Wednesday, January 9, 2013

Why Are There Vacant Storefronts?

Matt Yglesias asks some questions about the boarded up commerical property in San Diego:

Downtown San Diego, for example, features a lot of unemployed storefronts these days. It's simple enough to say that this has something to do with the real estate boom of some years ago and its subsequent unwinding, but you ought to be able to feel the tug of the classical intuition that this can't really happen. There should be some non-zero price at which the storefronts lease. And yet there they stand vacant. And the idea that it's microeconomics all the way down and unemployed storefronts must be caused by bad government regulations standing in the way of the market is even less plausible with regards to these storefronts than with regards to people. After all, this is relatively new construction that we're talking about. Burdensome regulation should stop the buildings from being built in the first place, not induce people to build unleasable structures.

There are a few things that could explain this.  First, zoing regulations might limit potential uses.  Second, a store-owner might not want to rent to a marginal tenant (one whose business has a high chance of failure) because the cost of eviction is high.  Third, business owners in a week economy might not be able to turn a profit even if the rent is extremely cheap.  That is, rent is only one of many business expenses.  If profits don't cover the cost of permits, utilities, taxes, furniture, and employee salaries, then it doesn't matter how good a deal you get on rent.  

Steve Clowney

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All good questions. My (perhaps baseless) hunch would be that the last factor you propose is the weightiest: neighborhood economics make it impossible for a storeowner to turn a profit.

Some cities have pushed past the economics and found property owners willing to let artists and pop-up stores use the spaces for free until paying tenants arrive.

(Here's one of many examples, this one from Seattle)

Keeping the vacant spaces vibrant, even for free, seems like a great solution from the property owner's perspective, especially if the city or sponsoring art group is willing to foot the bill for insurance.

Posted by: Celeste Pagano | Jan 9, 2013 8:23:59 AM

Also, it costs the landlord money to rent the space, even if it is delivered in "as-is" condition with no additional investment to customize the space to tenant needs. At a bare minimum, landlords bear the costs of broker commissions and lease preparation fees. And there is inherent risk in leasing commercial space beyond the risk that the tenant won't pay rent -- the tenant could cause damage to the space, or run up liens or utility bills that the landlord will ultimately be required to pay. As a result of these costs and risks, it isn't surprising that few commercial landlords would be willing to allow a tenant to occupy the space for a rent significantly below market.

Posted by: Tanya Marsh | Jan 9, 2013 6:45:21 PM

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