Last week, the mainstream media awoke to the fact that it’s not just knee-jerk NIMBY reactions driving Torontonians to fight new condo developments. It’s the banal podiums, those first few stories of big-box banks, pharmacies and chain retail stores that are the pièce de résistance of new condos in the city. (Spacing‘s Shawn Micallef also wrote about this last week in his Toronto Star column).
While urban designers have been saying this for a while now, little attention has been given to why big boxes, banks and chain retail are the developer’s ground floor tenants of choice. Or for that matter how this could be changed. I’ll start this post by trying to explain why this is happening across the city and then highlight a few ways we could address the problem.
Toronto’s current zoning requires most new residential developments, particularly those on main streets, to be mixed use i.e. to have commercial tenants on the ground floor. The City’s Avenue plans then try to tweak these requirements with setback and height regulations so new buildings will match the existing character of the main streets they will inhabit.
These regulations make their impact far before the condo is even built. To get a development constructed takes loans, and banks (particularly in Canada) won’t provide construction loans until enough units have been sold. In financing, these sales are reflected as a cash flow the bank can measure to decide whether they believe the developer can make enough income on the project to pay off the loan. Locking down commercial tenants in those large podiums therefore becomes a key part of the cash flow equation.
But commercial tenants, unlike condo owners, are essentially renters. They sign on for limited time periods and, crucially, often depend on the success of their business to pay the rent. As a result, rather than find lots of small independent businesses to fill their podiums, developers look for the safest tenants willing to occupy large floor plates for a long period of time. Goodbye mom-and-pop shop, hello Shoppers Drug Mart. In other words, form follows finance.
The irony of this is that having many smaller tenants rather than a couple large big box chains or banks would probably make a developer (and municipalities) more money. But to banks — and to some extent developers — this is riskier than landing a couple deep-pocketed tenants who will pay lower rent on large spaces but have little chance of closing down unexpectedly (unlike new restaurants, 60% of which fail in their first year), forcing the developer to scramble to fill the space.
This is the sad reality that is suburban-izing many of Toronto’s downtown streets. In essence, form follows finance.
There are a few options for combating this problem:
1. Do nothing – As Jane Jacobs famously said, “old ideas can use new buildings, but new ideas need old buildings.” In other words, we could just wait a while. Look at some of the older condo buildings along the waterfront and you’ll generally see a diversity of smaller chain stores. This may not satisfy the Ossington crowd, but its better than sterile banks and drug stores.
There are also signs that developers might just realize that it pays to have interesting tenants. Five St. Joseph is the best example of a condo project actively marketing the fact that it’s keeping its small storefronts. Up market projects like the Shangri-La or Four Seasons aggressively seek out ritzy tenants to give their tower the glamour needed to sell $28 million condos. Finally, developers are starting to take notice of the Distillery Districts and DUMBOs that subsidize a menu of galleries, shops and restaurants to create the street life that sells a lifestyle as much as it sells condos.
2. Do something – New York City has taken the lead in actively regulating the size and location of commercial stores on streets through zoning. This happened first on Harlem’s 125th Street, where new banks were relegated to the second floor of buildings. More recently, City Council has gone one step further, passing new zoning in the Upper West Side that also limits the width of storefronts. It’s unclear whether this will return either neighbourhood to their formerly messy glory, but it’s a start.
3. Compromise – Move away from the mixed-use podium paradigm that forces developers to provide banal retail and instead have them build family-sized townhouses free of use regulations. After all, the buildings found on Toronto’s beloved main streets were originally built for (and often by) families to live in. They were the building blocks from which small businesses sprung.
The City of Toronto is already trying to get more family-sized units included in new condo developments and allowing families to rent out the first floor of their townhouse to businesses could make these units more affordable. This is already happening in CityPlace and Queen Street West condos, where small businesses are springing up in the townhouses built at the bases of new towers.
There’s no guarantee these ideas will lead to the kind of neighbourhoods many of us want to live in. In the end, it’s high rent that is driving independent businesses from the downtown; case in point, the plethora of family-owned ethnic restaurants found cheek-by-jowl in Toronto’s suburban strip-malls and food courts.
The key is to avoid the griping about big boxes and banks that can be dismissively shrugged off like so many other “first world problems.” After all, many neighbourhoods need more banks and drugstores. But Toronto’s downtown also has needs: family-sized units, affordable housing and gathering spaces to tie communities together. These needs shouldn’t be trumped by design imperatives for flush streetwalls and matching setback heights.
