Economic Development

3 STEPS TO SAVE SMALL BIZ (And no, I don’t mean hopping in a time machine back to 2019 with masks!)

by Michele Reeves on May 6, 2020

If local brick & mortar establishments are going to weather Coronavirus, they must work backward from consumer behavior and commercial real estate realities. Plans that suggest we jump into a time machine and return to retail and restaurant circa 2019, but with warning signs, plexiglass, PPE, and plastic sheeting, don’t understand a thing about how small, in-person transactional business actually works.

The ground floor commercial ecosystem consists primarily of retail, restaurant, and personal service businesses (salons, spas, etc). These brick & mortar concerns require customers to spend in-person time in a physical space. The best of these businesses are multi-sensory and encourage product interaction. (In fact, the more senses engaged, the more successful a brick & mortar business usually is.)

The characteristics that customers value from these in-person businesses has been evolving over the last few decades. Now, American consumers are choosing to invest their personal time in ways that are almost trending back to the 1900s. We have the Internet instead of the Sears catalog. We increasingly have commodities delivered. And, we choose to spend our personal time in spaces and with businesses that offer a combination of these four things:

Great physical experiences.
Personal customer service.
Unique curation. (products, services, etc.)
Expertise.

Another way of looking at it: fewer and fewer people want to be their own personal delivery vehicle, driving to a distributed network of stores and services all over the city, or even all over the Internet.

If we want to save as many of small, beloved businesses as possible, there are three key steps we need to take, which require combined action from the public sector, from property owners, and from businesses. You will notice that these steps reflect real estate realities and the customer preferences mentioned above.

Here are the steps and who has primary ownership over those steps:

PERCENTAGE RENT LEASES (Property Owners)
SUBSIDIZED LOCAL DELIVERY COOPERATIVE (Public Sector/Business Owners)
EXTERIOR COMMERCE (Public Sector/Business Owners)

PERCENTAGE RENT LEASES

Vacancies Will Abound Without % Rent Leases

Rent per square foot is tied to sales per square foot. Low sales districts have low rent. High sales districts have high rent. There are almost no brick & mortar businesses projecting that they will be doing anywhere near their 2019 sales levels anytime soon (unless there is a cure/treatment for Coronavirus). Most small, local businesses I talk to are hoping to be at 25% to 50% of 2019 sales levels after a month or two of opening. That means they are only going to be able to afford 25% to 50% of 2019 rent.

Here is the hard truth: landlords that require small businesses to pay 2019 rent between opening and the end of the year will most likely lose ALL of their tenants. And, each and every “juice the economy” plan being rolled out by governors will not work at 2019 rent levels either.

Luckily, there is a leasing tool that works really well for this situation. It is a type of lease called a percentage rent lease. In these agreements, tenants agree to pay a certain percentage of their sales in rent, sometimes with a floor or a ceiling. Instituting this type of sliding scale rent between opening and the end of 2020 is beneficial for landlords and tenants for several reasons:

It will keep space occupied in a very down market for landlords.
It is a period of time that will help us establish a new normal for sales per square foot through typical high seasons: summer, back-to-school, and Christmas.
It allows businesses to be entrepreneurial, building the new revenue streams and approaches they will need to survive.
It will include data from future breakouts, from micro hot spots to bigger outbreaks that coincide with flu season.

SUBSIDIZED LOCAL DELIVERY COOPERATIVE

We are training consumers right now to order online and take delivery of products that many have been resistant to in the past, such as groceries. If we are going to help local business compete with Internet vendors and with Amazon, the best thing that cities and towns can do in terms of local economic development is to fund the creation of local delivery cooperatives that can move products from local businesses to local residents.

(Notice, I am not talking about the delivery of on-demand prepared food. Honestly, outside of very dense places, it’s not good for the planet, nor is it sustainable long-term from a cost perspective, to have restaurants preparing ramen and having someone like Uber Eats drive it 30 minutes away. Having said that, this model could easily be used for pre-ordered prepared food, delivered at a scheduled time.)

Branded Electric Cargo Bike Delivery to Start!

A delivery cooperative could be started by focusing on first connecting local businesses with their local trade area. It could easily be a branded electric cargo bike-based approach. This service should be used to reinforce old school personal and direct relationships between vendors and customers. Going back to the list above:

Great physical experiences. If the bike is attractive, the branding distinct, delivery packaging eco-friendly, then every single person who gets something delivered locally is going to get a huge dopamine hit each time this bike pulls up and delivers something even FASTER than Amazon! Shoppers will feel sooooooooo good for using this service. And seriously, that a huge part of brick & mortar business… dopamine hits.

Personal customer service. We want to start using delivery to reinforce relationships. It’s not just about the internet. You want your customers to pick up the phone and order a new snazzy shirt and set of earrings so you look “newscaster on the top” during your Zoom calls.

Unique Curation. Your salon could easily deliver the hair care products you need to keep your curls rocking!

Expertise. I don’t want to look at every type of degreaser to scrape adhesive off of windows. I just want to talk to my local hardware store, ask what I should use, and have them deliver it! That would be awesome.

This is sustainable. This decreases driving. This creates connection and trust between local vendors and customers, which is what local retail is about. This gets local into the delivery model in a way that is appropriate to small brick & mortar businesses. And, it contributes to the future success of these businesses, post COVID. (Remember, Amazon is able to massively subsidize their product operations with the profits from their IT behemoth, Amazon Web Services.)

EXTERIOR COMMERCE

I was reading through a governor’s draft list of guidelines for retail and restaurant openings in the age of COVID, and what was described was such a ghastly environment, I don’t think even the most talented retailer would be able to lure someone to impulse purchase something!

Seriously. Food is love. It’s communion. It’s family. It’s connection. There is nothing we hate more than an empty restaurant, or a half empty restaurant. Now imagine a half empty restaurant, filled with staff wearing masks, the smell of bleach wafting up to the HVAC ducts from constant disinfecting, you can’t hear your waiter through their mask, and there are hand sanitizer stations and information signage everywhere telling you all of the things they are doing to keep you safe. Meanwhile, none of the customers will be wearing masks, because they have to eat.

Adaptation (Courtesy of Extracto Coffee)

What this describes is an environment saying, “You really shouldn’t be here, it’s not safe.” This is not an environment conducive to driving repeat business. Nor does it make customers happy. Nor is it a place that makes me want to spend money. In short, this plan is a money losing nightmare. It’s not meeting customers where they want to be. It’s not giving them a great experience.

Or imagine a little 600 SF boutique with one other customer in the store. Even that will feel too close to maintain social distancing. Perhaps here, staff is wearing a mask, but the customer isn’t, and that customer is flitting around, trying to touch everything. Products are behind glass and under plastic. I can see, but I can’t touch. I have to ask staff to try something on. Hmmmm, again, not really the experience that makes people part with their hard earned cash.

