t know what to do about this. I don’t even know if anything can be done.

Is There Really A Problem?

The answer may surprise you. When I saw the original article in the paper, I had to fight the temptation to make a “drive-by” post criticizing something, then moving on. Yes, many businesses are failing or leaving downtown. But, is this happening any more than usual? Moreover, is there less turnover than with businesses at the mall?

A good friend who went to UMD with me has turned himself into a real estate mogul in, I dare to say, the state of Maryland. I respect his opinion very much, and when it comes to real estate, I would no sooner doubt his opinion than I would that of Walter Williams, which is to say I would need an authenticated telegram from Heaven informing me that said opinion was hijacked by evil spirits. My friend would argue that there isn’t a structural problem, or at least not as big of one as people might believe.

We need to distinguish vacancy from turnover. There is always turnover, because there are always people with a surplus of money and a deficiency of luck or innovation that open doomed businesses. Replacing under-producing businesses is vital, and normal. The unique nature of some failed businesses relates to the age of the buildings, and investment strategy. The old buildings were not retrofitted with sprinklers, allowing fire to destroy several businesses. Hurricane Katrina ended other business ventures, as several places without insurance decided it was not worth the effort to rebuild.

None of those issues have anything to do with the mall, and are somewhat more easily dealt with. However, you could make the argument that such things do not explain the entire situation, and you could also argue that the type of businesses downtown are important; downtown, after all, is supposed to sustain daily life for nearby residents, right? With this in mind, let’s continue.

Parking.

So why didn’t business owners prepare for emergencies? Why didn’t they install sprinklers or get flood insurance on their own? Surprisingly enough, because of parking. Theory would explain this, and my friend the mogul verifies its practical truth from experience as a commercial landlord. Downtown is not good for vehicle traffic. You can approach from 3 sides: the Eastport bridge, Rowe Blvd, or the Naval Academy bridge–with all three routes dumping cars into a very concentrated area. The streets are somewhat unorganized, and parking spaces limited. This problem makes businesses less profitable. Reduced access means that business owners can expect lower profits, and it is not a good business decision to invest in sprinklers and pay for flood insurance. The mogul guarantees that addressing this problem would reverse the trend, and has repeatedly suggested to me that many businesses would pay for their own sprinklers if even 1 more parking garage were built. Where? How about at the site for the sailing hall of fame?

Parking also deters from downtown business in a more general way. If people want to shop at peak times, they will stay away from downtown. I know I would.

The Cost of Rent and the Types of Stores.

It can be safely assumed that unaffordable rents are a main contributor to the failure of most businesses downtown. In the truest sense, high rents are the demise of all businesses (unless they own the property)–if rent was $0, any business could succeed as long as it covered variable costs, which is a relatively easy thing to do. Anecdotally, many downtown businesses have complained about this, but let’s look at some data.

If you believe this source is appropriate, here are the industries that produce the highest sales per square foot of retail space, observed from the neighborhood level:

1. Drugs
2. Food
3. Jewelery
4. Liquor
5. Food Services (I don’t know how this differs from #2)
6. Gifts/Specialty

Notice any familiarities with our downtown? All of these sectors (and not too much else) can be found on the Main St. corridor. For me, seeing the highest per square foot industries all grouped together is a sign that only such industries can afford to pay the rent.

So how much is the rent? For those unfamiliar with the costs businesses face, the numbers are staggering. For ground level retail space in a newer building, think $50 per square foot per year. For second floor space or office space, the number is closer to $25-$30. I would be surprised to find any downtown businesses that paid less than $5000 per month in rent; I would guess the median rent to be around $15,000 per month; and I have heard numbers for some of the bigger restaurants of over $30,000 per month. You have to sell a lot of crab cakes just to break even!

The problem with the type of stores downtown are that they are what I would refer to as support stores. To elaborate, if I go shopping, it is usually for clothes or food. So, I go to the best place to buy these things, then may stop for a coffee or a bottle of wine on the way home. It actually doesn’t matter what the main shopping goal is–the point is that your destination is not the liquor store or restaurant. Downtown simply can’t support a supermarket or a big retailer, which is where people want to get their food and their clothes. The clothing stores downtown are small, have limited selections, limited sizes within those selections, and tend to be expensive. That is fine on occasion, but all the time for the average family. And I don’t know if anyone can do anything about this.

The Mall Argument.

The classic argument, or excuse depending on how you feel, is that downtown businesses can’t compete with the mall, or other surrounding destinations that enjoy better accessibility, convenience, and user-friendliness. However, there is reason to believe that malls don’t have a particular inherent advantage.

A recent survey in The Economist details the continued downfall of malls:

By the 1990s malls were in trouble. Having bred too quickly, they began to
cannibalise each other. (Turn left out of Southdale’s car park and the first
building you pass is another shopping mall.) Discount shops, factory-outlet
stores and category killers like Toys “R” Us ate into their profits. As
middle-aged shoppers began to disappear, the teenagers who had inhabited malls
from the beginning became more noticeable, which only made things worse. In 1998
Good Housekeeping ran a story entitled “Danger at the Mall”. Indoor shopping
malls are now so out of favour that not one will be built in America before 2009
at the earliest, according to the International Council of Shopping Centres.

