Why Strip Malls Don’t Have Empty Storefronts
Strip mall, Vero Beach, Florida (cc photo by Sylvar)
Yesterday I wondered why, if the long length of commercial leases makes it hard for the market in urban retail storefronts to clear, you so rarely see vacant storefronts in strip malls. Now via Felix Salmon, I see a highly plausible explanation from Karl Smith:
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.
And of course a mall owner can better internalize positive externalities as well. In general, the whole strip mall is operated as a unit. By the same token, this is why you see whole malls go totally dead which rarely happens on urban retail corridors even in depressed areas. It becomes more of an all-or-nothing thing.
33 Responses to “Why Strip Malls Don’t Have Empty Storefronts”
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September 1st, 2009 at 10:50 am
Having traveled around the US a lot this summer, I can assure you that strip malls have plenty of empty storefronts. Plenty.
September 1st, 2009 at 10:51 am
As your commenters pointed out yesterday, places like the building in the picture yesterday need a huge amount of work to get them on par infrastructure-wise relative to a strip mall space. And, you also know what you’re getting in a mall space; you assume you’re getting a space well-suited to retail.
But since you don’t read your comments (and won’t read this), you didn’t see that.
September 1st, 2009 at 10:52 am
I also think there’s a wider variety of types of businesses that can go into a strip mall (laundromats, and other low margin service type undertakings) than might go into more urban settings.
September 1st, 2009 at 10:57 am
The time i understood this dynamic better (theres more to it than in the post, and for sure much more i understand ) made me rethink my attitude towards subsidies. The demand to subsidies stores always looked ridiculous to me. Doesnt sound that ridiculous anymore now. So that makes me question if many of those other regulation/subsidy regimes that look ridiculous just look so because i dont understand enough about the issue.
September 1st, 2009 at 10:57 am
With “the dynamic” i meant the general externality internalice dynamic with shopping malls. Shopping malls would be less sucesfull if non mall shopping areas would coordinate better.
September 1st, 2009 at 10:58 am
Arg, much more than i understand…. grrr. Edit button would be great.
September 1st, 2009 at 11:00 am
> The difference is that a mall has a single
> owner who internalizes all of the
> externalites associated with vacant storefronts (
Boom! There goes Assertion #1 of classical microeconomics/perfect competition.
Cranky
September 1st, 2009 at 11:09 am
“assertion #1″ assumes no externalities, I would bet. Of greater relevance, the externalities that the owner internalizes are (a) not externalities at all, since the owner must take them into consideration, and b) don’t include the actual externalities of vacant storefronts, which include effects on neighboring property values, quality of life in nearby areas, etc.
September 1st, 2009 at 11:11 am
I am not so sure about your premise. Purely anecdotal, but in South Jersey there are a LOT of strip malls with vacancies, many of which have been vacant for over a year.
September 1st, 2009 at 11:13 am
Just to reinforce that first comment:
I don’t know whether you don’t stray much beyond your particular bubble (and that’s not a snide comment; if you’re in a pleasant urban area with an easy commute of your work, why would you?), but there are many, many empty storefronts in strip malls. Most of my experiences have been in Nevada and California, and there are not just empty store fronts in strip malls but entire malls without renters.
And even before the recession, it wasn’t at all uncommon to see empty strip mall storefronts. I can’t recount how many times I’ve been in a rural area where the anchor store of a strip mall has gone out of business and half the mall is an empty, boarded up building.
In short: your post is based on a faulty premise.
September 1st, 2009 at 11:13 am
At least when the strip mall is initially being built, the owners need to get a certain occupancy rate (~75-80%) to transition from the higher interest rate construction loan to the more normal loan rates for buildings owned by successful businesses.
September 1st, 2009 at 11:18 am
I work in property, and I think there’s something that’s being missed.