What’s clear is the status quo isn’t working, and while patience is the name of the game in real estate, better retail, and therefore more walkable streets, couldn’t come sooner.
37 comments
I hate the chain or franchise stores that can only afford the excessive rents that they must pay to get in. The small independent stores don’t stand a chance.
It sounds like it’s less about the actual rent price, and more about the instability of small companies. A large company can weather a few bad months, and probably feel more confident about the market in the area they set up. The way that condo financing is set up, a developer currently has zero interest in bringing in shops that could go belly-up in a year, even if having five small shops would bring in more rent than one big one.
Good analysis. Some of this was covered on urbantoronto last fall too: http://urbantoronto.ca/news/2011/11/wanted-better-street-retail-new-condos
But W.K. as Jane Jacobs identifies, established “big” companies are the ones with the reputation and credit history to take on working in a new space. The reality is building a tower costs many millions of dollars, and developers/new owners have to recoup that cost somehow. Taking a risk on a small business is just dangerous with that much money on the line. Are they going to be around in 10 months? 10 years? That debt will still have to paid off in that time frame.
From the point of view of the small business, there’s also a lot of risk: you don’t know what the demographics of a new neighbourhood/building are, or what they’ll be in a few years. Big companies have the deep pockets required for patience.
Big companies are pioneer species in new buildings/neighbourhoods in our current economy. As the neighbourhood matures, they move on/change their needs and as they’ve cleared the initial debt out of the way, the building owners are given opportunities to take on other businesses as tenants, and be a little more risky with what they are looking for.
And this isn’t new: How many cities in Canada were the first commercial enterprises the Hudson’s Bay trading post, or the military supply depot? i.e. big businesses with the deep pockets to take risks.
R.
The main reason developers build for large chain stores is that the chain store can sign an agreement for space that opens a couple years from now, time to be determined. Small businesses want to open… now.
But Richard’s idea that large businesses are “pioneers” and that small businesses move in later is just nonsense. Once a space is built to chain retail standards (10,000 square feet, high ceilings, etc.) it never turns into a small, 16-foot wide retail space. It is forever a large chain retailer.
On Ossington, one of the main demands of the local residents is that small retail spaces be preserved. Too bad Spacing mocks that as the requests of “whiny, selfish NIMBYs”.
Michael> Nobody had any problem with advocating for smaller retail in the base of the Ossington condo (though it’s open for debate certainly). Once again: please stick to reality if you want to debate.
I am Richard. While some ideas like breaking up the retails space into smaller ones is worth considering, leaving it as up to the market is also a legitimate response. When enough condos are built this way, there is gotta be oversupply of such retail space which the big chains store cannot digest, then the rent will come down and the small business can take roots. By that time perhaps the owner/builders will divide the space up by themselves to attract small business. Give it time, things will right themselves. Allowing/encouraging building family-size unit at street-level is also a good idea, but those units should automatically have the zoning permit to run business, so that enterprising people can use them effectively as home/store combination, much like the 2-3 storey building lining many of our commercial streets.
Maybe, to get the social benefit we want, we need to socialize the risk. A local economic development organization (municipal or provincial) could rent the spaces (hopefully negotiating the same low rents that the banks & chain stores get), providing developers (and their lenders) with the security they are looking for. That organization would then sublet the space to smaller, entrepreneurial businesses.
A couple of points…
The Developer does not typically rent anything. The Developer does not look for any tenants. The goals is to sell the property. Tenants, like banks or Shoppers Drugmart, lease, not purchase, space.
The space is usually sold to companies that specialize in that category. Companies such as Madison Properties or even private companies or individuals. These entities then lease out the space as they see fit. In one large parcel, or they are free to divide it.
The real issue with condo-retail is that the taxes are much to high. Most developers would rather not build it at all but are required to replace the non-residential floor space of the site. The new space must compete with older retail space that pay a fraction of the full CVA taxes due to capping. While this capping is coming off gradually, its expiration will not not solve the problem. Toronto’s ridiculous tax treatment of businesses (and apartment buildings) is going to irreparably harm the vitality of the city.
P.S. for a good overview of how retail space in condos works check out this link….. http://www.torontorealtyblog.com/archives/commercialretail-condo-space/5839
Thanks for this article, Jake.
