Robert F. Bukaty/AP Photo
A sign announces a coronavirus closure at a flower shop in Jay, Maine, April 16, 2020.
Big-box stores and, more recently, Amazon have been blamed for the demise of small merchants. There was no reason to rent office space and hire salespeople who talk to customers if the ultimate purchase could be made online.
But, the conventional wisdom had it, so long as independent businesses offered “experiential” services—think yoga studios or coffee houses or ax tossing—they would be spared from the disintermediation of all things retail. Or so we thought.
A new menace has emerged during the pandemic, however, which threatens the survival of even the fittest boutiques. With rents overdue and airtight long-term leases, commercial landlords now imperil small businesses. And the victim is close to expiring.
A similar phenomenon is playing out with evictions of residential tenants who have lost employment due to the pandemic. According to Pew Research, by mid-April, 39 percent of lower-income Americans had lost a job or been laid off. Employment rates for the bottom wage quartile (less than $27,000 in income) are roughly 15 percent below levels at the beginning of the year. Home mortgage delinquencies have reached their highest rate since the 2008 housing bubble burst. Though President Trump has instructed regulators to study the possibility of an eviction moratorium via executive order, there are no signs of serious relief.
Even before landlords pounced, the pandemic threatened brick-and-mortar retailers. Economists at the University of California, Santa Cruz estimated an 8 percent drop in the number of small businesses from February to June, and an even bigger decline among small businesses owned by minorities. As is often the case with government data, these now-stale numbers likely understate the amount of small-firm demise through June (the last month of the study period), when the short-term Paycheck Protection Program (PPP) loans were keeping mom-and-pops afloat. More bankruptcy and exit could follow in July and August as landlords insist on back rent.
Case Study of a Coffee Shop Near the White House
Consider the fate of small retailers in our nation’s capital. The business district immediately surrounding the White House is now a ghost town. Commercial establishments are largely boarded up, office buildings are vacant as “knowledge” workers telecommute from home, and the metro stops are eerily quiet.
And this scene is a full two months after the protests, which largely culminated after Trump’s bible-brandishing photo op at St. John’s Church on June 1. Aside from police and a few tourists gathered along Black Lives Matter Plaza on 16th Street Northwest, between H and I Streets, there is little sign of human life in the McPherson Square neighborhood. The near complete desertion of business clientele from the business district appears to be permanent, at least until a vaccine arrives. And even then, we might not be out of the woods, due to resistance among significant portions of the population to taking the vaccine shot.
As with many other Washingtonians, February was the last month I commuted downtown. I had to travel for much of the month, but I managed a few days in my building, just one block from Lafayette Square. Come rain or shine, our merry band of economists would take the elevator downstairs to the lobby at 2:30 sharp. An interior glass door provides access to Café Chocolat, where we would ingest the best cortado in all of Washington. The name highlights the combination of chocolates and coffee, capped off by an elegant s’mores dish. Baristas there were trained not only to make great-tasting espressos, but also in foam art. It was a sensory explosion that would propel you through the last hours of the day.
Those days are gone. Café Chocolat may be closing for good.
Gjergj Dollani is the founder and owner of Café Chocolat. He worked outside jobs to funnel money into the coffee shop. Dollani was born in Albania, speaks four languages, and was educated in the states, earning his MBA at the University of Illinois in the early aughts. Over the past two years, I’ve spent a lot of time with Dollani, so he was kind enough to reopen the store just for me. I could savor one final cortado in a dark and empty café.
When his revenues dried up, Dollani helped his employees look for jobs. Because that’s what most small-business owners do. Workers are considered family.
When the pandemic hit, Dollani applied for a PPP loan and got it. Administered by the Small Business Administration, PPP loans are forgivable so long as the proprietor uses the bulk of the loan (three-quarters) to cover the wages of employees. Borrowers must apply for a refund after they use the funds for their employees; until a refund is granted, the loan is considered due. Dollani also applied for D.C. Mayor Muriel Bowser’s microgrant for small businesses, and got that as well.
