Gentrified Urban America Will Be Hit Hardest By The Recession

Wednesday, January 23, 2019
By Paul Martin

by Charles Hugh Smith via OfTwoMinds blog,
Wed, 01/23/2019

Combine sky-high commercial rents in homogenized, gentrified urban areas and sharp declines in the incomes of the limited populace who can afford gentrified urban areas and what do you get?

A number of macro dynamics have set up gentrified urban America for a big fall in the coming recession. What does gentrified mean? Gentrified means only the gentry (top 10%) can afford to enjoy the urban amenities as commercial rents and the cost of doing business in desirable urban areas have skyrocketed along with residential rents.

As a result, low-margin businesses have been squeezed out of desirable urban neighborhoods along with lower-income residents. The top 10% is the only demographic who can afford to live in gentrified urban America.

As noted in What’s Really Happening to Retail?, Only Amazon-proof businesses can now survive in brick and mortar. And that quickly boils down to high-cost, high-margin food and drinks–cafes, bars, restaurants– and mega-corporate chains: Walgreens, Starbucks, Chipotle, etc. and smaller chains that cater to the needs/obsessions of the top 10%: fitness centers, etc.

On a per capita basis, America is grossly over-supplied with commercial real estate. But within the desirable urban cores, commercial rents have soared due to the relative scarcity of commercial space. As a result, landlords and property managers are asking exorbitant rents, and many are leaving spaces empty rather than rent them for less.

The net result is desirable urban zones are being homogenized: niche retailers and other small service providers can no longer afford the rents (unless they also own the building) and the only businesses that can afford the nosebleed rents are high-margin food-beverage establishments or corporate chains.

The irony is two-fold: the very diversity and novelty that attracted the top 10% is being eroded, while the reliance on free-spending young wage earners in the top 10% (or even top 5% in pricey urban zones) makes such gentrified urban areas extremely vulnerable to any downturn that trims the population, salaries and bonuses of the top 10%.

Drive out all the small businesses that the top 50% can afford and all that’s left is high-cost businesses only the top 5% can afford.

Even worse, the vast majority of these high-cost businesses are discretionary:nobody really needs a $5 coffee, $5 bagel, fitness center membership, etc., and buying a couple rolls of toilet paper and some instant noodles at Walgreens ins’t going to generate the per-square-foot sales Walgreens needs to keep the high-rent store in a gentrified urban neighborhood open.

The Rest…HERE

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