Targeted Taxes Pose Challenges to Equity, Economic Growth
By Liz Farmer, January 23, 2020
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Cities that feel hamstrung by property tax caps are increasingly using alternative approaches to taxing real estate, with the goal of eking out more revenue and, in some cases, changing behavior. But rather than helping city coffers, experts warn, such moves may be more likely to disrupt economic growth, raise equity concerns, and insert instability into the otherwise fairly predictable property tax revenue stream.
In some instances, cities and states are raising so-called “mansion taxes”—transfer taxes on high-value residential real estate—as a way of cashing in on a booming real estate market. Connecticut, which is losing population, even structured its tax to discourage wealthy people from leaving the state. This fall, Boston approved a higher transfer tax rate on residential and commercial property sales over a certain market value. If approved by the state legislature this session, the shift would allow the city to add a local transfer tax of up to 2 percent on sales of $2 million or more. Chicago is considering a similar move, as are several other smaller cities. In other cases, local governments are taxing vacant properties at a premium as a way to nudge owners to lease, develop, or sell.
Opponents of these alternative taxes say they will discourage the very investment that has benefited the real estate market. Greg Vasil, CEO and president of the Greater Boston Real Estate Board, has warned that increasing the cost of doing business in the city could ultimately backfire by pushing up the cost of rent. Proponents in Boston pitched the recently adopted tax as an issue of fairness: Boston’s booming real estate market has left some behind and made it more difficult to find reasonably priced housing, they say. A high-end transfer tax could raise more than $150 million in any given year that would go toward affordable housing, more than doubling the city’s current funding stream for affordable housing.
“We want to make sure that everybody in the city can grow with the developers, can grow with people who are building homes,” the bill’s lead sponsor, City Councilor Lydia Edwards, said at the bill signing last year.
But any time taxes are narrowed to specific populations, whether it be smokers, gamblers, or the rich, it is likely that the revenue from that tax will be volatile. The best tax policies—in terms of fairness and revenue stability—tend to be ones that have a broad base and are both limited in exemptions and progressive in nature, says Ron Rakow, a Lincoln Institute fellow and Boston’s former assessing commissioner. Increasing mansion taxes runs counter to that.
“What happens when the market dips?” he said. “Unlike the property tax . . . transfer tax revenue can be really volatile. It’s not unusual to see it drop by half in any given year.”
Targeted taxes also tend to invite taxpayers to game the system or find loopholes, which also lessens their long-term effect. For example, New York state has long had a higher transfer tax rate on properties sold for $1 million or more. But in 2019, the legislature approved an even higher rate for New York City. Before the new rate went into effect that July, Manhattan saw a closing frenzy. According to a report from Douglas Elliman Real Estate, sales from April through June 2019 were up 12.5 percent compared to the same period in 2018, surging by a full 37 percent in the $2 million to $5 million price range. The following quarter, the city’s inventory increased, and sale prices dropped by 12 percent.
In Connecticut, lawmakers added an unusual provision to not only curb evasion, but also encourage these presumably wealthy sellers to make their next home purchase inside state lines: Those who retain their in-state residency for at least three years after a sale become eligible to claim a tax credit against their mansion tax. Whether the lure works remains to be seen—it goes into effect July 2020—but those in the high-end real estate market have still criticized the tax hike, calling it punitive.
Vacancy taxes have drawn similar criticism. Washington, DC, and Vancouver, Canada, already have such taxes, and San Francisco and Oakland, California, and New York City are all considering following suit.
DC’s tax was created in 2011, and included a tier for vacant properties, taxed at $5 per $100 of assessed value, as well as a higher “blighted” tier taxed at $10 per $100. The blighted tax rate is more than ten times the city’s ordinary property tax rate. The idea was to force absentee landowners into doing something with properties they were neglecting.
But Lincoln Senior Fellow Joan Youngman notes that there can be many reasons for commercial vacancies, depending on market conditions and the owner’s situation. In some cases, landlords may be seeking creditworthy tenants and long-term guarantees; in others, changing retail patterns may affect the desirability of the location to traditional tenants. Residential vacancies present a different set of issues. “The first step is to understand the market conditions that lead to a pattern of vacancies, and to tailor the most effective response, which might not be through a tax instrument,” Youngman said.