Bottom line, you have to work backward from what customers want. Right now, most people across both parties are not super excited about reopening. They are not super excited about being indoors with a bunch of other people, especially since much of what is known right now seems to show that it is prolonged indoor exposure to other people that is the biggest spreader of COVID.

Not a Whole Lotta Room in Small Boutiques…

So we need to change our brick and mortar interactions to an exterior commerce model that reflects the safety of employees and customers.

Two to three days a week, streets should close down in commercial districts and make exterior commerce available to locals. This is not a street fair. It’s a set, regular time where restaurants, stores, salons and others bring their services outside. And, if we reclaim the streets, we have room to make it cool, fun, safe, and SOCIALLY DISTANCED in a way we cannot do with interior commerce.

Every one of these districts should also have a pick-up concierge service during street closures where you customers can order items ahead, and pick them up in one place on the street whether you are walking, biking, or driving.

For larger cities, to prevent crowding, you have to ensure these closures are held on a regular rolling basis everywhere in the city, so all neighborhoods have regular access to exterior in-person commerce opportunities.

Some specific thoughts for restaurant, retail, and service are shown below:

Restaurant. I very much worry we are putting waitstaff and customers at unnecessary risk with any sort of typical indoor dining model. I strongly recommend exterior counter service and/or pre-order and pick up. Then people can take their food and eat at any of the socially distanced tables. We are really not in a position to offer table service as far as I’m concerned.

Retail. I am inspired by downtown El Paso and it’s charming district right on the border. The product outside is for interacting with/display. It’s where you decide what to buy. Then you ask the vendor for what you want to purchase, and he fetches that from inside the store. Much of the commerce/shopping happens outside. Thinking about merchandising that will allow for self guided discovery (how Americans shop) with more vendor assistance than is typical for us will be key.

Service. This is the toughest one, and it will require some imagination, but it can happen. Heck, I’ve seen people getting tattooed in public at a Comic Con. And, vacationers get massages in outdoor cabanas in Hawaii. There is a way to make this happen!

District street closures can restrict entry if it gets too crowded, or reserve timed entry.

FINAL THOUGHTS

The last thing I want to say is that time is of the essence. As my father-in-law the retired investment banker put it: “I call it a crisis because timely action/resolution is important. A lot of human and business damage can occur if ‘help’ arrives late.”

We can’t afford to arrive late. The private and public sector must work together to make this happen if we want business to be able to roll with the punches that are coming over the next 18 to 24 months. It requires lenders to give a break to landlords so they can offer percentage rent leases. It requires the public sector to close some streets and use economic development money to start hyper local delivery services. And, it requires the brick & mortar business owners to do what they do best: reinvent! So let’s give them the space, time, and financial breathing room they need!

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Do You Want Every Small Business in America to Close?

by Michele Reeves on March 24, 2020

April 1st is coming people, and most of our small businesses have seen such a big drop in sales, they are not going to be able to pay rent in a few short days. More than that, they are not going to survive this economic pause without immediate infusions of cash and assistance.

Current GOP-forwarded initiatives are NOT going to work to help small business in the wake of the COVID crisis — they are both the wrong products (i.e. loans) and have the wrong timeline (not soon enough and not long enough).

*Tax Dollars Need to Support Small Business First, Not Cruise Ships and Fat Cat Airline CEOs*

This is not a “juice demand” stimulus situation. This is a “the world’s economies have all shut down so what do we do now?” situation. So what do we do? The answer is sort of simple. If the world’s economy is on pause, then we have to help small business press the pause button. We need a new set of tools to help small biz hibernate, take a hiatus, or do some minimal sort of operation (described more below), so they can re-emerge when demand starts to pick back up and/or they are legally allowed to open. And make no mistake, business is not going to recover back to 2019 levels for at least 12 – 18 months, if at all. So ALL of our tools should be oriented on helping people be closed for awhile.

How Do We Press Pause?

We have to go up the food chain to note holders and focus on debt forgiveness. And, we need to work on income replacement for lots of folks who might not qualify for unemployment.

Small brick and mortar businesses have 4 big categories of expenses: employees, build-out loans, inventory/food costs, and rent. If we want the small guys to take a hiatus instead of going out of business, we have to have a plan that can work for all four categories of expenses.

Employees

Whose brilliant idea was it to give loans to businesses with zero dollars in sales so they could pay employees? That’s the most complicated back door unemployment program I could imagine. And a needless hassle for business owners under stress. Instead, we need non-viable businesses to save money now, take a hiatus, and have government/foundations step up and offer unemployment benefits to two key types of employees:

Documented service workers that don’t qualify for unemployment.
Owners who aren’t employees, such as sole proprietors.

Build-Out Loans

*This is a “warm shell” space. It has walls, basic lighting and electrical, a floor, HVAC with ducting, and junction boxes for light fixtures.*

In many markets, space is delivered in what is called “cold shell” condition. That means walls framed, no sheetrock, no electrical distribution, no lighting, sometimes no floor, no bathroom, no HVAC (or no ducting), etc. So a retailer who takes a cold shell space is spending a lot of money all at once upon starting their business to build out their space (finishing a cold shell space is referred to in the biz as building out “tenant improvements”). Many startup businesses obtain a loan for tenant improvements. On average, smaller retail tenants usually have TI loans of less than $100,000. Of course, this depends on the market.

This process is even more amplified for uses that have particularly expensive equipment/systems to install, such as dentists, restaurants, or hair salons. As an example, take restaurants. They have to pay to bring their spaces to warm shell condition, and then on top of it, they have to install two ADA restrooms, a ton of plumbing, a ton of sewer connections, a grease trap, a hood vent, a fire-rated chase for a hood vent, upgraded HVAC, sometimes electrical panel upgrades, sometimes upgraded water supply, walk in cooler, etc etc. These types of tenants might have TI loans between $100,000 and $500,000, depending on the market and the size of the space. (It can be much more in very expensive markets.)

In order to hit pause, all tenant improvement note holders must refinance these loans so that there can be no payments by businesses for up to 12 months. Forgiveness or reduction of these loans should be considered for permanent COVID-induced closures or for businesses with depressed sales as compared to 2019. Lenders and bankers will cry, and how much they should receive in lieu of loan payments for 12 months, I would leave up to Elizabeth Warren to figure out. 🙂

Inventory Loans/Food

We should be connecting food banks and restaurants temporarily closing so they can unload anything that might spoil over the next 6 months. And, we should compensate restaurants for this cost of food.