Though a developer wants more, smaller residential units for more profit, isn’t this opposite for the retail space because the rental rates are largely determined by square footage? That is, the total square footage of retail space will garner the same monthly rent regardless of how many separate units there are. I think, anyway…
Also, people should note that older buildings attract chains. If the area is busy with people, a chain will overhaul an old retail space (eg. Queen West, Bloor (Annex)). I agree with (and love!) Death and Life, but the chapter of the need for old buildings is her weakest argument. Glaeser (Triumph of the City) provides a critique, but I think most people just ‘know’ that the rental costs depend less on the age of a building than location. Thus, you see start-ups, quirky shops open on the periphery of 100% locations (Queen West West, Ossignton).
Mark, I think the tax difference that Glen mentioned is very important. With a lower tax, many older building owners probably would not mind keep renting to small business owners for a small profit, especially they have been long term tenants; yet if the tax is much higher, the building owner will have to look for business who can afford higher rent, because now the question is no longer a small profit vs. a big profit, but loss vs. profit.
@ Richard, I like the pioneer species analogy. Very biomimetic.
Though we have artificial rules and environments; I always wonder how far the artificial system parellel the biological one.
For example, pioneer species are usually smaller and numerous, more like multiple mom & pa stores. They are dynamic – die, replaced, thrive.
Big box and chains like banks are more akin to climax forest – big, less, fixed, slow growing. Quite permanent unless there is a major disruption.
From what little I know about Jane Jacob, she liked neighbourhoods / initiatives that were from-the-ground-up and organic. But that usually works under the assumption that there is a fertile ground where multiple things are free to grow as they see fit.
Which is what we prefer (at least for now). So can the chains / big boxes organically grow into the dynamic collections of small shops we so adore? Will the policies and owner incentives allow that to happen? The soil is fertile but things are not free to grow atm.
Right now our neighbourhoods are often “made” from cookie cutters, not “grown”. But maybe some may prefer that too, like a well manicured monoculture lawn.
There are some interesting examples on Queen St. west of Spadina where a new building includes both large and small retail footprints – the larger ones housing chain retail, and the smaller ones end up housing more independent stores. At Queen/Portland that was forced on RioCan by the local councillor and the City, but there’s at least one other smaller development that seems to have done it by choice, one large space and one small space. Mixed floorspace sizes in one development is a good solution – providing a range of types of stores and the possibility of both stability and variety/opportunity.
As a developer, getting the rent from a mom&pop tenant usually isn’t the largest issue, its actually their financial covenant. When a developer leases a space, they have to assess whether or not the store can a) pay the rent, b) pay the operating costs, c) pay for their portion of any tenant improvements and what is their overall financial stability. Smaller startups are very risky, as TI costs can you a bigger investor in their business startup costs than the actual business is! Add to that the high failure rate, and developers need to get security in the form of guarantees, usually personal with mom&pops
and small mom&pop operations usually don’t want to do personal guarantees, and therefore the space doesn’t get leased. Zoning ordinances that limit width make it worse, you essentially get “for lease” signs forever as most cities have no idea that 150 m2 is almost impossible to run a retail business in given storage, display, cash counter, office space, etc etc. Making frontages that dont line up with columns makes for awkward usable spaces too, another problem with zoning the widths
A big problem for on street retail is the oversupply of auto-oriented retail that’s been targeting TO’s industrial lands, think Laird, the ‘Stock Yards’, Lakeshore Blvd East etc.. Downtown (North York etc.) new retail often comes in the form of multi-story malls in office buildings, hospitals, Universities and some condos which drains life from the public sidewalk.
In order to minimize losses from mandatory commercial frontage, developers often try to fill it with other things like large lobbies, or produce retail with narrow depths. That’s why in condos or malls you often notice single firms take up multiple spaces along the street (e.g..Structube on College, Baton Rouge Eaton Ctr). Otherwise you end up with cramped kiosks like the Perfume Boutique or cellphone shop in College Park).
Mandating minimum depths would help, but changing current value assessment to fairly tax the growing landscape of surface parking lots and disposable one-story retail would get at the root of the problem.
If I bought and lived in a condo above a retail space I would love to have a variety of shops and restaurants to have the variety close at hand. BUT I would prefer a bank or drugstore as those premises are much quieter and do not stay open till 2am in the morning. Yes Shoppers and some drugstores may stay open till midnight and even all night long but still are relatively quiet. A 24 hour convenience would also be convenient but these usually have a steady presence of panhandlers and unsavoury characters.
It’s a tough choice when I want a neighbourhood with character but would feel more at ease with a large bank and drugstore like the one at 3333 Main Street, Vancouver a block from where I live.
The Avenues study already recommends narrow ground floor units in order to maintain the “rhythm” of the street. It’s not a question of changing the rules, it’s a question of applying the ones we already have.
