Experts, business owners speculate on 2018 small business closures

Tuesday, January 29, 2019 - 12:07pm

.

Design by Nolan Felicidario

In November 2018, Ann Arbor’s beloved MD Bagel Fragel was forced to close shop. A family-owned business of 25 years that attracted customers through its local vibe and “fragel,” a shop staple consisting of deep fried raisin dough covered in cinnamon sugar, its owners were given two days to move out of their location on Broadway Square after the building was purchased by a company from Toledo.

Community outrage ensued, with supporters starting a GoFundMe that accrued more than $11,000 and Underground Printing creating T-shirts printed with the phrase “#SaveBagelFragel”. The new owners of the building gave the business an extension, allowing them to move out by the end of the year before turning the space into a marijuana dispensary. 

MD Bagel Fragel is one of 18 Ann Arbor businesses that closed in 2018. For many Ann Arbor residents, the closure of small businesses comes with a community cost. Of the 18 businesses that closed in 2018, nine of them were open for more than 25 years, with only two businesses being open for two years or less.

In an email interview with The Daily, MD Bagel Fragel shop owner Patricia Rockette offered some advice to City Council.

“Stop letting the big corporations like Starbucks go in which forces the small businesses out of business,” Rockette wrote. “They cannot compete. Landlords raise the rent so much, that only big, unfeeling companies can survive.”

City Councilmember Jeff Hayner, D-Ward 1, used to hold coffee hours at Electric Eye Café, a business that also closed in 2018. According to Hayner, the loss of businesses such as Electric Eye Café and MD Bagel Fragel are often unquantifiable.

“Businesses come and go, and especially these small businesses, but there were some that has really been sad with the community, especially my constituents,” Hayner said. “A lot of these small businesses like that, they actually play a role in the community in a small way, where they offer their room up for meetings, or they host different events or creative things. When these small businesses go away, sometimes you lose those things that aren’t quantifiable.” 

While records tracking the number of businesses that have closed in Ann Arbor over the past few years do not exist, some estimate this is a relatively large amount to close in one year, particularly since 2018 proved strong for the overall economy.

Six of the businesses that closed in 2018 belonged to the dining industry, such as MD Bagel Fragel and Pieology Pizzeria. However, the majority of closures — 10 — were retail businesses.

According to Harley Etienne, assistant professor of urban and regional planning at the University of Michigan, the retail industry has faced challenges with the rise of e-commerce, particularly with companies like Amazon whose ease of delivery has proved damaging to brick-and-mortar businesses.

“Nationally, there is a real crisis going on in retail,” Etienne said. “Competition from online providers and online retailers have changed how retail works in this country. Retailers that are not a part of the change are particularly challenged, especially if they’re not luxury, small retailers. And so there’s something to be concerned about in terms of how people get their goods and the competition that local businesses face from online retailers.”

Councilmember Ali Ramlawi, D-Ward 5, said City Council has focused on supporting technology startups in Ann Arbor in the past. However, with companies like Google moving certain offices into the locality, he believes the council should shift its attention to local retailers that are hurting.

“We’ve been focused now for the last ten to 15 years on incubating startups from the technology sector of our economy, using the University of Michigan’s pool of brain power,” Ramlawi said. “And it’s worked. But I think the focus now needs to shift. It’s not 15 years ago, I think now the biggest part of the economy that could use help would be the retailers and trying to find creative ways to help retailers in our downtown to become less of a homogenous area.”

Ramlawi, who owns Jerusalem Garden, a restaurant on East Liberty Street, said he ran for City Council partly to diversify the membership.

“Part of my campaigning was that these small businesses are the social fabric of the community,” Ramlawi said. “Small businesses help employ local people, bring character to the community so we’re not just a city full of franchises. So, we’ve lost the uniqueness of our city and what made Ann Arbor a place that people would talk about in conversation. I don’t think we have that edge anymore.”