For retailers, inventory loans are essentially short-term lines of credit that are used to purchase inventory, with the collateral being the product that is for sale. Any reasonable Main St assistance needs to include straight up forgiveness for inventory loan payments that cannot be made while businesses are put on pause. Once again, we would have to go to inventory lenders and ask them to refinance these loans. Debt forgiveness is a huge part of any package to help small business. Retailers could start paying upon resumption of business, or after 12 months, whichever comes first. And there should be a provision for a write down of this debt if sales are still significantly depressed after 12 months.

Rent

Every small brick and mortar biz (other than grocery, liquor, weed, hardware, and drugstores) is going to take a big sales hit. In some cases, by “hit,” I mean literally no sales. So, every small brick & mortar business should be able to close without paying rent, NNNs or CAMs (common area maintenance charges) for up to 12 months, or whenever COVID restrictions are lifted, whichever comes first. (Please see my post on why we need a commercial eviction moratorium RIGHT NOW! And, if you know any businesses having trouble asking for a rent reduction, here is a letter to get the ball rolling.)

If we do this there are many positive effects. Perhaps a business can do some online sales. They can offer community based support. They will keep utilities on and space occupied. (Unused commercial space decays into disrepair mighty quick.)

*This is “common area” in a commercial building. Tenants have to pay their pro-rated share of taxes, insurance, maintenance, utilities, and janitorial for this space. Those are “CAMs”*

Of course, non-payment of rent, NNN fees (taxes, insurance, and maintenance), and CAMS will negatively impact property owners. Many of the buildings that are good homes for small business are also owned by small property owners who have to make loan payments, and pay for property taxes, insurance, etc.

The only way to solve this is to move up the capitalist food chain, once again, to the folks who got massively bailed out in the last recession: note holders. This time lenders for commercial spaces should be required to step up. They can re-amortize commercial loans so property owners don’t have to make any payments if they are waiving rent. Unpaid interest during waived rent periods can be added to the re-amortization.

In this scenario, lenders will sacrifice some short term cash flow, but you know what? It’s about time they paid back the American people for the bailout they received during our last downturn. And property owners will pay a bit more for this over time, but you know what? That’s totally fair because property owners are typically in a much better financial position than small business owners.

Replacement Income

Service workers are being laid off in droves. All of them. Many of them are not going to qualify for unemployment programs for various reasons. We need to three key things:

Change the rules of unemployment programs so they cover as many service workers as possible (such as providing $$ for part-time employees) and then make sure these programs are adequately funded. They will require a bail out themselves when we see the numbers over the next few weeks.
Make sure sole proprietors or pass through entities for tax reasons (single-member LLCs) are eligible for some form of unemployment insurance/income replacement.
Foundations should set up a “service worker relief fund” that can serve as a sort of unemployment program for undocumented service workers.

Establish Delivery Service

What else would I like to see? I would like city governments get involved in creating opportunities for local vendors to sell their goods in a distributed way.

Perhaps it is in the form of a hyper local delivery service with e-bike cargo cyclists employed by the City. It could be offered for free as a service to vendors who want to work together to offer regular deliveries of everything from food, clothing, drinks, accessories, produce, activities, toys, etc. This would really help small biz create at least some revenue during this closure. (Retooling for delivery is not as easy as it sounds. For example, an ice cream maker wouldn’t make enough on a pint of ice cream to make traditional delivery feasible. Or a fine dining establishment doesn’t necessarily prepare food suitable for takeout. There is a lot of work to figuring out how to take what you do to make it delivery, pick up, or take out friendly.)

I like the idea of creating distributed local locations for pick up subscription boxes for local products with food, treats, group activities/games. Pick up times could be scheduled so there is no overlap and social distancing is observed.

Right now, Safeway and Amazon are getting a lot of the local grocery delivery market. Could we figure out a way to help smaller ethnic grocers cash into this demand by providing delivery to their local trade areas?

Just want to close by saying that I have been heartened by the incredible outpouring of passion, knowledge, technical expertise, and hard work that is being directed toward the challenge presented by COVID to small business. It is delightful to work along side the amazing people putting their heads together to help those who are most impacted by Coronavirus.

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Small Biz Commercial Eviction Moratorium NOW!

by Michele Reeves on March 23, 2020

If you want any of your favorite small retailers, restaurants, bars, and service businesses (for example, nail salons) to be in business after COVID loosens its grip on on America, the most important thing local jurisdictions can do right now is to issue a moratorium on commercial evictions.

*Extracto Coffee Reduced to Tiny Takeout Window with Social Distancing Line Markings*

WHY IS TIME OF THE ESSENCE?

Rent is due April 1. Depending upon the lease, many tenants may be evictable under their leases within 5 days of not paying full rent under the lease.

And why is that a problem? Because almost NONE of these restaurant, service, and retail businesses are going to be able to pay their full rent in April. No one who operates these beloved businesses (that are the very fabric of our community) is doing it to get rich. These establishments are owned and run by people whose businesses make it month-to-month—managing cash flow is always a challenge. In March, many have already seen their sales plunge, in some cases to $0. And remember, this has occurred in an unprecedented fashion, in the blink of an eye. Not a slow easing, or a gradual decrease in sales, as happened before the Great Recession. And, no one has any idea when sales will start back up again, and at what level.

Many of these businesses have already had to close, layoff all of their employees, and think about how to pay for inventory loans and tenant improvement loans in addition to rent. Not to mention, business owners have no personal income coming in during this time.

And now small business is supposed to make decisions about what to do with their holdings, determine whether the business can start back up again… when their business might start back up again, whether it can be remade into something else during the COVID crisis… literally do all of this in days with the threat of eviction hanging over their heads. This is not acceptable, especially when these business owners have their entire net worth tied up in loans, inventory/food, and lease obligations.

IS THIS REALLY NECESSARY?

In a word, Yes! Not all property owners are rich land barons. But as a whole, property owners are typically in a much better financial position than small business owners. And without a commercial eviction moratorium, small business will be 100% at the mercy of the worst behavior of property owners.

I am already seeing this less than helpful behavior on the part of owners in the emails I am forwarded by tenants seeing advice:

Property owners who are not proactively reaching out to their tenants.
Property owners who are not engaging with tenants when they are being begged for rent relief for at least April.
Property owners who are trying to tie tenants into long term agreements for reduced rent, the balance being added to future rent. This is tantamount to tenants taking on even more debt without any real idea of when they can reopen and what sales will be like at that time.
Property owners who are issuing lease addenda with small concessions that come with strict confidentiality requirements for tenants.
Property owners saying, “Sorry, you should have saved more money.”

HOW BAD IS THE LOSS FROM A LOCKOUT?

Most people have no idea that many kinds of spaces require expensive buildouts, the costs of which are entirely borne by tenants. If someone wants to start a restaurant, or a dentist or a beauty salon with a lot of plumbing, they are usually on the hook for hundreds of thousands of dollars in tenant improvement loans to construct their space.