Hartford, Connecticut, a small city dotted with vacant lots, also considered making it more expensive for property owners to hold unused land. But in 2017, Mayor Luke Bronin killed a proposed vacant property tax due to concerns that it would hurt development even more.
Two years later, Bronin was among a group of officials who pushed the state to pass two pieces of legislation that took a more holistic approach to blight for all Connecticut cities. The first targets absentee landlords and speeds up the process of turning vacant properties over to a receiver. The other bill allows cities to establish a land bank to help revitalize properties.
Of course, in the short term, it’s politically easier for officials to pick out one thing they don’t want to happen, and then use taxes to discourage it. And in some places, it’s easier to tax the rich—or at least try to. But Rakow points out that Boston’s property tax structure already is progressive because homeowners are exempt from paying on the first $200,000 in value. That is a significantly greater discount for the average homeowner, compared with wealthy owners of multimillion-dollar homes.
Many cities already have the tools they need to raise property tax revenue without creating a new layer, Rakow adds. Boston, for example, can go to voters and ask them to approve additional revenue above the city’s cap that would be dedicated to affordable housing, or to buffer the general fund budget against instability.
At a minimum, Youngman and Rakow advise proceeding with caution and acknowledging that any revenue impacts from targeting certain property taxpayers are, at best, unpredictable. As Youngman put it, “it’s important not to assume that a new tax is the best way to deal with a land market problem.”
Liz Farmer is a fiscal policy expert and journalist whose areas of expertise include budgets, fiscal distress, and tax policy. She is currently a research fellow at the Rockefeller Institute’s Future of Labor Research Center.
Photograph: Implementing targeted taxes such as transfer fees on high-end real estate can be alluring to municipalities, but experts warn that these moves can backfire. Credit: www.aag.com via Flickr CC BY 2.0.
Graduate Student Fellowships
2020 C. Lowell Harriss Dissertation Fellowship Program
Submission Deadline:
March 16, 2020 at 6:00 PM
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The Lincoln Institute's C. Lowell Harriss Dissertation Fellowship Program assists Ph.D. students, primarily at U.S. universities, whose research complements the Institute's interests in land and tax policy. The program provides an important link between the Institute's educational mission and its research objectives by supporting scholars early in their careers.
2020 Professional Certificate in Municipal Finance – Phoenix
April 15, 2020 - April 17, 2020
Phoenix, AZ United States
Offered in English
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Events in Detroit, Stockton, Flint, and Puerto Rico highlight the severe challenges related to fiscal systems that support public services and the continued stress they face given local governments’ shrinking revenue streams.
Whether you want to better understand public-private partnerships, debt and municipal securities, or leading land-based finance strategies to finance infrastructure projects, this Professional Certificate in Municipal Finance will give you the skills and insights you need as you advance your career in urban planning, real estate, or economic development.
Overview
Created by Harris Public Policy’s Center for Municipal Finance and the Lincoln Institute of Land Policy, this three-day program provides a thorough foundation in municipal finance with a focus on urban planning and economic development. This course will include modules on the following topics:
Capital Budgeting/Accounting and Infrastructure Maintenance
Debt/Municipal Securities
Land-Based Finance/Land Value Capture
Public-Private Partnerships
Cost-Benefit Analysis
Fiscal Impact Analysis
Participants will learn how to effectively apply tools of financial analysis to make strategic decisions and gain an improved understanding of the interplay among finance, urban economics, and public policy as it relates to urban planning and economic development.
Upon completion of the program, participants will receive a Certificate in Municipal Finance.
Who Should Attend
Urban planners who work in both the private and public sectors as well as individuals in the economic development, community development, and land development industries.
Cost
Nonprofit and public sector: $1,200
Private sector: $2,250
Space is limited.
Details
Date
April 15, 2020 - April 17, 2020
Application Period
December 20, 2019 - April 2, 2020
Location
11010 N. Tatum Boulevard, Suite D-101 David C. Lincoln Conference Center Phoenix, AZ United States
Economic Development, Infrastructure, Land Use, Local Government, Municipal Fiscal Health, Planning, Property Taxation, Public Finance
Course
2020 Professional Certificate in Municipal Finance – Chicago
March 18, 2020 - March 20, 2020
Chicago, IL United States
Offered in English
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Events in Detroit, Stockton, Flint, and Puerto Rico highlight the severe challenges related to fiscal systems that support public services and the continued stress they face given local governments’ shrinking revenue streams.
