Did Simon Properties comply with the Domain incentive agreement?

City staff says it did.  Here is the presentation (pdf) it made to Council last week.

It struck me that the direct subsidies to the Domain retailers were actually quite paltry.  The incentive agreement required Simon to put $1 million into a fund to assist small local businesses locate at the Domain.  Simon spent the money assisting five businesses design and construct interior improvements.  The incentive agreement did not otherwise require Simon to pass on its subsidies to the retailers.

This raises a point I've been meaning to make for a while.  I understand why local businesses get upset when the city spends tax dollars to encourage the development of competing businesses.  I'm skeptical, though, that incentive agreements like the Domain agreement benefit specific retailers in the long run.  Retailing is a viciously competitive business, which means retailers are very sensitive to the rent they must pay.  When a bunch of new retailers flood the market, they lower profits across the board; those lower profits ultimately must be passed back one way or another to the property owners.  Simply imagine central Austin adding a dozen large strip malls.  The extra supply of retail space would require existing property owners to lower their rents to keep their existing tenants from defecting, and would attract new retailers who couldn't have cut it at the old rents.  We would end up with more retailers earning less revenue but paying less rent.

Unless they target subsidies directly to specific retailers, incentive agreements like the Domain agreement merely enlarge the supply of retail space.  In this regard, they operate much like the vertical mixed use ordinance which mandates street-level retail regardless of demand.  (There are still vacant ground uses in several Guadalupe mixed-use developments.)

I suspect that the people who have the most to fear from retail incentive programs like the Domain's are not the retailers themselves, but the owners of existing retail space.

More on SDS:

1. Stop the Charter Amendment! (Aug. 23, 2008)
2. A little hypocritical, no? (Aug. 23, 2008)
3. An unintended consequence of the SDS charter amendment? (Aug. 26, 2008)
4. More on the unintended consequences of the SDS charter amendment (Sept. 18, 2008)
5. The City's really worried about SDS's impact on Mueller (Sept. 24, 2008)
6. Prescient (Sept. 25, 2008)
7. More on the SDS charter amendment and Mueller (Oct. 1, 2008) 

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Comments

[Jay]

While I'm against SDS and agree with most subsidies because (I feel) they generally do more good than harm and help the employment rate, I'm going to have to disagree with this point. Your assumption that new space will be cheaper than the current space is, well, just wrong.

New space is generally, if not always, more expensive than existing space. At best the argument could be that new space forces old space to update their amenities in order to keep up- but as long as they don't raise the rent too much they don't even need to do that.

[natrius]

The empty retail spaces on Guadalupe make me sad. Do you know why they're empty? You'd think lowering the asking price for rent would be more profitable than leaving them empty...

[AC]

Natrius, I'm no expert in the commercial markets, but my guess is that, because it takes a large investment to customize a commercial space for an individual tenant, commercial landlords prefer multi-year leases, and they don't want to lock themselves in to low lease rates. If the soft market persists, though, I think they'll be less stubborn.

Jay, new space is generally more expensive than old space, but flooding the market with must reduce rents somewhere. Some old spaces will be updated, but others will slide down a notch or two.

[M1EK]

The empty space on Guadalupe is empty because there aren't enough people within walking distance to make up for the difficulty suburbanites think they would have in driving there. The folks within walking distance that ARE there (this is up by my neck of the woods, now, not at UT) are the rich old people behind McMansion - they aren't walkers anyways and aren't interested in new retail/restaurant. And, of course, those folks have successfully prevented most new apartment use on Guadalupe - except for the VMU buildings themselves. One reason I think VMU should only be encouraged on major transit corridors is that, frankly, a building with a few stories of apartments doesn't provide nearly enough potential customers for the retail at the bottom - so we obviously need some residential development without retail to be built in these areas as well. (Used to be done with interior infill; now there's no option but VMU, meaning you can expect to see more of this problem).

Note how heavily used the Triangle is now, for comparison's sake. It's well-leased and packing them in pretty nicely. Their ratio of residential to retail is much higher.

[M1EK]

Should be "a building with ONLY a few stories" - like Guadalupe 31, which only has 2 floors of residences - nowhere near enough to provide the right number of potential customers for the amount of retail space it has. Down in West Campus, this would be fine because they've been able to build apartments on the blocks in back which are much taller with or without retail.

This is not to say that I expect the customers for retail in building X to come from residential in building X, but rather that the total number of residences in all buildings (A..Z) had better be large enough to generate enough potential customers for retail in (A..Z).

[Jay]

AC-

So what you're saying is that FLOODING the marketing is OK as long as old spaces SOMEWHRE reduce their rate A NOTCH OR TWO. You realize of course that this is how suburbs/sprawl/etc was started. Not how I would expand things.