The value of these buildouts are sometimes the only equity that these businesses have. If a landlord locks a tenant out, then that tenant cannot recoup their investment through the sale of their business. Instead, an owner would get a valuable space that would eventually be highly desirable and leasable, at no cost to the landlord to build out. We need to be sure that we are protecting the significant investment that restaurants, hair salons, and others have put into building out their space.

I want to be clear that many property owners understand they are in business with their tenants (not in a legal sense, but in a “rising tide lifts all boats” sense). And there are great stories of landlords working with their tenants. But we have to protect small business from those who are not collaborative because the stakes are just too high.

This is not business as usual. This is not even a typical recession. This is an unprecedented halt to commercial activity for an unknown period of time. We need new tools. We need new approaches. And we need to make sure the most vulnerable among us are not trampled. For us to work together going forward, small businesses needs the spectre of eviction removed from the equation as we determine the most equitable way to put worldwide commerce on hold.

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Commercial Revitalization: Stop Displacing, Start Improving

by Michele Reeves on July 5, 2017

You can look at commercial district revitalization in two ways: The first way, which is the common way, and unfortunately not the best way, is to hatch a scheme to get rid of everything that is underperforming and replace it with something else. Bulldoze it, and start over with a blank slate. This approach to economic revitalization is the cornerstone of many well-intentioned plans — the wholesale replacement of entire existing commercial ecosystems. It is also an approach that values typical male attributes: valuing big, valuing new, valuing the deal. This is truly a shame since these districts often have wonderful businesses, owned by locals, that serve as non-traditional anchors pulling from wide trade areas.

The second way to approach these eclectic, local, one-of-a-kind commercial places is to figure out how to improve what is already there. Not only improve, but fully embrace and leverage what is there to ratchet up economic performance and brand. Remember, it’s always easiest to brand around unique and authentic assets, which these districts typically have in spades. Growing your improvement from within, locally and incrementally, instead of imposing it from without, is what I call a female approach to economic development.

The bottom line is that we need our economic development approaches to focus more on cultivation, or adding to what is already there, and less on replacement. There are many reasons why. The wholesale displacement approach to commercial revitalization depresses local wealth creation because it calls for out-of-town developers, big money, and national chains. (On a side note, I am not sure why communities encourage outside development so heavily, because out-of-town owners are consistently listed as a primary obstacle to renewal in cities and towns of all sizes.) On the other hand, fertilizing what exists is affordable, it encourages local ownership, helps foster local wealth creation, and creates opportunity for a wider assortment of entrepreneurs through incremental improvements. As you can imagine, I am a big fan of the “improve what you have” approach, even if it seems messier, and requires a new toolkit, and doesn’t always come with a deal plaque!

A great example of cultivating economic development is being implemented right now on a corridor called Auburn Blvd in the city of Citrus Heights, CA. One of their first “improve what you have” projects was wildly successful. Two local gentlemen wanted to take a long-standing, boring, beige, vacant restaurant (pictured above to the right) and open a new venue for chowing down! When this restaurant startup applied for their permits, the city used the land use process not to create roadblocks, but instead to find opportunities to collaborate so they could work together to make the business, the building, and the street better! Citrus Heights offered these two amazing Latino entrepreneurs some guerrilla design assistance, together with matching funds, to help them affordably amp up this restaurant’s ground floor identity.

Every city should be doing this!!

The restaurant, Crepe and Burger, has been a big success, they did a wonderful job transforming this space. (The “after” exterior photo is above left, and the “after” interior photo is below right.) Customers are even frequenting the outdoor seating area, which is a welcome injection of vibrancy on such a busy corridor. It’s entirely true that people sitting at tables with eye-catching umbrellas is the best sign a restaurant could ever have.

And yes, the community is talking about this building because it’s not the standard TanLand beige stucco building with stacked stone that dominates the retail environment in Northern California! But you know what? Standing out and getting attention for your business is a good thing!!

So let’s talk about the “improve what you have” toolkit for ground floor retail execution. It certainly involves thinking beyond just facade improvement programs, which can be expensive, and are typically most effective with well-funded property owners. Instead, cities should be creating programs with a wider variety of options, that contain smaller steps toward improvement, and that can be implemented by a more robust mix of stakeholders, from the well-funded to the cash-strapped. Examples might include:

dated acoustical tile false ceiling removal program
window transparency program
window lighting education and improvement program
building color consulting (also known as Ban Beige!)
merchandising training
parking lot outdoor seating
district performance training tracking
extreme makeover team development
in-store improvement classes

Investing in the improvement of the ground floor experience is vitally important to the economic success of your local commercial districts right now, and also moving forward into the future as retail continues to evolve. (Heads up: retail has always been about reinvention, that’s the nature of the beast.) In the years to come, brick & mortar businesses are all going to have to offer a wonderful atmosphere, a curated experience, and excellent service in order to attract in-store customers, whether it be a lawyer, doctor, accountant, bank, clothing store, grocery store, or restaurant. If a business doesn’t offer a distinct experience, they will be trafficking strictly in a commodity. And more and more, commodities will be consumed online. We will diagnose our medical problems online instead of going to the doctor, we will get that LLC contract online instead of going to see our lawyer, and we will shop for groceries and clothes online instead of going to stores.

To convince customers to invest their time in real-world businesses, districts will have to tell a great story at the street level, and businesses will need to craft unique and interesting experiences to entice people to visit. So let’s get to work and help our existing stores, restaurants, and districts do just that so they can survive and thrive in the years ahead.

Thank you to Casey Kempenaar and Devon Rodriguez for the “After” photos of Crepe and Burger above.

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Oh the Stories They Could Tell…Astoria Armory Edition

by Michele Reeves on April 3, 2017

This nondescript building in downtown Astoria, OR was hiding a surprise: a breathtaking expanse of clear span space with a rare domed lamella roof system. As unlikely as it appears on the exterior, this warehouse-like building was actually an Armory, constructed to provide entertainment for military personnel during World War II headquartered in this lovely Pacific Northwest spot — the gateway to the mighty Columbia River.

My grandfather was one of those people. He served in the Pacific Theater as a naval doctor and shipped out of Astoria. As a young child, my mother traveled up there with the family. Everyone thought her older sister was her mother! For me, the chance to tour this building and learn more about its past was like reaching back through time to picture life there in my grandfather’s era.

When I wandered through in 2013, the building had seen better days. It was on life support, being kept alive as a storage space for Astoria’s wonderful maritime museum. (When it comes to historic preservation, often, an occupied building is a saved building, no matter the type of occupancy.) As a consequence, the basement was a compelling jumble of nautical items from every era stored for future exhibits — boats, engines, harpoons. It was as if I entered the lair of a seafaring hoarder, with tightly packed treasure at every turn (see photos at the end of the post).