Whether you want to better understand public-private partnerships, debt and municipal securities, or leading land-based finance strategies to finance infrastructure projects, this Professional Certificate in Municipal Finance will give you the skills and insights you need as you advance your career in urban planning, real estate, or economic development.
Overview
Created by Harris Public Policy’s Center for Municipal Finance and the Lincoln Institute of Land Policy, this three-day program provides a thorough foundation in municipal finance with a focus on urban planning and economic development. This course will include modules on the following topics:
Capital Budgeting/Accounting and Infrastructure Maintenance
Debt/Municipal Securities
Land-Based Finance/Land Value Capture
Public-Private Partnerships
Cost-Benefit Analysis
Fiscal Impact Analysis
Participants will learn how to effectively apply tools of financial analysis to make strategic decisions and gain an improved understanding of the interplay among finance, urban economics, and public policy as it relates to urban planning and economic development.
Upon completion of the program, participants will receive a Certificate in Municipal Finance.
Who Should Attend
Urban planners who work in both the private and public sectors as well as individuals in the economic development, community development, and land development industries.
Cost
Nonprofit and public sector: $1,200
Private sector: $2,250
Space is limited.
Details
Date
March 18, 2020 - March 20, 2020
Application Period
December 20, 2019 - March 9, 2020
Location
The University of Chicago Keller Center 1307 E 60th St. Chicago, IL United States
Situated almost exactly in between Boston and New York, Hartford, Connecticut, is a classic mid-sized legacy city with great potential for reinvention. In this episode of the Land Matters podcast, planning commissioner Sara Bronin talks about the cutting-edge urban planning practices she hopes will put the city back on the map, after decades of decline.
“In light of the city’s structural challenges in terms of how it gets taxes and how it relates to the state, we’ve really felt within the city we have to take matters into our own hands,” Bronin says. Among the revitalization initiatives: a complete overhaul of an outdated zoning code, which has smoothed the way for lower-cost redevelopment of abandoned factories and other historic buildings now accommodating makers spaces and craft breweries.
An architect and law professor, Bronin helped kick off the Lincoln Institute’s recent scenario planning workshop in Hartford, put on in partnership with the Capitol Region Council of Governments. The metropolitan region is starting to use scenario planning to project multiple futures for the area, in housing, economic development, and transportation.
With a population of about 125,000 – nearly 1 million including the communities all around it—Hartford is the state capital and the fourth largest city in the state. Once a center of innovation and commerce—inventions include firearms, typewriters, tools, sewing machines, bicycles, and even one of the nation’s first electric cars, plus the beginnings of the modern-day insurance industry – Hartford endured population and manufacturing loss, a decline in property tax revenue, crime and high unemployment dating back at least to the 1960s.
Adding to the challenges, a portion of Interstate 84 through downtown has reached the end of its lifespan, and needs to be rebuilt or reconfigured. Possible solutions include replacing sections with surface boulevards, lowering portions of the freeway, or building extensive tunnels for both vehicular traffic and high-speed rail.
That last proposal suggests a path to renewal through some big-picture thinking. Under the Rebooting New England initiative, Amtrak’s high-speed Acela route would go through Hartford between New York and Boston, placing the city at the center of a new Northeast megaregion – and instantly opening up housing and labor markets through faster connections among all the cities of southern New England. The proposal was inspired by the UK’s Northern Powerhouse effort linking older industrial cities north of London.
Zoning reform, scenario planning, major infrastructure investments, and megaregions are all in the mix, and get thorough consideration in this wide-ranging conversation.
Anthony Flint is senior fellow in the Office of the President at the Lincoln Institute of Land Policy.
Photograph: Sara Bronin speaks at the third annual Consortium for Scenario Planning Conference, which took place in November in Hartford, Connecticut. Credit: Diego Lomelli Trejo.
The Unmalling of America
How Municipalities Are Navigating the Changing Retail Landscape
By Gregory Scruggs, December 16, 2019
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The struggling Bangor Mall is a national parable of changing retail habits. Built on a former dairy farm in Maine, the mall threw open its doors in October 1978, growing to serve up to two-thirds of the state’s population with a plum location off a main thoroughfare, Interstate 95, in the middle of the state. For decades, the mall contributed handsomely to the local tax base, to the tune of $1.2 million per year. In recent years, however, the cream-colored structure with blue trim that once anchored Maine’s third-largest city has gone through the same hard times affecting shopping malls across the country.