Jeremy Levine, assistant professor of organizational studies and sociology, said he agrees the city has become much more commercialized than it was when he was a freshman at the University in 2004.

“There’s a valid concern that I think many feel about Ann Arbor becoming more corporate,” Levine said. “If I compare me here in 2019 to when I was a freshman here in 2004, it is way more corporate now than it was then, and it was more corporate then than it was before that. This is not an Ann Arbor only thing. In Austin, they say, ‘Keep Austin Weird,’ but Austin is so much more corporate now.”

Aside from the increasing ubiquity of e-commerce, many attribute a large part of small businesses’ struggle to survive to the increase in development within the city, and the raising rent that comes along with it.

Etienne said with an increase in development, some small businesses may be unable to afford the raise in rent, especially if their profits are limited to begin with.

“There’s been a few businesses that have been displaced,” Etienne said. “I’d say it’s unaffordability, the cost of doing business here. The land is just too valuable. It’s really difficult to pay their property taxes and compete given their profit margins, and so it’s a real concern. But when you add, I think most of the businesses that I’m talking about were renting spaces, in spaces like along South U where they were displaced by new construction, new student housing, new condominiums. And if you’re unable to find a new affordable space in some other part of Ann Arbor, which is already very challenging, then you’re faced with the prospect of closing.”

For Hayner, the displacement of local businesses is personal. He owns a small design and fabrication shop and is about to lose his lease for the third time in the past decade.

“It’s hit me especially hard, because I’ve been gentrified out of two different shop spaces in the last ten years, one of them on the Beale property,” Hayner said. “And I’m about to get it again. I got a shop up out on the Northside, and it’s going to be 69 townhouses if the plans come through.”

Much of the new construction requires a change in zoning, which City Council is in charge of approving. For example, if a developer wants to renovate a space previously used for industrial purposes, it must receive City Council’s permission to rezone to residential.

Hayner said the rezoning of some places from commercial to residential use has had an adverse effect on some local businesses, which are effectively forced out of their location.

“Between Felch and Kingsley, it sits on Allen Creek,” Hayner said. “It was called the Old Beale property. In all those old, dumpy buildings was a wooden toymaker that shipped all over the world. There was a cabinet maker, another cabinet maker, a guy who did concrete countertops, an architect. There were 24 small businesses in this area. It got rezoned from light industrial to residential, they put a bunch of million dollar condos in there. And now there’s 24 small businesses out there, scrambling around looking for affordable space again. Some rezonings haven’t been healthy. We need residential but we also need commercial.”

While Hayner said he believes the rezoning of some properties to residential has been detrimental to local businesses, Etienne said an increase in housing developments in Ann Arbor is essential to procuring affordable housing.

“People want to live here, Ann Arbor’s interesting, it has lots of great amenities, and so there’s something to be said for, yes, we do have to accommodate these people, because limiting the amount of new housing actually raises rents enormously,” Etienne said. “You can’t put a cap on housing and expect housing just to remain affordable in a meaningful way. But that’s also a challenge for businesses, in that you want new businesses to go along with the increase in the number of housing units in the city.”

Hayner said the previous City Council approved most requests for rezoning. However, with a new council where three incumbents were voted out of office, he said he believes the council will rethink how they approach rezoning requests.  

“But when we talk about rezoning, when somebody comes to us for rezoning, we don’t have to say, ‘Sure, build a giant (development),’” Hayner said. “Rezoning is where the rubber meets the road. The (past City Council) always said yes, but that was then, this is now.”

The master plan, a document that contains analysis and recommendations for development within the city, serves as a logistical challenge to deciding which rezoning requests City Council should approve or deny. This is something Hayner said he wants to change.  

“The master plan informs what we think we want our zoning types to be, but there’s a lot of talk and it’s inevitable that we’ll be redoing our master plan very soon, I believe very soon,” Hayner said. “I’m going to start that study up this year. It’s a large process that involves a lot of people and it’s very expensive and it takes a lot of staff time, but I think our master plan is a little out of sync with the needs of community in the future, especially our sustainable initiatives.”