But the star of this space, even with the broken windows, dusty bleachers, and a bad stage remodel, was the soaring ceiling and the diamond shaped pattern of the roof. You could easily close your eyes and picture a crowded USO performance, hear the music, envision the mood.

One of the pure joys of my work is not only having the honor of seeing amazing structures and touring incredible places, but also witnessing communities take these assets and resurrect them to live another day. And that’s exactly what happened in Astoria.

The building was purchased by Craft 3, one of the most innovative Community Development Financial Institutions (CDFI) in the country. They bought the structure and leased it to an informal group of Astorians who had dubbed themselves “Friends of the Astoria Armory” (FOAA). The lease rate? $1. Basically, the deal was this: prove it can be a going concern, and Craft 3 would sell it to the FOAA.

According to this innovative lender, after buying it, Astorians put in about 1,000 volunteer hours and, and within a few weeks were hosting their first event: a roller derby bout! And over the next year and change, they clocked in over 175 events in the venue. In this short period of time, they proved the concept, formed a non-profit, and bought the Armory, with Craft 3 underwriting the loan.

This city of 10,000 is one of the best can-do small towns anywhere in the world. They restored and installed a rail trolley car on their riverfront tracks, they recently located and floated an historic ferry to Astoria that used to service the area, and now, they have restored their Armory, to name just a few of the incredible projects this community has made happen with duct tape, chutzpah, and a little bit of magic.

Please do check out the Astoria Armory site, marvel at the historic photos from the building’s heyday, and take heart, like I do, in the power of community and humanity to endlessly renew itself!

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Oh the Stories They Could Tell… The “Is That a Beluga Whale?” Edition

by Michele Reeves on April 22, 2016

There is a unique joy in walking through a building and experiencing what it was, understanding what it is now, and contemplating what it can be in the future.

Some structures clearly have a grand old past, evoked by remnants of fixtures, stained glass, and finish work. Some have a more sordid identity, making it difficult to imagine a new future. Ruminating on building stories — both glorious and sordid — is going to be a new series here on the blog. And, the kick-off will be this tale from a structure often referred to as the Sugar Shack.

The story of the Sugar Shack is a tale of the more sordid variety. And the tour of this building was, perhaps, one of the most unusual I have ever had the pleasure of taking.

Imagine a mid-century strip mall, built in 1951, now entirely sided with corrugated metal, its storefronts lost to time.

If you took this metal-walled building and filled it with sea animal replicas, a largely empty porn video store, a wannabe natural history museum, a working strip club, and odd people living in the nooks and crannies of the rabbit warren of rooms that had been carved out over time, voila, you would have the Sugar Shack.

(Yep, you read that list correctly.)

On the day I took a tour of these fine facilities, we thankfully set out to look at the building prior to the adult entertainment business actually opening to the public. It began in the seafood restaurant. We filed into its darkened recesses, one after another. As my eyes adjusted, I gasped when images came into focus and I could make sense of them.

“Is that a beluga whale over there?”

StripClubInteriorSmaller

The room was filled with all manner of creatures from the deep blue sea — on tables, on the floor, and still hanging from the ceiling. It was eerie in the gloom, and we had to be careful not to trip over said sea life as we traipsed around the room.

We then stepped through to the strip club, poised to begin operation for the day, replete with disco ball, low lighting, and tired interior.

The walkthrough also included areas that showed how the internet killed brick & mortar pornography, including an abandoned adult video store and little used lap dance studios.

By far the strangest, and most surprising part of the tour was the retail space devoted entirely to a very complete collection of taxidermy. I kid you not.

Taxidermy1Smaller

Once again, we found ourselves in the dark, no natural light intruded upon this area of the building. It had a musty aroma — a combination of the dead animals and wood chips that were strewn about the floor. The impressive collection of animals was intermittently illuminated by the swinging flashlights and cell phone beams of us tour goers, creating a surreal atmosphere.

This structure has certainly seen some hard days, it has housed some highly illegal activities, and the operators have been investigated by what seemed like every law enforcement agency in existence. But that’s not its entire story. That’s not what this building is, nor is it what this building has to be.

You see, the community took this building back when it was purchased recently by a group of area non-profits, and they are working now to consider what it can be, and determining how it can tell new stories — stories of hope, stories of jobs, stories of activity — stories that are good for the neighborhood.

I, for one, am very excited about the next chapter of the building formerly known as the Sugar Shack.

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When Improving Places, It Always Comes Down to People

by Michele Reeves on August 23, 2012

What is one of the first things I consider when I’m working in a mixed-use district, whether I’m helping private sector developers strategize acquisitions, or diagnosing and suggesting improvements to an economically underperforming city?

RELATIONSHIPS!

In fact, I can often tell a lot about the connections between stakeholders in a small downtown or mixed-use district just by walking through it, because the nature of relationships, past and present, are always reflected in its buildings, streets, and businesses. If property owners don’t know one another, if the public sector does not have strong ties to the community, if there are not close associations between businesses, then I will not likely find an environment that includes sidewalk tables filled with residents chatting and little red wagons overflowing with bright fresh flowers when I visit your district.

It can’t be overstated: to catalyze change and bring revitalization to underperforming districts, relationships between businesses, property owners, residents, and the public sector must be established and strengthened. Below are a handful of ways to begin looking at district-wide relationships, some ideas for improving connections, and a few examples from various cities.

WHAT IS THE STATE OF RELATIONSHIPS BETWEEN THE PUBLIC AND PRIVATE SECTOR?

A mixed-use district typically has a patchwork of property owners that must work in concert toward shared goals in order to create success and vitality for everyone. Owners have to invest in their buildings and they have to tenant with active ground floor businesses, or revitalization will never get started. It is generally easiest to achieve this collaboration through public sector led activities, such as providing technical assistance, facade improvement matching grant dollars, and goal-setting exercises.

The bottom line: it’s harder to be the jerk with the really ugly building if you have cordial relationships with the property owners and businesses that are located next door.

Example: In Hillsboro, Oregon, Jon Gimre, of Gimre’s shoes was awarded one of their downtown urban renewal area’s first facade improvement grants. (He was not one of the aforementioned “jerks” with an ugly building, by the way!) To ensure that this initial project was successful, city staff worked closely with Mr. Gimre through every step of his building’s dynamic transformation. By providing the necessary technical assistance and support, Gimre’s was remade through the introduction of a warm three-color paint scheme; the addition of a bright sign from one of its 50’s era logos; the removal of a large, overpowering awning; and, the incorporation of exterior building lighting. Sales have risen for the shoe store, and a model for simple, yet effective, renovation has been created for others to emulate in the district. In fact, there are now multiple applicants for the next wave of facade improvement funds, all of whom wish to implement a similar quality of project in the downtown. And to think, it all began with a building and good relationships between its owner/user and city staff.

