Rent Control for Small Businesses Another Bad Idea

It’s “Basic Economics” that residential rent control is harmful housing policy. So it makes perfect sense that we’re beginning to hear about commercial rent control in California. Why not heap more destructive laws on the pile?

San Jose Inside reported earlier this month that “a local community leader” wants the city “to explore ways to sustain small businesses, which, like the people who staff them, face soaring rents in Silicon Valley.” Apparently this “local community leader” told city officials in a letter that “in addition to seeking federal aid through the Small Business Administration, San Jose should figure out other ways to limit rent increases for mom-and-pop shops.”

Establishing rent ceilings on non-residential commercial property has been prohibited for three decades in California. But the “local community leader” would like to see them made legal again because a grocery store that she apparently liked, Gene’s Fine Foods in Saratoga, had to go out of business because the owner couldn’t afford an upcoming rent increase. It’s always interesting when someone wants to use the power of government to enforce their personal tastes and aspirations, and apparently gives no thought to those who might be hurt by the policies they advocate — such as property owners, who, like the mom-and-pop tenants, also have families to feed.

Also overlooked is legitimate concern that commercial rent control would handicap landlords’ abilities to maintain and improve their properties. The result is property depreciation that not only affects the building in question but the entire neighborhood. This goes for residential rent control, as well.

While we agree with the “local community leader” that small businesses are the “backbone to our nation’s economy,” and are “important in America,” we’re also aware that business failure is a core component of our economy, as well, and is just as important in America. If businesses are not allowed to fail, an economy will never perform near its potential.

“Failure is the driver of future success simply because the former frees precious assets and people from ongoing misallocation by poor managers,” writes John Tamny, editor of RealClearMarkets. “The bigger the collapse of what’s poorly run, the better.”

Tamny is a tireless defender of the free market, and his argument might be considered by some to be expected of him. But even recently resigned Seattle Mayor Ed Murrary, a far-left Democrat, agrees on with his point. He assembled a Commercial Affordability Advisory Committee last year that determined, among its many findings, that “rent control has the potential to perpetuate business models that are unsustainable.”

The demise of Gene’s Fine Foods is not a classic example of a business failure. But that doesn’t argue for commercial rent control. If the owner(s) of Gene’s old space can get market value for their property, then that’s a benefit to the economy because that new business should be one that outperforms Gene’s.

Nothing against Gene’s. And as Tamny has said before, “there’s no good or compassionate way to minimize the agony that comes with economic hardship.” Yet we have to recognize the economic gains realized when assets fall “into the hands of those who can either afford them, or who possess a stated objective to use them more wisely.”

The San Jose “local community leader” should find another issue to chase. For example, lowering onerous regulations so that small businesses will continue to thrive. A PRI study ranks California 50th in terms of small business regulations. So even a small deregulatory advance would carry a significant positive impact.

While appealing for commercial rent control laws might be a feel-good project, rarely do feel-good projects ever achieve any lasting and widespread good. Their benefits tend to be limited to those who find “problems” where none exist.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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