Over the past two decades, consumers nationwide have made significant shifts in their shopping habits, migrating to online retail and returning to traditional commercial corridors and shopping districts in economically strong metro areas. Meanwhile, Walmart has consolidated its position as the nation’s largest brick-and-mortar retailer, with a strong clientele of rural, exurban, and small-town customers. As a result, once-venerable retail brands like Sears and Toys ’R’ Us have faced bankruptcy.
This disruption has created a checkerboard of vacancies nationwide, including on the expansive 88 acres of the Bangor Mall, which is now anchored by Dick’s Sporting Goods and Furniture Mattresses & More. Other longtime retailers in the space, like department store JCPenney, have signed lease extensions, though the mall’s very future remains wobbly as out-of-state owners grapple with retail headwinds. In 2017, then-owner Simon Property Group of Indianapolis—which owns retail properties in 37 U.S. states and Puerto Rico, as well as in Europe and Asia—defaulted on an $80 million loan that had used the mall as collateral. The property was sold at auction to a New York-based investor trio in February 2019 for $12.6 million, less than half of its assessed value.
Those assessments have fallen precipitously in recent years due to the decrease in estimated net operating income and increase in vacancy, according to Bangor City Assessor Philip Drew. The mall has seen consecutive year-over-year reductions of roughly 25 percent, from $60.9 million in 2017 to $46.3 million in 2018 to $34.6 million in 2019. In both 2017 and 2018, years that saw the departures of flagship tenants Macy’s and Sears, respectively, the mall’s owner paid its taxes, but appealed for reductions in its assessment given the precarious situation at the property. Drew denied the requests, and his decisions have been appealed to the State of Maine Board of Property Tax Review.
In the meantime, the Bangor Mall’s tax bill has dropped below $1 million for the first time in two decades. Such an outcome may sound like a major hit to Bangor’s budget, but the blow turned out to be manageable, Drew says. The mall accounts for 1.31 percent of the city’s total taxable valuation. But the shifts at the mall aren’t the only changes afoot: overall, Bangor collected more property tax revenue this year than last. “The city’s taxable valuation growth has recently occurred in the downtown district, with a new bank campus owned by Bangor Savings Bank valued at $22 million and the remodel of downtown structures to satisfy the demand for downtown apartments,” Drew says.
In other words, while a mall on the edge of town sputters, Bangor’s downtown is thriving, and the loss of property and sales tax from one was compensated for by the other. It’s the result of a downtown revitalization plan Bangor started in the 1990s. It’s also part of a growing counternarrative to the dominant media story of the past decade, which predicted that the surge in online shopping would spell the end for brick-and-mortar retail, potentially damaging municipal fiscal health along the way.
As this shift plays out in communities large and small across the United States, the facts are more complicated than those media accounts would suggest—and the outlook is more optimistic than the headlines portend. By implementing proactive measures from investing in downtowns to rethinking the use of the valuable acreage occupied by malls, Bangor and other jurisdictions are demonstrating how to navigate the changing retail tides.
Why Retail Matters to Municipalities
That local governments fund their operations in large part on property taxes is no secret (see Figure 1). The revenue source accounts for 72 percent of the total local taxes collected in 2015. While the ratio of residential to commercial properties varies from community to community, as do the respective tax rates placed upon those properties, retail typically accounts for approximately one-quarter of all commercial property value. Whether retail is make or break for a municipal budget, however, varies widely.
“In some communities dependent on malls, they can make up 20 to 30 percent of their tax base and other taxpayers may have been paying relatively less,” says Lincoln Institute of Land Policy Fellow Ron Rakow, former assessor for the City of Boston. Rakow has conducted research on the tax implications of the changing retail environment (Rakow 2018). “If the mall isn’t doing as well, the community is either going to have to reduce services or increase taxes for others.”