WHAT ARE A PLACE’S MOST BELOVED BUSINESSES AND EVENTS?

Upon commencing work in a district, I usually try to understand what people feel a sense of relationship to in a place. As one part of this, I seek to identify the most beloved businesses and events, because these are the very things that build district identity and value well into the future.

One of the benefits of quantifying an area’s beloved businesses is so that property owners truly understand the types of ground floor activators that create long-term value. Small, locally-owned restaurants, one-of-a-kind retailers, and funky coffee shops usually top these lists of favorites. These purveyors create identity because a majority of stakeholders in the community connect with them. Unfortunately, when a district has been in decline for some time, landlords forget the concept of highest and best use. It becomes tempting for owers to tenant with legal, medical, and professional service office users since these are stable businesses generating steady cash flow. But, these are not establishments that people engage with, and if you try to create a downtown that is comprised of inward facing office tenants at street level, you will have a very unsuccessful mixed-use district because it will be missing…well, a good mix!

No one says, “Hey, let’s go hang out and have lunch on that Main Street with all the dentists!”

The reality is that a spiraling decrease in property values and achievable rents will ensue if office use becomes the predominant ground floor presence in a district.

All landlords have to remember which tenants the community relates to best on the ground floor: outward facing and engaging businesses with personality at street level. Any business can build stronger bonds by offering excitement and exchange at the sidewalk. I have seen banks that proffer popcorn, public Internet access, and community events in their lobbies. Or a medical office with dramatic windows at the sidewalk through which pedestrians can see the waiting area and huge floor-to-ceiling murals depicting the history of the neighborhood. Or a used building supply store that built a new warehouse out of pieced-together windows and lumber taken from deconstructed buildings and houses, the very products they carry, creating a story on the exterior of their building for everyone to enjoy. Or a yoga studio with an eclectic retail shop offering new and gently-used lifestyle, homeware, and apparel products.

Figure out what people relate to in your district and give them more of it!

Another reason to take a gander at what people are relating to in a district, is to determine if they are leveraging these events and businesses for maximum economic impact. Sadly, it is often the case that they are not. It is not uncommon for a downtown to play host to an event and then garner almost no positive brand association from that event because they don’t participate in it in a meaningful or memorable way. This is one of the reasons I am not always a fan of gated outdoor programming; they typically do not create positive brand association for the area and eventgoers do not frequent area businesses.

Example: One of the leading complaints I hear in cities is, “On farmer’s market day, everyone comes downtown. But other than that, it’s empty…they won’t come back.” How do markets create all of this excitement with a few run down tents and battered banquet tables? With people. With sights. With smells. With lots of small, affordable purchasing options. With tastes. With close proximity. With atmosphere.

On a farmer’s market day, people want to experience street activity. Customers wish to rub shoulders with their neighbors and experience the fabric of their community. They do not want to go into stores. They do not want to dine in sit-down restaurants. So bring your store and your food businesses outside! Provide free samples. Put products on the sidewalk. Consider this quote from Richard Bloom, published in the Metro News Feed, about his small floral and homewares shop in downtown Lake Oswego:

Bloom moved his business in March to Lake Oswego’s main street, A Avenue, and incorporated several of Reeves’ suggestions at his new, highly visible storefront. “The change (in walk-in traffic) has been phenomenal,” says Bloom. “We were hidden off the main drag in a complex with low visibility and no storefront…By moving locations where our storefront is highly visible and adding sidewalk interest with an antique flower cart and spillover product, we’ve probably increased our walk-in business by 40 to 50 percent.”

On Saturdays, he converts several of the customer parking spots next to his building into an outdoor market to take advantage of Lake Oswego’s farmers market crowd. “Saturdays used to mean a skeleton crew and closing early,” says Bloom. “Now it’s one of our busiest days.”

DO THE BUSINESSES IN THE DISTRICT COLLABORATE?

Adjacencies are a key component to good merchandising when laying out products in a store. What are adjacencies? Inventory that sells well next to each another. In Main Street and downtown environments, you are looking for the same things: what are the physical and emotional adjacencies that can be wielded to build more economic success?

If businesses have strong relationships with each other, they can cooperate and discover where people eat after they get tutoring, or what shops they tend to frequent serially, and they can successfully cross promote offerings to those who live, work, and play nearby.

In economically underperforming areas, it is typical for individual stores and restaurants to feel like islands; isolated, trying to keep their borders above water. But this offers the antithesis of what a successful mixed-use district should: a place with community fabric. In a strip mall, no one expects the clerk from Ross Dress for Less to know, and interact with, a clerk from Best Buy. But, the opposite is true in a downtown or Main Street. People want shared passion and purpose. The community fabric people want to experience is woven primarily using a downtown’s ground floor stakeholders. So functioning business associations that receive technical assistance and monetary support from area institutions and the public sector are vitally important to create adjacencies and downtown fabric.

Example: In a matter of months, downtown Tigard, went from having a defunct business association and little interaction between stakeholders, to creating a district-wide annual event. How did this happen? The city of Tigard provided technical assistance to engaged stakeholders in the downtown. Staff brought in Business Association Management to lend a helping hand with creating a downtown email list, fostering regular communication, developing event posters, postcards, and flyers, and hosting networking meetings. Through this collaboration, events and identity are being created, including the first ever Downtown Tigard Street Fair, which was held August 11th, and included a car show, brew fest, live music, and offerings for the kiddos. Pretty darn impressive in less than a year.

WHAT ARE YOUR STORIES?

Every place is teeming with stories. The collective tales that reside in a district are what make it unique, and bring it to life. I was reminded of this recently when working in downtown Lake Oswego.

Robert Foster, an incredibly talented landscape architect, artist, and resident of Lake Oswego, came up to me after a presentation in their downtown and gave me a copy of his self published book called: Art in the Coffee Shop. It was the 13th edition and it contained sketches of, and poems about, people he observes in coffee shops throughout the region, and it is the source for the images in this post.

About the woman at the top of this blog entry Robert wrote:

A delightful smile, haven’t seen in a while.
I’ll put it in the book and keep it in my file.
She delighted her friends, she was very attentive,
She gave them pause she gave them incentive.
People like this keep the world going round,
How do we keep them from flying off the ground.

Yes, people like this…and their individual stories, are what make the world go ’round, and they are the ones who ultimately provide the spark needed to bring renewal to a neighborhood, a city, or a town. It always begins with people.

All images are published with the permission of Robert H Foster. Thank you for sharing your talent so generously Robert!

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Retail, REITs and Cannibalization

by Michele Reeves on May 4, 2012

When he got his start in the grocery business with Fred Meyer decades ago, Gary Slabaugh said he knew EVERY property owner that surrounded the store where he worked. He knew them, their families, their kids’ birthdays. Part of managing the store was participating in, and being a member of, the surrounding community. Smart business if you are a retailer and property owner.

