The Low Margin Imperative

Classic bid-rent functions tell you that a certain location demands a certain value for its use, based on proximity to the central city, market, or what have you. Locations, at least for all intents and purposes, are assumed to have identical values within an area (i.e. within a neighborhood, block, etc) and each of these set by the highest and best use of the property. Uses that have high margins and can demand high dollar-per-foot numbers take over the higher value locations, and the lower the margin of the business the less desirable the location until you get down to vast tracts occupied by industrial land. This is the economics of the thing. The only problem is that people don't work that way.

The city is a fabric of activity, one thing by another and people's daily activities all mixed into a space. It is this activity - lifestyle if you will - that the container must accommodate. Each person's daily activity carries a certain pattern of demand, and each person requires a certain amount of stuff close at hand to meet their needs. This pattern doesn't necessarily mesh well with the bid-rent function. Daily needs (lower-order goods) show up in the pattern much more often than once-in-a-while needs (higher-order goods,) and, while orthodox Central Place Theory and Perry's Neighborhood Unit recognize the need for the hierarchy, the economics of place work actively against the needs of the people.

To wit: Neighborhoods (whether they be single family, high-density housing, or something else) that have desirable locations attract a higher-resource group to occupy them. This high-income demographic makes the location desirable for retail, and especially desirable for high-margin specialty retail (as this demographic constitutes a large part of their customer base,) making commercial rents in the area very high. These high margin businesses, which are by their very nature once-in-a-while (higher order) goods, can afford to crowd out more conventional (lower-order) goods dealers, leaving the entire area populated by vendors selling things no one needs every day. Thus, somewhat ironically, the affluent are inconvenienced by being set at a distance from daily needs (convenience retail, grocery, etc.) or forced to pay a readiness premium on the most basic things to meet the difference in margin between the everyday and premium rent.

Where this effect gets really insidious is in urban revitalization. A neighborhood works well; it has a functioning community, daily needs close at hand, and lots of charm and character. This very success makes the area a more attractive place to live (or work, or whatever.) The more attractive it becomes, the more the price of locating there increases, and the more and more exclusive the reputation of the area grows. (Think Georgetown. ) As prices and cachet escalate, the bid-rent effects kick in and local business needs higher and higher margins just to meet their lease commitments. They are gradually squeezed out and replaced by higher-margin (once-in-a-while) businesses and a more homogenous population of residents, rendering the once-successful area an unnatural concentration of the wealthy and goods dealers that even the most extravagant don't need to visit every day. The very success of the neighborhood, coupled with economic forces, destroys it.

It's imperative that we figure out a way to keep low-margin businesses in place if we want to preserve areas that succeed.