Rather interestingly, the story attributes some of the early success of malls to racial isolationism. Blacks from the south were moving northward into cities, causing whites to seek suburbs. Malls created the benefits of a downtown without the dangers (of being harassed by blacks, so the thinking went). To try and relate this notion to our downtown–people don’t avoid downtown because they are afraid of rif-raf. There has been a shooting in the mall more recently than there has been a shooting in Ward 1! Rather than compete with downtowns, malls are being built to mimic them:

Every new shopping centre built in America next year will be roofless (and
several traditional shopping malls will tear off their roofs). Open-air centres
will appear not just in temperate places like southern California but also in
muggy Houston and frigid Massachusetts.

The point that I’m getting at here is that malls don’t have a natural advantage. Downtown Annapolis is a more attractive place to go than the Annapolis mall, provided there are things there that people want to buy.

A Look At Zoning.

I found a really good article on the internet yesterday, but had to restart my computer, and I can’t find it today. This makes me really mad because I just searched for it for half an hour. Anyway, the point of the article was to have zoning with minimal setbacks and high building density, which encourages foot traffic. There were other points, but I remember thinking that the Annapolis downtown had all of the things that the article recommended.

Now, let’s talk about historic district zoning. What a pain in the butt it must be to conform. I cannot imagine how much these requirements add to the cost of investing in physical structure, which is not to say the requirements are bad. On net, historic zoning requirements are probably a wash. Yes, they add cost to businesses. However, seeing that people do not go downtown (for the most part) to buy the staples of daily life, the ambiance must be that much more attractive for visitors, and historic requirements ensure such an attraction.

Zoning is the most direct way to affect the types of businesses that go downtown, and I really hope the city doesn’t try to zone in any specific businesses. First of all, how would they do it? Would Main St. and Dock St. become their own zone? Would only a certain percentage of space be available to bars? And what of the others? Even if you successfully determined which properties could be used for certain things, you would drive down the rental value of that property dramatically–rent control would be unavoidable, even in this indirect way.

Rent Control.

If rent is the problem, you might be wondering, why doesn’t the city implement a maximum rent? This is a bad idea. With rents artificially low, landlords will expect less profit. They will be less likely to invest in infrastructure improvements and the quality of the buildings will suffer. There will be no desire to build new properties, and with demand for retail space outpacing supply, landlords wouldn’t have to worry about attracting new tenants; the above effects would compound.

Plus, when the higher-ups realize that rent control is bad and choose to deregulate, there would be massive business turnover as the market sorts out the true market-rate rent.

Business Improvement District.

BID’s are basically groups of geographically related businesses that band together and form a self-taxing organization. All businesses contribute to the organization, and the money is spent on marketing, building improvements, etc.

There is much precedent for this–an internet search for BID’s will show you pages and pages of downtown BID’s. New York City has 57 different improvement districts. For Annapolis, I can’t see how it would hurt, but I don’t know how much it would help. While the need for cosmetic maintenance downtown exists, it is not as important as the major transportation issues. You need tax money from major sources to fix this, and extra contributions from a handful of downtown businesses wouldn’t get you very far when the cost of a parking garage is roughly $15,000 per space.

Government Sponsored Economic Development.

Don’t get me started.

Conclusion.

Downtown businesses face many struggles; some are unique, others are not. Rare events such as fire and natural disaster, when combined with natural business turnover, probably cause an overstatement of the trouble downtown businesses are in.

Competition from the mall surely affects downtown businesses, but does not prevent success of businesses downtown. There are undoubtedly businesses downtown right now that are making money–you simply need the right strategy.

Government involvement in the issue is appropriate, but only in the traditional ways. More specifically, a Department of Economic Affairs will not help downtown businesses. Any representation of downtown as a whole can be accomplished by a BID.

Certain businesses will foreseeably always do well downtown: restaurants, bars, jewelery, and novelty. Attracting larger supermarkets or department stores that many citizens patronize would require space that downtown Annapolis just doesn’t have.

The strategy for downtown business development, and for the rest of the city for that matter, should be:

1. Lower property taxes as much as possible to increase return on investment and lower commercial rents.
2. Streamline permitting process to facilitate risk-taking by entrepreneurs.
3. Ensure clear zoning laws to aid with business feasibility decisions.

Additionally, the city needs to determine its vision for downtown. A downtown that truly competes with the mall would require making downtown a shopping destination. If this is a priority, than ease of transportation and parking space creation are important, and costly, priorities. If downtown is to be a lifestyle center for nearby residents, then focus should be on pedestrian-friendly development. To be successful, such initiatives would have to drive down rents enough to attract a wide range of businesses, an outcome that is unlikely with the private market and disastrous if achieved through government price control.

The fact is: downtown is used by different groups of people–local residents, shoppers, and tourists. The city government cannot possibly interpret the exact mix of user demands, and if it stays out of the way, the private market will sort it out well enough.






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