Onondoga County, which surrounds Syracuse, New York, is among those communities facing such tough choices. ShoppingTown Mall opened in 1954, placing it among the earliest U.S. shopping malls. A succession of major tenants, including Macy’s, Dick’s Sporting Goods, JCPenney, and Sears, has closed since 2015. The mall’s assessment has dropped precipitously as well, from $53 million in 2008 to $36 million in 2014. Meanwhile, the mall’s owner, Moonbeam LLC, has resisted paying its tax bill to Onondoga County. In June 2019, the company missed a deadline to pay $9.7 million in back taxes dating to 2015. The county is trying to foreclose on the mall in order to redevelop the site, but in August 2019 the company announced its intention to head to bankruptcy court to avoid losing the property.
It’s not just property taxes that are a factor, of course. “Retail is huge, not only from a property tax standpoint, but also [in terms of] sales tax,” says Marc Moffitt, senior research analyst at the Denton (Texas) Central Appraisal District and an adjunct faculty member at the University of North Texas. Sales and other non-property taxes account for about 12 percent of municipal tax revenue. So far, that revenue stream appears to be holding steady nationwide. In the Rockefeller Institute’s most recent state revenue report, covering the fourth quarter of 2017, sales tax collection increased 4.8 percent, doubling the typical quarterly average (Dadayan 2018). The combination of property and sales tax that retailers provide makes for a potent one-two punch. “There are Texas towns that are 80 percent residential, but the 20 percent that is commercial makes up the tax base,” Moffitt says.
Reinvesting in Downtowns
There are 8.5 billion square feet of retail space in the United States, which equates to 24.5 square feet of retail space per capita, or five times Europe’s average of 4.5 square feet per capita. Moffitt looks to the 13 regional malls sprawled across the Dallas-Fort Worth metro area where he lives as a classic example of the overbuilt mall environment. “How many regional malls can you have in one region?” he asks.
Local governments have seen the mall contraction coming. Most malls have been struggling to maintain close to full occupancy for at least a decade, sometimes up to two decades. “The general trends support the fact that increasing vacancy rates are likely for some regional malls,” Bangor assessor Drew says.
Moffitt predicts that such vacancies will increase 20 percent over the next five years. That makes the forthcoming decade a crucial transition period as consumers vote with their feet and their wallets, staking out a preference for denser, walkable urban environments over big-box stores and shopping malls. In 2019, a report from the George Washington University School of Business and Smart Growth America claimed that “walkable urban places,” which meet a certain threshold of real estate, walkability, and human interaction density, were gaining market share faster than their suburban counterparts in the country’s 30 largest metro areas (Loh 2019).
This trend includes both infill in central cities and the urban redevelopment of traditionally car-oriented outer areas. While booming metropolitan economies are driving this increasingly urban pattern in the built environment—New York City, Washington, DC, Chicago, Boston, the San Francisco Bay area, and Seattle top the list—smaller communities are catching on.
Sheboygan, Wisconsin, on the shores of Lake Michigan, is seeing the fruits of decades of work to revitalize its downtown. The construction of two malls in the area in the early 1970s “essentially sapped the economic life out of the downtown,” according to Downtowns: Revitalizing the Centers of Small Urban Communities (Buriyidi 2001). The city began to explore strategies for bringing residents and shoppers back downtown as early as the 1980s, creating a retail-focused Business Improvement District in the 1990s, but the local shopping hub, Memorial Mall, remained a significant player in the financial mix. A decade ago, the city lost $1.3 million in annual tax revenue when Memorial Mall, which eventually closed in 2017, challenged its tax assessment.
The mall wasn’t the only commercial taxpayer to take issue with its bill; Walmart is now seeking tax reductions of $90,000 and $180,000 for 2017 and 2018. The effort by Walmart is one of many initiated by the retailer in municipalities across the country, and is part of an ongoing conflict between big-box retailers and municipalities regarding the fairness of property tax assessments. The tension has led to legal appeals in at least 21 states over the past 10 years, according to a survey of the International Association of Assessing Officers conducted by CityLab in 2018, and has led at least four states to consider legislation that would regulate assessments for big-box properties.