In 30 years, most of the chains and “sterile retail” will probably move on. Rents will fall, and the likelihood of interesting small businesses moving in will be high. Putting in townhouses on a main street will have a deadening effect that’s unnecessary and worst than a bank or drug store. There may be some planning strategies towards more interesting retail, and that would seem like something worthy of further investigation in Toronto. However, in North York, there are some interesting exceptions to the rule that are worth discussing: several new condominiums on Yonge Street have a series of small storefronts with independent retailers who are often Asian.
The Avenues study already recommends narrow ground floor..It’s not a question of changing the rules, it’s a question of applying the ones we already have.
Height, minimum setback restrictions and segregation of residential, commercial and institutional use of land, minimum parking requirements and development charges depress property values of low-density land use and supply of efficient use of the land (especially non-residential uses of the land), and inflate the cost of efficient use of the land. Property taxes based on the combination of land and building penalizes the efficient use of the land, to the benefit of the chain businesses, as these tend to be inefficient in their use of land (dependent on trucks from suppliers and cars from their consumers, shopping carts for purchases of bulky or large number of items and wide aisles/excess space). Land value taxation would reduce the property tax burden by more than half of infill buildings, resulting in greater flexibility of what types of businesses would be able to pay rent, increasing the profitability of the holding company and generating a greater number of (local) jobs.
I grew up on that stretch of Yonge Street and its still messy and cool but I am not so sure I like the walls of condos a block behind that ruined all the existing streets and created separated roads that block the existing residential 2 story homes from the small shops. Guess what, everybody drives when they used to walk to these store. I agree with the point but I am not sure Yonge Street in that location is a great trade off. I would also add that many people downtown welcome a new Shoppers, or bank, often in areas that were very under served in the past like King and Stanley.
Interesting article and comments, esp. from @Paul and @Chris. Instead of socializing the risk through a city agency, might not a company be created that would lease the large space and in turn deal with smaller tenants? Something like the Blue Banana does in Kensington but with larger booths like those at Pacific Mall. Or a quango like Artscape could become active. This would also make it easier for developers to deal with one agency instead of many. Finally, such an agency could offer space (if they had multiple locations) immediately to small businesses as presumably there would be some amount of churn among subtenants.
Land value taxation is a good idea in general. Yet I think it tends to have the effect of encouraging highrise over midrise. It is already hard to get the finance right for midrise. So maybe the taxation (and development charge) should be an U shape, if you are either lower or higher than the density stipulated by official plan, you are taxed more; if you stick with the height/density stipulated by official plan, you are taxed less.
Land value taxation opeates under the false assumption that service costs scale linear with density. They certainly do not. While densiry does provide some areas of economy it is far less than assumed by most. Add to that the incidence of less density is born by individuals in the most part.
The costs of low density are subsidized by everyone else in many ways. The mismatch begins with current value land assessment whose charges are determined on the value of real estate (land & structure) instead of the cost of servicing. Your typical parking lot has little real estate value to tax. Ditto the disposable one-story cinder block box structures. The big bucks come from downtown wards, in particular downtown high rises. That’s why the Province pushed for Metro and amalgamation to leverage Toronto’s high tax base to fund suburban expansion.
Sprawl also leads to much greater public service expenses per person, more water & sewer pipe, more road surface, transit milage, policing, electricity etc. Looking at the financial & environmental costs, it makes sense to rejig our tax system (and zoning, parking requirements etc) to stop encouraging sprawl.
Roger, capital cost or servicing costs are covered by development fees. The economic literature dose not support your opinion about the cost savings from density. In fact the optimal city size from an economic operating perspective is considerably less than half a million. Roads and pipes are small potatoes compared to the costs of the services that scale with population and not density.
One Bedford is a condo with the right idea. It has big box stores in it right now, while it is new, but if you look at the layout of the groundfloor retail, it is set up to convert to smaller shops in the future. It is also worth considering that condo owners have a different idea on what they want in retail compared to pedestrians. Where we may see restaurants as livening up the streetscape, many condo’s explicitly forbid restaurants because of the smell and noise. I also think that Toronto’s obsession with ground floor retail prevents tall towers from having enough businesses and services to support their own population. In Athens, businesses can operate out of anyone’s home, and so there are hair stylists, doctors, professionals, etc. all on the higher floors of an apartment building. It truly makes the building mixed use across the entire area, rather than just the main floor. We somewhat plan for these types of businesses by developing live/work units (typically the ground floor townhouses), but often people buy them because they are cheaper and have no intention of creating a business there. Perhaps we need to be controlling that, so that commercial property isn’t used for residential only.