Both infusions were helpful. Dollani characterizes the PPP as “great effort but wrong timing.” When he applied for the PPP loan in June, he had eight weeks to use the money, which allowed him to reopen the store. A week after he reopened, however, the protests began (a movement that Dollani supports). Because he had to use the funds, even without customers, his employees were kept whole. He ran out of PPP funding around July 23. He used microgrant funding to keep the store going through the end of July. There has been talk of a second round of PPP funding, but Congress went on vacation.
Dollani doesn’t feel comfortable reopening when the store is only generating $10 worth of sales per day. By comparison, before the shutdown Café Chocolat generated over $1,000 per day, though less in summertime. (This drop-off is typical of D.C. retail establishments, which experience 40 percent revenue declines in the summer as the city empties and Congress is in recess.)
Controlling for the season, Café Chocolat experienced a revenue decline of 99 percent in June and July of this year. As yet, his bank hasn’t started accepting requests for PPP refunds; this is another debt over his head.
Dollani had planned to reopen once more in September, but a standoff with his landlord could be his undoing. The landlord, who will remain anonymous, has asked for rent covering March, April, May, and June, the period when Café Chocolat was closed. The landlord is not willing to forgive any of the back rent, and will only entertain plans in which it collects all rents owed by the end of 2021, which puts Dollani’s small business in jeopardy.
Payments of back rents when revenues are close to zero will be impossible. And even when revenues return to normal, because Dollani operates at small margins, an obligation to pay back rent means that Café Chocolat would operate at a loss until the loan is repaid.
Despite his passion for providing great coffee, Dollani would sooner close the business permanently than fall further behind. On top of rent, wages, and materials, he pays down his original business loan on a monthly basis. That loan allowed Dollani to invest several hundred thousand dollars renovating the space, including $20,000 for a high-end espresso machine. In Dollani’s words, his business-interruption insurance told him “to go fuck himself.”
To negotiate an early exit from his ten-year lease, Dollani likely would have to leave behind his beloved espresso machine as “blood money.” He would also have to renegotiate his business loan. He might have to file for bankruptcy to protect his assets. With the vultures swirling, he has lawyered up.
A Plan to Save Small Businesses
We don’t know whether Café Chocolat is representative of the plight of small-business owners. But to the extent it is, we could be witnessing the snuffing-out of small retailers en masse. In the retail sector, as many as 25,000 stores could shut down permanently in 2020, mostly in malls, according to Coresight Research. As of mid-July, 73,000 pandemic-era closures on Yelp are now permanent; the restaurant industry accounts for over 15,000 of those permanent closures.
Thinking through the things that would help Dollani might also be helpful in formulating a national response. In the event of a bomb, there would likely be an out clause in the contract, as the landlord could no longer provide the space. The pandemic can be understood as a bomb that leaves the structure in place, but makes the space inhospitable to customers or workers. Unfortunately, no rental contract could have contemplated this contingency. So we are in a Wild Wild West scenario.
The basis for an intervention here is the power imbalance between landlords and small-scale tenants; non-intervention means that landlords will squeeze tenants for every drop of rent owed. By alleviating that power imbalance, the landlords would be forced to bear some of the burden, permitting tenants to stave off bankruptcy.
The basis for an intervention here is the power imbalance between landlords and small-scale tenants.
The first power-balancing intervention is a national eviction moratorium, not only for residential tenants who have suffered employment loss owing to the pandemic, but also for commercial tenants that have suffered revenue loss owing to the pandemic. Unfortunately, eviction isn’t the only threat that landlords have over tenants. So this is just the start.
The second source of leverage is the landlord’s claim to back rent and penalties for breaking the lease. These debts need to be absorbed by three parties: the landlord, the tenant, and the taxpayer. An obviously equitable split is one third, one third, one third. The government should task an agency with negotiating these workouts and permitting the parties to off-load a portion of the back rent to the taxpayer.
A final intervention would be to extend the PPP program through the end of 2020. If that seems too generous, the program could be narrowed to those small businesses, such as Café Chocolat, that employ between, say, two and 20 workers. There is no reason to believe that pandemic-dislocated workers will find employment elsewhere in the economy. And there is little chance that revenue in disaster areas such as downtown Washington will bounce back before a vaccine.
Small businesses are the backbone of America. This is the time for us to have their back. Congress should move quickly before more go the way of Café Chocolat.
