You’ve seen it happen. The cutesy old shops replaced by “modern” sans-serif black text on a white background juice bars. The colorful and varied street replaced with steel and glass. This is not gentrification: it’s the gentrification aesthetic. Others have written about this better, but gentrification can occur even as the facade of a city remains unchanged. When that facade does change, it is the result of gentrification, not the cause. Gentrification is about displacement and rent increases, the market conditions (usually as a result of insufficient housing supply) that force old residents out. However, there is still an interesting question left unanswered. Why do we associate this particular aesthetic with gentrification, and why is it so boring? Why do many newer restaurants feel sort of corporatized and cold? Some of it is just a natural human resistance to change, but I don’t think that’s all of it. I think he answer, at least in part, is finance.
If you follow the world of housing and urbanism, you’ve probably heard a story like this. A plucky local entrepreneur decides they want to open a restaurant. They rent a commercial space (for an exorbitant amount), and get ready to open. However, they’re soon met with a massive bundle of regulatory hurdles to overcome. They want to refurnish the inside of the building and the storefront: that requires special permitting. Since they’re operating a business, that may also require special permitting. Even when such a project doesn’t involve any modifications to the outside of a building, costs quickly rack up. A specific example is the case of Matcha n’ More, an SF ice cream shop where the owner found themselves $150,000 in debt before they could even open their doors. The article details their experience of becoming mired in compliance costs and legal fees, all while paying rent on an empty building that they aren’t allowed to fill.
San Francisco may be one of the worst cases, but stories like this play out in cities across the US. The minimum cost to start a business or convert a house into an apartment, where it’s legal at all, has become higher and higher. As a result, it’s almost impossible for landowners and potential business owners to self finance projects. Even if they have the money, the legal and bureaucratic know-how required to build something new will be beyond most people, requiring expensive consultants and often years of filing out forms and emotionally draining committee meetings. Despite this, new restaurants and apartments continue to go up, albeit at a very slow pace. How? Investors.
From an SF Eater article on opening a new restaurant:
With Steele on board, Tortosa began to have direction. Steele and White guided Tortosa through sharpening a business plan, winning investors, finding a space, and connecting him with everyone that helps a restaurant come together: a realtor, accountant, lawyer, architect, contractor, and so much more. Tortosa has upwards of five hundred emails from Steele alone in his inbox.
“I call it the process of demystification,” says Steele. “This is Adam’s creation. We have no involvement in the creativity of this. But one of the most important things we do for our clients is the investor deck. It’s so critical to create an attractive document that gives the impression to anyone who reads it that the person creating this restaurant has their shit together, which means one has to actually have their shit together and think through everything this restaurant is going to be. That’s what we do.”
Their services for this particular project cost $25,000 up-front — plus a future percentage of profits for seven years. Steele notes that each project has different time requirements, and thus different costs.
If you talk to people in small business, especially the restaurant industry, it’ll often come up how it used to be possible for a family or community to pool some funds and start a business locally. If that was insufficient, there was always the option of a small business loan from a local credit union or bank. However, this has become less and less true, as a result of the aforementioned cost explosion. So now, business owners turn to outside investors, and landowners sell their land to “developers”. As more and more people become involved in a project, individual vision gets diluted. Investors want projects that are a guaranteed success. In the above quote, the consultant assures us they “have no involvement in the creativity of this,” but how could it not affect the owner to hear a consultant who they are paying tens of thousands of dollars say: “this is what will get you investors.”
What kind of things is a consultant going to say when trying to help you get investors (and help themselves get a return on their own investment, given they’re getting paid in equity)? Well, probably something like:
This city has 20 gelato shops that do well, so a gelato place is a pretty sure bet. We don’t want to risk getting drawn into tons of design review, or scaring away customers with a bad design, so let’s make the storefront look like this template one we keep in a folder. I see hear you intended to call it “Lee’s Cafe”, obviously we would never interfere with your creative vision… but you should know that names with 4 letters preform 15% better with investors.
The same thing happens with housing: why take the expense and risk of a new look when a standard design will sell just fine? Maybe if it’s a prestige project, but not for the average affordable 3 story midrise. A homeowner who converts their plot into apartments will be concerned about cost too, but they won’t only be concerned about cost, especially since homeowners that take that route frequently live on the property.
So capital reshapes our environment. Many of the changes that it brings provide real potential gains in efficiency, but they come at the expense of individual vision. The shop becomes a brand, the 12 unit apartment building becomes a “development”. In the end, you’re left with carefully planned neighborhoods that have passed every possible committee, but feel less pleasant than those built 100 years earlier with essentially no central planning at all.
Here’s the heart of it: as capital requirements for urban development increase beyond the ability of individuals to finance, even with debt, the individuality and diversity of new projects goes down. As long as every coffee shop requires a board of investors to open, and every new building requires 100 lawyers to build, the gentrification aesthetic will be here to stay.
On that rather pessimistic note, that covers the topic for this post. I’ll be continuing it soon by covering potential solutions, and what we can learn by looking at cities in both our past, and around the world today. Land use rules are part of the answer, but there’s plenty more to cover. Below are some postscripts about the topic.
Obviously capital has its place in a city. A 20 story apartment building would never get built without outside investors, and almost nobody complains about the Empire State Building being a product of capital. The problem is when all of your development takes place within that model. When it comes to commercial buildings, obviously not every building has to be exciting, and what is inside the space matters more than whether a restaurants landlord got to exercise their creative flair. I’d probably say this problem of investor-everything is most important with regards to small businesses, then housing much lower, and commercial properties at the bottom.
Also, I don’t cover it much here because it’s not my realm of expertise, but it’s easy to see how an increased necessity for outside investment will disproportionately hit those who have a harder time accessing that investment. As a consequence, black and other minority entrepreneurs will likely face yet more burdens on building wealth and starting businesses to serve their communities.