Fast forward a few decades, and contrast that with some of Gary’s more recent experiences as VP of Real Estate for Safeway, where he said some of their leased mall locations have been sold 12 times over the last few years. Each sale of the mall, he said, exchanged hands for more money, selling to another out-of-town Real Estate Investment Trust (REIT).

How did these properties increase in value if rent wasn’t increasing as well? We puzzled over this question as I was moderating a panel at the Portland ICSC Alliance event this year on the subject of Retrofitting Suburbia. (Keynote presentations by Michael Freedman and Ellen Dunham-Jones are available on the right hand navigation bar, if you follow the previous ICSC link.)

The role of retail and restaurants in a city is vitally important. Stores and eateries act as activators. They are entertainers. They are draws. They provide identity. Yet, few cities actually manage this square footage like the precious resource that it is.

In fact, as Gary’s story so beautifully illustrates, the whole nature of retail, particularly along arterials and in suburban communities, has dramatically changed, shifting almost entirely into the hands of institutional investors, out-of-state owners, and large corporations. Accountants are not retailers, as my professional crush Paco Underhill notes in Call of the Mall. (One of the reasons he cites for malls being so ugly!)

This consolidation of properties and development into the hands of absentee number crunchers has not been good for America’s communities. It has led us to us being an utterly and completely over-retailed nation, diluting the positive impact that retail and restaurants can have on our cities and towns. And, it has left us with under invested or abandoned retail infrastructure that drives down property values, invites crime, and creates negative identity, like the arterial pictured above left.

Let’s compare America’s retail spaces to the rest of the world.

In a Costar report from 2010, the real estate database and analytics firm estimated there is at least 56 square feet of retail space per person in the United States. This equates to about 46.6 square feet of total retail space per capita in our country, according to ICSC estimates.

Juxtapose those numbers with retail space in a few other countries. Canada and the UK clock in at around half of the US glut, and places like Mexico and India are closer to 2 square feet of retail space per capita. A fraction of the real estate we have enshrined to consumption!

What do these statistics tell us? The United States has more retail space than it needs…more than it can possibly use.

Every time a city adds retail space, it is cannibalizing its own existing retail infrastructure. This trend gets exacerbated in areas with sales tax, as cities duke it out over who lures Wal-Mart from the next county over.

In a reality where we have a huge oversupply of retail space, why do we keep pretending there are unlimited dollars just waiting to be spent? Why do we think that all we need to do is build the next new mall and everything will be great in our towns, neighborhoods and corridors?

Let’s look at a local example of this from Gresham, Oregon. (Click on the map below for images and more information.)

There is a fabulous little downtown here, that had, and still has, a great street grid, charming buildings, and a nearby park with a Japanese garden that is being renovated. As this suburban downtown started to suffer the inevitable postwar decline that occurred everywhere, what happened?

A strip mall was conceived and built right along the edge of downtown. (Mall #1 on the map.)

Did this help downtown? Of course not.

Since the strip mall was a super block, it ruined grid connectivity, it visually eliminated any connection between downtown and nearby streets, and the mall was oriented so its back faced downtown, doing the strip mall equivalent of mooning this once thriving center in Gresham.

Eventually, this “new” mall became dated. Downtown continued to suffer. So what happened next?

Another mall!! Across the street from Mall #1. Literally. This shopping paradise was larger, newer and lifestyle center-y. (Let’s call it: Mall #2.)

Sadly, with this much retail space stacked on top of each other, this is now an environment that struggles with vacancy and turnover. And, this massive amount of mall space is dwarfing a great downtown, and hindering its revitalization as well.

There are several big lessons for cities in all of this:

Large corporations with no connection to your municipality often don’t care about your city, they are making decisions for their bottom line first and foremost. I would venture to say that nearly every REIT and big box concept has built in places that were clearly bad for the city and the surrounding area. Remember, what may be good for an out-of-town company is not necessarily good for a city as a whole.
Complete, and keep up to date, a retail capacity assessment in your city.
Don’t over zone for retail.
Don’t allow new large retail developments without considering how they impact all retail infrastructure in the city.
Give preference to local developers who have a stake in the community and tend to hold their properties for long periods of time. Real estate is rarely developed optimally, and maintained at its highest and best use for the whole community, if it is owned, controlled, and managed by institutional employees as an accounting exercise in another state.

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Hot Lake Springs…The Arkansas of Oregon?

by Michele Reeves on March 30, 2012

Earlier this week, I paid a visit to an intriguing place called Hot Lake Springs, which is located in what felt like the middle of nowhere in eastern Oregon. Back in the day, Hot Lake Springs billed itself as the “Arkansas of the West” — after Hot Springs, Arkansas. (The site in its full glory is pictured to the left.)

Hot Lake Springs went from spa darling to decrepit building over the last century, facing the same challenges that are found in many rural historical sites around the nation:

What do you do with a huge building steeped in history that is in a very remote location? What if that building is falling apart? Riddled with lawsuits? Has bankrupted previous owners? What if the entire region has given up hope and assumed the building would decay until it could no longer be saved?

The story of this place is an improbable tale of renewal and adaptive reuse. A tale that requires some back story…

These hot springs had long been a neutral gathering place for various Native American tribes in the area, who came to partake of the spring’s healing qualities, according to the present owners, David and Lee Manuel.

In the early 1800s, it was discovered by what were to be Astorians, and by the middle part of the century (and in the midst of a nearby gold rush) Europeans had taken it over and had erected extensive wooden buildings on the site.

With the advent of the railroad in the early 1900s, passenger loads of visitors were shepherded to a station right in front of the hotel three times a day.

According to an article in USA Today,

The Mayo brothers, of Mayo Clinic fame, were frequent visitors.

Vacationers came to relax, patients to shed a variety of ills.

Hospital director Dr. W.T. Phy believed syphilis could not withstand the repeated hot sulfuric baths in the lake water (it survived just fine) and, in those pre-antibiotic days, dosed his patients accordingly. Arthritis patients were placed in a hot mud bog.

Under Dr. Phy’s stewardship, this became an unlikely major worldwide tourist attraction. It was most frequently reached by rail (nearly 300 miles east of Portland). It had a teaching hospital, a post office, a hotel, a spa, a dance hall…it was really like a self contained little town.

Dr. Phy died in 1931. Three years later, most of the wooden structures on the site burned to the ground in a massive fire, leaving just the large colonial-style brick building that remains today (designed by John V. Bennes).

After the fire, the long, slow, inevitable decline of this historic property began. It operated as a resort, then as a hospital. It also served as a flight school and nurses training center during World War II. Later incarnations included a nursing home, an asylum, a restaurant & nightclub, and a bathhouse.

