I have a leather jacket. I’ve had it for over a decade. We’ve been through many adventures together, and I’d be devastated if anything were to happen to it. Plus, both my wife and I think I look great in it.
Like all leather, it requires care and maintenance. I’ll sometimes smooth it out with the appropriate creams. That’s what you do with nice leather. The problem is that, occasionally, something will happen to it. One time, I put a sticker name tag on it—big mistake. Another time, someone scratched it. Those are things I can’t fix myself. When they happen, I need a professional.
Thankfully, I have a leather guy. His name is Tony. Whenever I need a repair, I can take the jacket to him. He’ll get everything fixed quickly at a high but reasonable price, given his skill. Thanks to him, my jacket always comes back looking like new and will continue to be well-maintained for decades, possibly for the rest of my life.
The problem is that Tony doesn’t live in the same city as me. He lives in Los Angeles.
And San Francisco, for all its purported love of leather, simply doesn’t have anyone quite like Tony. Believe me, I’ve looked. But apparently, the city just can’t support a really good leather guy.
The reason is economics. Someone like Tony can be the best in his market—even substantially so. But unlike inventing a new computer chip that can process something 10 times faster, it’s almost impossible to be more than twice as good as anyone else in an artisanal business. As a result, Tony can charge maybe twice what an average leather guy can, but not many times more. Yet he still needs to pay for supplies, commercial rent and labor and have enough money to feed himself and his family. That is a recipe for disaster in an economy with skyrocketing real estate prices. Because if Tony can charge only twice as much as the next guy, but his real estate costs triple, he’s out of business.
That’s what has happened in San Francisco. And it’s a direct result of policies we have chosen: not building more housing, not building more subways and regulating small businesses to death.
Why am I so interested in leather guys? They are an example of a business category that requires a small number of skilled craftspeople, typically an owner and maybe one or two helpers. These craftspeople form a local ecosystem that is essential for quality of life. They allow us to have nice things and support demand for high-end consumer goods by ensuring customers that their purchases can be maintained and improved.
Specialized niche businesses are essential to a thriving city. They include crafts businesses, entertainment venues such as comedy clubs, educational businesses like music lessons and specialty shops that serve specific interests, like Burning Man costume purveyors. They are part of what makes a community fun and unique. They also support ecosystems—people are more likely to buy a nice leather jacket or leather furniture from a local store if they know there will be a leather guy to repair it. Unsurprisingly, businesses like Tony’s are going under at alarming rates—nearly a third of San Francisco business owners said they intend to sell, close or move to a new location. I could never find a leather guy in San Francisco, so I still use his shop in Los Angeles when I visit; I suspect his business would not be viable here.
These businesses also drive the middle class. While it is great to be a highly paid professional or start a unicorn venture, for most people, family wealth is created by starting a small business. The federal government classifies more than 99% of U.S. businesses as small, with under 500 employees, and they account for 34% of all nonfinancial family assets. In San Francisco, 93% of businesses have 100 employees or fewer.
Many businesses can never charge prices high enough to create a windfall, so the only way to profit and build value is to have reasonable costs. Rent and local regulations are the costs that most determine whether a business is profitable.
But business costs aren’t the only factor: high residential rents for the young people who could become employees limit their choices. Tony has told me his shop may have to close in a few years because it’s been difficult finding an apprentice. Few young people can afford to risk becoming an apprentice at a salary the business can afford and still pay their rent. Without another generation to take over, communities lose. Intergenerational mobility suffers because apprentices often purchase businesses from the original owners, creating retirement funds for the owner and an opportunity to generate wealth for the next generation. If the costs are too high, the transaction never happens.
We often hear from NIMBYs that development pushes out local businesses and makes cities more homogenous. Yet what I see with Tony is the opposite. High rents caused by lack of development are making it so that small businesses like his can’t operate. Business regulations make it hard for a successor to even start on their own without spending six figures on a “permit expediter” for a year.
When businesses like these fail, they are replaced by the same large luxury stores and fast food chains everywhere. Your local barber will become a Supercuts. Your favorite taqueria will close, and you’ll go to yet another Chipotle instead. And for me, if and when Tony closes his doors, I’ll have to go to a place like Bloomingdale’s and pray they’ve hired a leather specialist.
Evan Zimmerman is the co-founder of Edge, a Y Combinator-backed startup that uses AI to help write patents. He also founded the investment firm Jovono.