Despite these losses, Sheboygan has managed to maintain its existing city services without increasing residential property taxes. How? Parallel with Memorial Mall’s demise, Acuity Insurance has bet big on the 50,000-person beach town 60 miles north of Milwaukee. The mid-sized insurance company, founded in 1925 and active in 27 states, has made major investments in its corporate headquarters in Sheboygan, expanding the building and hiring hundreds of people. Although the headquarters itself is located outside of downtown, new downtown apartments have sprung up to house its growing staff, contributing to the ongoing revitalization effort there. Sheboygan is also investing in a downtown innovation district and launching a pop-up retail program that offers short-term leases to small business owners. As in Bangor, these downtown development efforts have helped Sheboygan absorb the loss of a mall that was once a major contributor to its tax base. This kind of rebound isn’t feasible everywhere, Rakow points out: “If a community’s economy and population is not growing and healthy, it will be difficult for [businesses] to thrive, whether in a mall or downtown.” But in Sheboygan, officials are demonstrating that there can be life after the mall.
“While in the past it was one of the higher valued properties, the loss of value affects the mindset more than the pocketbook,” says Sheboygan City Assessor Mike Grota.
Ripe for Redevelopment
Today’s malls, some say, are the wrong use for the right site. That is to say, they generally have good locations near major roadways and in some cases public transit, and the large parcel of land they occupy is already serviced with water, sewer, and electricity. “Malls as a property type are dead,” says Moffitt. “It is not if, it’s when they go under and are ready for redevelopment.”
“What malls are worth right now is their dirt. Their structures have little to no value,” Moffitt adds. “Investors view malls as mixed-use redevelopment opportunities better able to serve the community, and they are going to provide a much more robust sales and property tax base.”
Stories of successful mall transformations are emerging. “Mall properties may no longer be exclusively retail on a forward-going basis,” says Rakow. “To keep them economically viable and maintain the foot traffic that smaller retailers are so dependent on, other uses like museums, health clubs, and specialty food stores are coming into malls.”
Such a radical change from the mall as an exclusively retail environment may conflict with land use policy. Instead of serving as an obstacle to this transition, local government can seize the reins to help secure an economically vibrant future. “There is a whole new notion of communities working with mall owners if there are zoning or land use issues,” says Rakow.
Such is the case with University Place in Chapel Hill, North Carolina. In 2016, it was among the college town’s top 10 taxpayers. The next year, it fell off that perch. “The square footage of the center represents a significant retail presence in our market,” Chapel Hill Economic Development Officer Dwight Bassett says. “We would like to see new investment create new value and become a top taxpayer again.” For over a decade since Washington, DC–based Madison Marquette purchased the faltering mall, Chapel Hill has accommodated changes to the site from a traditional internal mall to one more externally facing. Now the mall is home to a children’s museum, health club, and CrossFit studio. One large retail space was converted to Southern Season, a specialty food store that offers a wine- and beer-tasting bar, cooking classes, and a full-service restaurant.
“We allowed a new entrance on a major road, changed our sign ordinance and temporarily had our library located at the mall while we rebuilt our library,” Bassett says. “I think that being a partner and constantly asking how we can help facilitate moving the center to a different market destination has been a key piece of the role we have played to date.”
But not every mall transformation works out successfully. The Hickory Hollow Mall in the Antioch neighborhood of Nashville, Tennessee, lost the last of its two remaining department stores in 2011 and ultimately closed its doors. The mall’s owners repositioned the property with a new name—Global Mall at the Crossings—and added a new community center, a community college satellite campus, a library, and a recreation center. As a potential anchor, the mall also hosts a practice rink for Nashville’s NHL franchise. However, even after pumping in over $50 million, the mall continues to struggle. In November 2019, a plan to transform the mall into Nashville’s first “innovation district” collapsed when a local developer backed out of the deal. Many of Hickory Hollow’s storefronts continue to sit vacant. Without money coming in, the structure has fallen into disrepair.
Another path for malls is linked to the success of e-commerce: their location has proven appealing to Amazon for its distribution centers. While communities were initially eager to offer tax breaks to the online retail giant—especially in the course of its search for a second headquarters—that has begun to shift, according to Rakow. “Communities have caught on to Amazon,” says Rakow. “Since Amazon really needs to have these distribution centers strategically placed, communities aren’t so quick to give tax incentives and breaks to host those facilities. Amazon should be paying its fair share just like any brick and mortar store. The notion of giving incentives doesn’t seem like it’s a wise fiscal practice.”
