Originally posted at the Socractic Hive.
Most of us are familiar with the term “rent” as that annoying expense we have to pay on a monthly basis. Studies show that rent typically takes up as much as 1/3 of a person’s income, if not more. It’s no different for commercial businesses that don’t own their own land. Just think of all those stores on the high street that have either moved or shut down?
There are several factors contributing to this, and a significant one is an increase in rents that businesses cannot afford. But how can it be in the interest of landlords to raise rents and lose tenants, especially when shops remain empty? That is another story that has to do with speculation and land banking.
This article is about explaining how rents are generated commercially and why, during this time of pandemic-induced economic slowdown, collection of commercial rents should be suspended.
It was David Ricardo (1772-1823) who first formalised the theory of rent when trying to show how land is a passive factor of value production. In other words, land generates its own kind of value distinct and non-attributable to labour or capital.
What Ricardo observed was how land use always takes into account certain advantages for production. He referred to different fertility grades of land, and how more fertile lands will produce more crops given the same expenditure of labour and capital across land of lesser fertility. The difference of output between the highest and lower grades of land is thus a surplus value.
This surplus, or difference, is what Ricardo and some of his contemporaries termed “ground rent”. J. S. Mill (1806-1873) famously shows how “Ricardo’s doctrine” applies to all land use—commercial, residential, and aesthetic.
One important feature to note with respect to our current situation is that such rent is based on future expectations of production. In other words, when deciding to employ labour and capital, the user of land will estimate how much of a return s/he will get over a period of time. The general term for this estimate is “value”, but as suggested above, this value breaks down into value produced by labour (or wages), by capital (or interest), and by land (or rent).
When a landlord is figured into this equation, s/he will estimate what fee (also called “rent”) can be charged based on the future earnings of the land. And the land user, or tenant, will only pay this fee if s/he thinks that production levels can indeed meet this fee and exceed it (in order to pay wages and operating costs).
To sum up, Ricardo’s theory of rent is differential, because it takes note of different qualities of land when providing advantage; and it is prospective, because value is based on future returns.
With commercial land use, differential land value is often captured by location. Business plots closer to the hub of social activity will garner more value because there is an expected increase in footfall. There may be aesthetic or esteem factors, as well. The prospective element is closely related to this. With more footfall, there is the expectation that demand for things sold or services provided will be steady, if not increase over time.
However, once the economy slows down, note that the prospective element declines. In the short run, businesses can make up the shortfall some other way (e.g. redundancies, lower wages, decrease size of products, etc.) until things pick up.
In the long run, if the drop is continuous, it cannot be compensated. Why? Because there is simply no future return on work. Businesses can’t even play catch up.
Now imagine a situation in which there is a pandemic, and most businesses have to shutter their doors for an indefinite time. Because this is happening now, rent is certainly coming to the fore as an important topic with there being no current and future production for a vast majority of businesses.
Yet, rents are still being collected. Moreover, if public assistance is provided in terms of a grant or loan, at least 1/3 of that financial assistance is taken by the landlord . . . when no production is taking place! Or consider the recent US stimulus package where commercial property owners get a tax rebate for a drop in land value. This approach seems unfair.
And so, it might be a prudent proposal to suspend the collection of commercial rents until better economic conditions emerge.
But does this mean that commercial landlords are the losers? In one sense, pre-pandemic they were already losing due to a steady drop in retail and speculative value. But to really get a reasonable perspective on this matter, it is important to bear in mind who loses if rents are not suspended? It seems clear: A significant portion of the working population, town and city centres, and tax payers versus a minority sector of business that thrives on the speculation of future production.
In the grand scheme, landlording is reliant on production and retail. It cannot collect rents without their thriving. In that sense, the question of landlords losing is moot. Suspension of rents seems as necessary as a lockdown to prevent further damage and disadvantage from spreading.
April 3, 2020