The economics of shopping malls

September 1, 2009
Matt Yglesias buys my argument that the phenomenon of empty storefronts is a function of long commercial leases, "but only to an extent":

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Matt Yglesias buys my argument that the phenomenon of empty storefronts is a function of long commercial leases, “but only to an extent”:

If you look at suburban strip malls, the same long lease dynamic applies, but widespread strip mall vacancies are normally a sign of specific economic distress. The current recession has less to a lot of them, but in normal economic times you tend not to see this. Instead, even depressed areas reach a low-rent equilibrium. Possibly this is because strip mall property is less speculative in nature than urban property. But I think the specifically urban nature of the problem probably has something to do with the level of regulatory uncertainty surrounding new retail endeavors in most American cities combined with the reluctance of many neighborhoods to play host to the sort of “uncool” national retail chains that could better manage the risks involved.

Karl Smith then cuts through all the wild guesses and nails the real real reason why strip malls don’t have empty storefronts:

The difference is that a mall has a single owner who internalizes all of the externalites associated with vacant storefronts (and trash and crime, etc). An ugly mall is a less popular mall and thus commands lower rents overall. Typically its worth for the mall owner to take a hit on one store if he can make it up in higher rents for the others. This, of course breaks down when demand for the whole mall declines.

If one landlord owned all the shops on Broadway, she could happily rent a few of them out to banks at high rents, while renting others out to high-prestige, low-profit artisanal shops at much lower rents, all in the interest of maximizing total rental revenue. (I’m reminded that at the Time Warner Center, the landlord actually paid a set of bold-face names like Thomas Keller and Jean-Georges Vongerichten to open up restaurants there: they would never have opened up in the middle of a shopping mall otherwise.) Those cross-subsidies can’t work when there’s a multiplicity of landlords.

So yes, one solution to the problem of empty storefronts would be for a single landlord to take over a large shopping area. But I don’t think many people want that: you invariably end up with something which feels like an outdoor mall.


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