New businesses are popping up in “donuts” of downtowns
New businesses are popping up in “donuts” of downtowns
The number of people applying to start new businesses spiked in the months after the onset of the pandemic. It’s settled down a bit since then, but the rate of new business formation is still a lot higher than it was before COVID-19 — and that’s despite the strong job market, and all of the inflation, interest rate hikes, and recession risks that this economy continues to face.
A lot of this boost to business formation has to do with where new businesses are popping up. Instead of downtowns and central business districts, many are opening in neighborhoods that surround those areas.
One of those neighborhoods is an office park about 20 miles north of downtown San Diego, near Interstate 5.
“From here, you can see a law firm, an annex of a hospital, some medical practices,” said Nathan Rogge, president and CEO of First Pacific Bank, which has a branch in the same complex.
Rogge pointed out that it’s not just offices in the area. Nearby, there’s a strip mall, with a grocery store, a gym, a hardware store, and a taco shop.
“And then outside of that, then, there are literally thousands of homes,” Rogge said.
In other words, this is the suburbs. Rogge’s bank has been in this location for about a year, and he said compared to downtown, working in this neighborhood has a lot of advantages. For one, it’s close to home. There’s also plenty of parking. And the building itself is fairly new.
“All the finishes are updated, the technology’s here, you don’t have any issues of obstructions for WiFi, or that you have a lack of access to technology,” Rogge said. “People enjoy, or feel better about, coming to a building that they’re comfortable with.”
Rogge said it’s a lot harder to find a place like this downtown — at least at the same price.
First Pacific Bank lends to a lot of small and medium-sized businesses that have set up shop in places just like this. And affordability, Rogge said, is a big draw.
“As you get further away from the downtown area, there are actually buildings that you can not only lease for a reasonable price, but actually acquire, and ultimately build equity,” Rogge said.
Last year, the downtown office vacancy rate rose above the vacancy rate in the suburbs for the first time since 1998, according to the property services company CBRE.
Nicholas Bloom, a professor at Stanford, calls this the “donut effect.”
“This is the classic American donut,” Bloom said. “People have left the center, and moved out to the ring.” He said it’s not just medium-sized businesses like First Pacific Bank. It’s also tiny businesses—side-hustles, owned by people who work from home.
“Imagine I wanted to, I don’t know, sell World War II memorabilia,” Bloom said. “I could start the thing up when I’m working from home, do a few sales on the side. If it really takes off, eventually, maybe I leave my job.”
Starting a business that way, Bloom said, is about as affordable as it gets.
“So rather than needing to go to the bank, and go to friends and family, and borrow, let’s say, $20,000, you can start it for free in your home,” Bloom said.
Businesses are starting up in the suburbs for another reason: people have been moving there.
“Businesses and entrepreneurs are going to go to where the opportunity is,” said Karen Kerrigan, CEO of the Small Business and Entrepreneurship Council.
Populations in the suburbs are growing faster than in urban cores, according to an analysis of Census data by the Brookings Institution.
“That’s a lot of customers and consumers to cater to with any type of business,” Kerrigan said.
We haven’t seen big, commercial real estate developers start responding to this population shift yet, said Richard Barkham, CBRE’s Global Chief Economist.
“At the moment, we’ve got elevated interest rates, and we’ve got an economy that’s slowing, so we may well see some new real estate investment in the suburbs, but it isn’t happening immediately,” Barkham said.
But some smaller businesses aren’t waiting. One of those is Dae’s Delicious Dogs, a food truck in Columbia, South Carolina.
Cierra Jenkins, who owns the food truck, said she had the idea to open a hot dog food truck early in the pandemic. Last year, she finally did it.
Jenkins said she had no interest in opening up downtown, in large part because that would have meant a lot of red tape.
“Just being close up in the city, you’re always just on your toes, because you never know how they’re going to feel about the next move you make,” Jenkins said.
A food truck, she said, gives her more freedom to go to her customers, whether they’re at a street festival, or just working from home.
“We are able to go into neighborhoods and set up, so people don’t have to leave their home and travel,” Jenkins said. “It’s just like us bringing it to their front doors.”
Jenkins said she’d love to open up a brick and mortar shop someday. But it won’t be in a busy urban center.
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