The size of the building is dictated by what the market will bear, distorted by government intervention. The current property tax system has a small effect on what will be built, with the exception of the extensive extent to which it delays the improvement of currently underutilized properties. The cost to provide services is largely a function of the size of the land (length or journey distance of infrastructure). Those who reside in high-density housing have a small land footprint, resulting in a low cost to provide services. Public housing and random location of zoning permitting higher-density housing, and segregation of commercial, residential and institutional use of land, would result in higher cost to provide services compared to if the free market dictated where higher-density land use took place (average journey distance would be greater).
Danny the big expenses of the city, police, fire, ambulance, parks, social services etc. or a function of population not density.
There really is a lot of research in this area, which if looked at would clear up these misconceptions.
‘capital cost or servicing costs are covered by development fees.’ The big problem with that argument is that this is a one time charge on the capital cost of a limited number of services. From then everyone pays the capital and operating costs. Ontario today has some of the highest development fees which are allowed to recuperate up to 90% of certain costs, which tend not to be things like buying city buses, let alone operations.
“The economic literature dose not support your opinion about the cost savings from density.” The cost savings of density are well established in peer reviewed economic literature and easy to find.
Sprawl costs: the economic impacts of unchecked growth
application/Van%20Holt%20Urban%20Sprawl%20Review.pdf
Of course there are always critiques and some bring up worthy limitations.
“In fact the optimal city size from an economic operating perspective is considerably less than half a million.” Won’t debate optimal population size except to note that population size is not the same thing as population density.
Never underestimate the impact of major ongoing financial regs like the tax code to influence private market decisions. However taxes are just the financial carrots, while the stick takes the form of regulations – parking mins, density maxes, separation of uses, park & amenity space mins, subdivisions designed by traffic engineers to meet the Road Hierarchy.
I’ll admit I skimmed the article and comments since I am running short on time, so this may have already been mentioned, but perhaps use the strategy that malls use: have a large anchor store, and the rest be smaller and independent retail.
Another option could be that if the manager/owner of the shops lives in the condos as well, they could receive a discount on their rent and mortgage.
Glen, based on my observation, the “big expenses” you mention seem to be funded based on how the politicians perceive will maximize the probability of being re-elected, including the influence of special-interest groups, although they would claim that the formulas they use based on population is optimal. All of the “big expenses” you mention are partly a function of the costs incurred in transportation, which decrease per dwelling unit as population density increases. Roads, highways, bridges and public transit are a major cost in every jurisdiction I am aware of. With more people in a given area, the probability and severity of fire and crime decreases, as the response time is faster and people are less likely to commit crime with others (potentially) watching. The need for parks would be reduced if some pavement and roofs were replaced with trees and other vegetation (I am actually opposed to parks, because they tend to have little effect on remediating stormwater runoff, because they are well-manicured, and they don’t contribute much in increased nearby property taxes compared to the increased transportation costs incurred and the opportunity costs of using the property for property-tax-generating residential and commercial purposes). Because of greater economies of scale, larger buildings are more cost-effective in having such intensive green roofs, which also reduces stormwater runoff and cost of utilities.
Here is a breakdown of the expenses. http://www.toronto.ca/budget2012/2012_budget_summary/howtax.htm
The Debt Charges is the cost of carrying the capital budget. Density does make some things cost more. And somethings cost less. Firefighting needs specialized equipment for highrises. Fires in high density quarters spread faster. Crime increases with Density (see West’s super-linear calculations). I am not arguing that density is less efficient. Just that there is a point where it is not so. Even so, the incidence of both the efficiencies (like energy and time) and inefficiencies are are skewed.
I agree that firefighting requires specialized equipment for highrises. However, because of greater economies of scale of there being a greater quantity of highrises as a proportion of buildings, the cost of this specialized equipment (and the corresponding additional number of employees needed to operate and maintain it) decreases with each additional highrise constructed. Improved building codes can impede the spread of fires.
People define crime differently, and they tend to emphasize the most visible crime (blue-collar) rather than white-collar or pink-collar crime. I personally believe drugs, vagrancy, prostitution, and jay-walking should not be considered to be crime.
Blue-collar crime might be correlated with population density, but it is more strongly (inversely) correlated with income, and based on current government intervention in land use and housing, larger buildings tend to contain those who have low incomes.
On a day-to-day basis, knowing that “crime” is at its lowest level since 1972, the police are less important than public transit, so the police budget should be decreased to below-TTC funding levels, with the savings be directed toward deficit and debt charges.