Vancouver City Council recently proposed the creation of an empty stores tax to reduce vacant storefronts. The goal would be to discourage speculators from buying and keeping properties vacant.
Let’s talk about this.
Reducing vacant storefronts and stimulating small businesses are laudable goals. But . . . is taxing property owners the right approach?
Why investors might hold a property even if it has no income or tenants
There are a few reasons why investors might choose to hold onto a property:
– It may have development or growth potential that’s waiting for its time. Sites can be more desirable without long leases. One of the reasons developers pass on a deal is that it’s locked-in with a long-term lease. Without demolition or cancellation clauses, developers wait until the tenant’s lease expires and there may be a gap where property is vacant.
– The investor has a plan and is waiting for the right time to execute it.
– The investor expects the value of the property to appreciate over time. Pure capital gains play.
– The investor is a speculator holding the property long-term, i.e. “parking money.”
– The investor hopes to attract a great tenant but cannot because of market conditions. Yes, buyers can make a mistake buying a vacant store.
Valuation of commercial real estate
Housing is a consumption good and part of final demand, but CRE is an investment asset. It is an income-producing property.
Think of CRE as office, industrial, retail and rental housing. As an investment asset class, like stocks and bonds, it is part of the capital asset market. CRE also adds to the production capacity on the supply side of the economy (trade, distribution, etc.).
For CRE, income potential of a property is key to value. Investors will look at things like the rent roll and any potential for future increases. They’ll also look at the expenses associated with owning and operating the property (such as taxes!).
The goal is to maximize potential return on investment (ROI).
In short, most owners of CRE want the highest net operating income (NOI), not vacancy.
Why are there so many vacant storefronts?
To understand Vancouver storefronts, one also needs to understand the fundamentals of retail.
How has it changed over the past century? And how does our mindset need to change if we want to create vibrant, thriving urban streets?
Retail is not what it used to be. A hundred years ago, the vast majority of people lived in rural areas. Their shopping habits were driven by a scarcity mentality.
They had fewer options for buying goods, so they would go to a store that offered the best price or selection.
Today, with the rise of e-commerce and big-box retailers like Amazon and Walmart, choices are abundant. People have more options for buying goods than ever before and we are no longer willing to settle for the store we know.
We want better selection and prices often at the click of a button!
As a result, many small retail businesses that once thrived in our cities are now struggling to stay afloat.
But is this the fault of commercial property owners? No.
Stimulate small business, don’t punish property owners
The reality is most property owners are not faceless “speculators” with unlimited resources. They are often small business owners and investors who may have bought decades ago.
Today some of them are struggling to make ends meet without tenants.
Local governments like Vancouver have limited tools. And influencing vacancies in retail stores is a giant task. As Abraham Maslow said, “To a man with a hammer, everything looks like a nail.”
Hence the go-to tool: taxes.
It’s convenient and simple, yet likely not effective. Why?
– Property tax mill rates for commercial uses are four times higher than residential. In essence, there already is an incentive for property owners to lease their empty space.
– Local convenience retail needs high population and foot traffic (like high-street retail). Vancouver is very expensive and it is hard to afford housing so naturally some residents left during the pandemic. Kelowna received the highest in-migration in B.C.
– Instead of imposing more taxes on property owners, the focus should be on creating jobs and better-paying jobs. An environment where small businesses thrive and pay well is what has made Canada one of the best countries in the world.
Considering both scarcity and abundance mentality, what else can the local government do?
Vancouver City Council should instead focus on stimulating small businesses and job creation.
Entrepreneurs are inventors. They’ll find ways to fill stores where it makes sense or turn them into other uses where it doesn’t.
This may create the vibrant urban streets that we all want to see. If taxes are a hammer, not everything has to be a nail.
It’s time to think outside the box.