Then, it languished for well over a decade. The place was looted, vandalized, lost most of its windows, rotted, and lost portions of its roof.

In fact, it was so bad, the hotel was featured on the television show The Scariest Places on Earth in 2001.

Enter Lee and David Manuel.

David is a successful bronze sculptor who specializes in Western art. He typically works for a year on his incredibly detailed pieces, and sells out limited edition runs before he ever finishes them. Lee, his wife, is a former restaurant owner who manages the business end of his art.

In 2003, on a trip with their blended family, they decided, on a whim, to purchase the building and bring it back to life. They disposed of their assets in Joseph, Oregon and put their hearts and souls into renovating this place.

Lee said it took 15 months of her coming every night and working a night crew just to get through clean up. She said they dry camped in the building for several years before all the utilities were functioning.

Now, 9 years later, David’s studios are here. They live here. There is a foundry on site. David’s collection of Native American art, war memorabilia, and historic vehicles has found a home here. They have a multitude of antique fire fighting equipment to view. In fact, antiques are placed throughout the hotel. There is a bronze art exhibit. Taxidermy abounds. And, of course you can partake of the 200 plus degree hot mineral water (cooled down, naturally). And now, most recently, they operate a rather rustic bed & breakfast.

The building is heated entirely with the original radiator system that uses water from the springs. Apparently, it is listed as the first building to use geothermal energy for heating in the country. The gentleman who tends to the radiators said he spends several hours a day just trying to keep the temperature at the correct levels throughout the building, something that is a particular challenge in spring, when the weather fluctuates dramatically.

The model the Manuels use for selling David’s art — only to direct buyers whom they meet face-to-face — dovetails perfectly with them being located in a building that is a living monument to the Wild West, filled with items from the Wild West, located in the Wild West.

Not everyone is enamored though. If you read online reviews, you will find many visitors who are less than impressed with the interior renovation work. Poor lighting fixtures…false ceilings…a horrible faux fireplace and mantle in the circular lobby…plastic spa tubs for a soak in the heated mineral water, and unfortunate carpeting choices are all examples cited. And while these comments are most certainly true, it also is fact that without the Manuels, this building would have decayed beyond repair. They employ many in a rural economy that definitely appreciates the jobs. And, the bronze studio provides a focal point for area artists.

As the Manuels have shown, small artisanal businesses, ones that have a wholesale or production component, are often the key to bringing back historic infrastructure. And in the case of Hot Lake Springs, it seems most important that they saved the building structure, brought life and activity back to the old sanitarium, and that the exterior is being preserved. All of this will allow the interior to live to fight another day!

Has the move been worth it for the Manuels?

According to Lee, her husband David, who is in his early 70s, is doing the best work of his life and is seeing an increase in sales, even during this recession.

His latest piece, which he talked with us about on our visit, will be a Native American couple on horseback, looking up at the moon. He said it is his first piece with a touch of romance and that he wants it to project love and peace.

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Connection and Diversity Spur Economic Development

by Michele Reeves on November 27, 2010

There is a traditional top down model, implemented the world over, in which cities build infrastructure in an attempt to cluster technical industries and spur job growth, which Vivek Wadhwa discussed recently in the Chronicle of Higher Education:

All of those are well-intentioned efforts to build Silicon Valley-style technology hubs, but they are based on the same flawed assumptions: that government planners can pick industries they want to develop and, by erecting buildings and providing money to entrepreneurs and university researchers, make innovation happen.

Regional planners and some academics get very defensive when asked to produce evidence of cluster theory’s success. They commonly tout Silicon Valley and North Carolina’s Research Triangle Park as examples of the success of government-supported clusters. Research Triangle Park is a 50-year-old project that achieved success decades ago but lost momentum in the Internet era. And the success of Silicon Valley was achieved without government involvement.

Economic development, whether it be on a neighborhood scale or from a city-wide perspective, can be fostered by focusing on connectivity and diversity, not unlike the interactions needed to encourage physical revitalization, as I laid out in my post on ants and revitalization.

There is an excellent article by Steven Johnson in the Financial Times about the thriving New York high tech scene. I was surprised to learn that the New York area is now second only to Silicon Valley in attracting venture funds to start-up internet firms. And, as Mr. Johnson argues in his piece, the route to reproducing the conditions that existed prior to the success of Silicon Valley, or the NY tech scene, need not require top down planning and large public expenditures.

Mr. Johnson believes that “one secret to New York’s technological success lies in the Interactive Telecommunications Program (ITP), a two-year graduate course at New York University.” This course brings together students of varied backgrounds, from artists with no technical expertise to hard core coders, and out of that cauldron of diversity comes creativity and ingenious ideas. The graduates of this program go on to work in, or found, copius numbers of start-up ventures in the region.

The physical density of the city also encourages innovation. Many start-ups, both now and during the first, late-1990s internet boom, share offices. This creates informal networks of influence, where ideas can pass from one company to the other over casual conversation at the espresso machine or water cooler… .

Economists have a telling phrase for the kind of sharing that happens in these densely populated environments: “information spillover.” When you share a civic culture with millions of people, good ideas have a tendency to flow from mind to mind, even when their creators try to keep them secret.

All of these spaces – the graduate schools, the co-working offices, the media environments – exhibit the final trait that has been key to New York’s technological success: its diversity. A number of studies have established an essential connection between diversity and innovation. One such study, by the Stanford Business School professor Martin Ruef, interviewed 766 graduates of the school who had gone on to have entrepreneurial careers. Ruef was interested in the diversity of professions and disciplines, not of race or sexual orientation. He created an elaborate system for scoring innovation based on a combination of factors: the introduction of new products, say, or the filing of trademarks and patents. Then he tracked each graduate’s social network – not just the number of acquaintances but the kind of acquaintances they had. Some graduates had large social networks that were clustered within their organisation; others had small insular groups dominated by friends and family. Some had wide-ranging connections outside their inner circle of friends and colleagues.

Ruef discovered that the most creative individuals consistently had broad social networks that extended outside their organisation and involved people from various fields of expertise. In groups united by shared values and long-term familiarity, conformity and convention tended to dampen any potential creative sparks. The limited reach of the network meant that concepts from the outside rarely entered the entrepreneur’s consciousness. But the entrepreneurs who built bridges outside their “islands,” as Ruef called them, were able to borrow or co-opt new ideas from these external environments.

Let sophisticated behavior trickle up. Get your citizens talking to one another. Encourage inter-disciplinary cooperation. Bring people together from varied and different backgrounds — both from a cultural and professional perspective. Strengthen the connections between the private sector and universities. And, as Vivek Wadhwa says, teach entrepreneurship to students and experienced workers alike, finding ways to eliminate the stigma associated with failure.

Then, get out of the way!!

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