According to Levine, there are steps City Council can take that don’t necessarily involve denying rezoning requests. These solutions allow Ann Arbor to encourage development, while also ameliorating the damages that come with it.

“It’s not like the city government has to say, ‘Here, take this land, do your thing,’” Levine said. “If it is valuable land, which it is, if it is going to make those developers money, which it will, then concessions can be negotiated.”

Etienne emphasized these kinds of negotiations are something City Council needs to be proactive about, because it’s not possible to negotiate with developers once permits are approved.

“It’s something you can’t do retroactively, you kind of have to look forward and say this is what we’re approving, and how many retail spaces will this eliminate, and how many will replace them,” Etienne said.

One possible solution is a negotiation called a Community Benefit Agreement. These agreements are often used in large cities with high demand development markets. In this agreement, city governments let developers buy the land as long as they follow certain requirements by the city. For example, a city might require developers to set aside a certain number of units for affordable housing, or set aside certain spaces on the ground floor for locally owned businesses.

“Essentially, CBAs are negotiations between the given locality and the people that live there, the city government, and the developer that is going to profit off of this valuable land,” Levine said. “And I think those are real opportunities that if they’re used well, they’re not a panacea, they’re not going to cure all the problems, but it isn’t like writing a blank check and sort of giving off the land and saying, ‘Go do your thing.’”

However, Etienne cautions that CBAs must be explicit in which community they are assisting, especially because Ann Arbor is home to so many unique communities, such as the student community, small business community and those who work for the University.

He also said CBAs risk angering residents who resist any kind of development often called NIMBYs, meaning “not in my backyard” because they may feel they won’t benefit from negotiations with developers.

“You don’t want to create a Community Benefits Agreement where it’s not clear who the beneficiaries are, and it could become weaponized as a way to stop all development, and that’s not wise, Etienne said. That’s something to be really careful of. The best Community Benefits Agreements will link development to some tangible benefit, so if we’re talking about all this new retail, all this new construction, there’s some benefit in terms of employment, in terms of investing in affordable housing, there are very clear ways to do that.”

Etienne believes a linkage fee, a nominal fee on the square footage of a development, is a better solution than a CBA.

“I would actually suggest something very different, I wouldn’t suggest a Community Benefits Agreement, Etienne said. What many cities have done is a linkage fee. And a linkage fee has worked well in really high demand places. It worked in Boston for a long time, in San Francisco, that basically says any developer that builds anything that gets developed or even renovated, you basically pay a certain amount per 100 square feet of space that you renovate or build. It’s usually a very nominal amount, like it could be $10 or $100, what have you, and that goes into a fund.”

Still, Etienne concedes a linkage fee would create opposition from developers and could backfire if the economy.

“You’re asking developers to tack on a fee to the city on top of all the other fees they pay to develop property, and they probably would fight it,” Etienne said. “But in the case of Boston and San Francisco, the reason why it works in competitive markets is because businesses want to be there so bad that they’re willing to pay it. The downside is that if there’s a turn in the market and property values tank and developers kind of go away, they’re certainly not going to want to pay a linkage fee when the market is down, because basically they’re doing the city a favor by developing anything when things are slow.”

Another solution City Council could take is using publicly owned buildings to rent to local businesses at below-market rates. However, according to Levine, the city is limited because the University owns lots of prime real estate within the city, and is not required to pay taxes.

“I think Ann Arbor’s challenge is that the University of Michigan is one of the biggest property holders, and that’s a problem for the city,” Levine said. “The footprint of the University is massive...A big part of how cities have money to play with and to provide services has to do with property tax. And in Ann Arbor, there’s less property to be taxed, because non-profits and I believe the University of Michigan are not paying property taxes on their footprint. There’s only so much a city government can do when the available land it has to play with is not literally the entire boundaries of the municipality. It’s the entire boundaries of the municipality with some blackout holes where the University is.”