Moffitt argues there are catalyzing moments when a small investment by the public sector, such as forgoing some property tax revenue, can pay a huge dividend. He points to Colin Creek Mall in Plano, Texas. A developer bought the dying mall, valued at just $10 million, with the benefit of a local property tax incentive and will recast the site with $1 billion in commercial development. “They are going to have 15 to 20 restaurants that spin off a ton of sales and liquor tax,” Moffitt says. “It’s a total game changer when it comes to the tax base.”
Cultivating Offline Commerce
Four in every five U.S. consumers makes online purchases (Pew 2016), and nearly 40 percent of those online shoppers buy something on Amazon at least once a month (Marist 2018). That tendency impacts the built environment, but perhaps not as severely as often thought. “The internet shopping trend has magnified what I believe is a market oversaturation with retail space,” Moffitt says. In other words, a trend that was already underway has been exacerbated. Moffitt breaks it down to simple supply and demand. “In a given 10-mile radius, there are only so many discretionary dollars available to spend,” he says. “Those dollars either go to brick and mortar or go online. If some of those are going online out of convenience, what’s going to happen is those online sales are going to cannibalize a local brick and mortar store [selling the same types of products].”
But Moffitt says retail is far from dead. He points out that U.S. retail real estate currently sits at over 95 percent occupancy, which is even higher than at the 2007 peak before the Great Recession. New retail space continues to be built out and leased. And the future eaters and drinkers at Colin Creek Mall represent another truism about the changing retail landscape, per Moffitt: “There’s a lot of stuff you don’t buy on Amazon.” Bars, restaurants, hair salons, barbershops, gyms, pet daycare, and yoga studios are all types of retail businesses based on experiences or consumption rather than on goods. They are much better positioned to thrive in the new retail era.
For example, London School of Economics professor Lindsay Relihan has studied early adopters of online grocery platforms. In the first two years since switching to some measure of online grocery shopping, those consumers reduce their spending at grocery stores by 4.5 percent but increase their spending at coffee shops by 7.6 percent (Relihan 2017). “Policies that support a transition to service-oriented retail, and the density and accessibility of that retail, are likely to be key to local retail health,” she says. “Transitions are very disruptive in the short run, but I don’t see any reason why fiscal health should necessarily decline in the long run.” Such service-oriented businesses, which rely heavily on foot traffic, tend to be located on main streets and traditional commercial corridors.
Those locations are now “the most desirable from a retail real estate perspective,” Rakow says. “They command fairly high rents and have lower vacancy.” This trend bodes well for urban locations and less so for postwar suburban areas that lack the dense fabric of a main street or commercial corridor.
At the end of the day, Amazon and the acceleration of e-commerce still account for only about 10 to 11 percent of retail sales (USDC 2019). CBRE expects that market share to grow to just over 15 percent by 2022 (CBRE 2019). Meanwhile, Walmart’s big-box stores on the urban fringe continue to thrive, even as cities reinvest in their downtowns. As customer proclivities and technologies evolve, few can predict what the retail landscape might look like 10 or 20 years from now. But one thing is certain, as municipal leaders in Bangor, Sheboygan, Chapel Hill, and many other communities are discovering: Keeping up with changing retail habits and their impact on fiscal health requires flexibility, creativity, and foresight.
Gregory Scruggs is a journalist who writes about built and natural environments. A member of the American Institute of Certified Planners, he is based in Seattle.
Photographs in order of appearance:
Aerial view of the Bangor Mall in Bangor, Maine. Credit: Ten-X Commercial.
Some experiences simply cannot be replicated online. Communities are counting on that fact to help coffee shops and other local businesses stay afloat. Credit: Brewbooks/Flickr CC BY 2.0.
Loh, Tracey Hadden, Christopher Leinberger, and Jordan Chafetz. 2019. “Foot Traffic Ahead: Ranking Walkable Urbanism in America’s Largest Metros.” Washington, DC: Washington University School of Business and Smart Growth America (June). https://smartgrowthamerica.org/resources/foot-traffic-ahead-2019/.
Rakow, Ron. Forthcoming. “The Impact of an Evolving Real Estate Environment on Property Tax Revenue.” Working paper. Cambridge, MA: Lincoln Institute of Land Policy.
Relihan, Lindsay. 2017. “Is Online Retail Killing Coffee Shops? Estimating the Winners and Losers of Online Retail Using Customer Transaction Microdata.” Working paper. Philadelphia, PA: Wharton School. https://www.lindsayrelihan.com/research/.