Although public policy solutions tend to center around city affordability and other national economic trends, according to Etienne and Levine, it is difficult to distill the closure of local businesses down to a few factors, as each business has a distinct story.

“If you look at other small businesses around here that have gone under, it has really nothing to do with anything related to rent or Amazon or other global economic issues,” Levine said, “Pangea, for example — the tattoo and piercing spot. Turns out the owner was a (expletive) racist, and so people stopped going and they shut it down.”

The closure of certain small businesses is also a normal function of the market, Levine said.

There is only enough demand to sustain a certain number of businesses, and if a business happens to find itself in a crowded market, it will either have to compete or be weeded out.

“If a brewery closes, in some ways that shouldn’t be that surprising, so far as there’s a ton of breweries per capita in Ann Arbor and even the general vicinity,” Levine said. “There’s a lot of good places to get a beer that’s made in-house. There’s a lot of great places to get a lot of different beers, that with one brewery closing, it’s sort of, ‘Are there even enough people to partake in that service?’”

Aside from macroeconomic trends and public policies, there are practical steps small businesses can take to increase their profits. According to Levine, the most successful small businesses ingratiate themselves within the local community.

“Across the board, in cities that are changing, where rents are increasing, where there’s a housing crunch — the same stuff that we’re seeing here, just on a smaller scale — small businesses that establish themselves as neighborhood institutions end up doing better,” Levine said. “That serve a purpose beyond selling a widget, selling a product, just sort of sitting there passively. The kind of places that when you come to Ann Arbor, you got to go there, that’s part of who we are and what we’re all about: our distinctiveness.”

LSA sophomore Oscar Martinez thinks this may be the reason Pieology Pizzeria, a national chain with an Ann Arbor location in the heart of downtown on East Liberty Street, closed in 2018. Martinez had eaten at Pieology when he visited Ann Arbor for a college tour as a high school senior. Although he liked the food, and thought it seemed like a place that would appeal to Ann Arbor residents, he never ended up going back.

“(Pieology) was never something that people, that my friends specifically, would say, ‘Let’s go to this.’ We would overlook it, not consider it. It wasn’t as much of a staple as Chipotle or Potbelly (Potbelly’s) or Jimmy John’s was, but it also wasn’t a sit-down, go out with friends on a Friday night type place, like Sava’s or B-Dubs I guess. I don’t think it had that feel of, ‘Let’s go out for a special occasion.’ It was in a weird limbo.”

Martinez often dines at Big Ten Burrito, though. Levine used the burrito shop as an example of an Ann Arbor business that has successfully created a local identity, with students creating an acronym for the restaurant, often referring to it as BTB.

According to Adam Lowenstein, owner of Big Ten Burrito and a University alum, the restaurant’s ability to adopt corporate practices into a local business is part of its success.

“We’ve never been corporate, we’ve never wanted to,” Lowenstein said. “We kind of hit that nice, between spot that it’s like a mom and pop shop, but we try and mimic the practices of bigger places, like Chipotle, in terms of the quality and the customer service, the professionalism. But at the same time, it’s never going to be a really corporate place. It’s an Ann Arbor place. And people can kind of tell, just from the vibe when you walk in...We have the product and the offering that people want, but it’s also they can relate and feel like they’re supporting their local spot, rather than Chipotle.”

This change in philosophy may prove more necessary in coming months, with many experts estimating that the economy will enter a recession, according to Etienne. 

“Looking at economic trends, 2019 promises to be rough economically,” Etienne said. “I think a lot of us who are watching the leading economic indicators are thinking there’s a recession coming soon. The government shutdown is not helping, and I am worried about how businesses will survive. Businesses that are on the verge may find themselves in trouble. We should be concerned about that, the city should be concerned about that, and small businesses owners should be concerned about that, about how to adapt, if they can, with what they sell and who they sell to. Making sure that they’re put a little bit away, because it could be a rough time for the next year or two.”