A lot of property owners are VERY picky about who they’ll rent to. This is especially true of ones with a lot of experience. You’d be surprised at how many seemingly solid tenants are turned away because they don’t fit the mold of what a given owner is looking for. I work with one landlord in particular who makes seemingly irrational decisions when turning away seemingly well-qualified applicants, simply because said applicant doesn’t fit into the narrow universe of tenants they deem desirable. I think you’re likely to find this to be most valid in so-called high rent districts. The price of entry into such markets is so exorbitant, it’s usually the case that most of the owners in such areas are very well capitalized, and so are very seldom desperate for tenants. And what defines “desirable?” Well, in my experience the savvy landlord is always thinking long term — especially with respect to property values. Some landlord also find that sticking to a narrower universe of highly desirable business tenants saves them time and money over the long term, because certain types of tenancies tend to generate more problems than others (and so you need a larger staff, and you expend more effort on rent collections, or in court, or more money or legal fees, or you have to maintain a larger staff, etc.). The bottom line is some types of businesses have a better track record than others, so it might be entirely rational for a landlord to sit on an vacant storefront for eighteen months or two years or whatever, waiting for the ideal tenant.
September 1st, 2009 at 11:27 am
Not really contradicting anything Matt’s written, but it’s worth keeping in mind that, even before the current crisis, the housing market was proverbial for its imperviousness to Econ 101-type explanations.
Paul Krugman has a good bit in one of his earlier popular books (Peddling Prosperity maybe?) about the revelation he experienced driving on the freeway in metro Boston in the 1980s.
Then, as now, you could see lots and lots of ‘for sale’ signs, with many properties clearly having been on the market for long periods of time. It’s the sort of thing that just shouldn’t happen according to simple standard models, yet there we were / here we are. All the things that can make real markets work differently than, say, the cartoons playing in Megan’s McArdle’s head really come to the forefront.
So it’s best use “it’s all secretly rational” models with extreme caution on this stuff.
September 1st, 2009 at 11:29 am
No post about this topic would be complete without a reference to the retailer Steve and Barry’s, which ran its stores at a loss, but which got by for a long time by taking payments from landlords for renting hard-to-lease or distressed locations.
September 1st, 2009 at 11:35 am
No post about this topic would be complete without a reference to the retailer Steve and Barry’s, which ran its stores at a loss, but which got by for a long time by taking payments from landlords for renting hard-to-lease or distressed locations.
Steve and Barry’s occupied a space in a strip mall right next to the gym where I go. The space has been vacant since S&B’s failed at the beginning of the year, but part of it is now being occupied by a “Halloween Store” (which will itself be gone in two months, of course). In any event, the quality of the shelving and other fixtures in S&B’s were much nicer than what you’d expect in a cheap store, no doubt thanks to these wrongly-booked-as-income landlord subsidies.
September 1st, 2009 at 11:37 am
I work with one landlord in particular who makes seemingly irrational decisions when turning away seemingly well-qualified applicants, simply because said applicant doesn’t fit into the narrow universe of tenants they deem desirable.
Out of curiosity, what are some types of tenants that the landlord does not consider acceptable?
September 1st, 2009 at 11:48 am
1. Yglesias has a Hayekian moment? Privatize the streets of Detroit and create West Grosse Pointe. Otherwise, you all must simply hate poor black people.
2. The reason why so many strip malls are empty (and will probably get even more empty) is because of the extreme monetary dilution imposed by the Federal Reserve which has totally distorted the investment/capital structure of the economy, especially in the capital goods industries. Diluting the money supply wreaks havoc with long term investment of any sort. The Yglesias/BHO/establish regime of preventing the liquidation of these malinvestments will only make things worse thereby impeding and delaying any hope of a return to prosperity.
September 1st, 2009 at 11:56 am
[...] Yglesias: And of course a mall owner can better internalize positive externalities as well. In general, the whole strip mall is operated as a unit. By the same token, this is why you see whole malls go totally dead which rarely happens on urban retail corridors even in depressed areas. It becomes more of an all-or-nothing thing. Possibly related posts: (automatically generated)Time for a Weekly Blog Check![News] CrebeauMainstore is closed! [...]
September 1st, 2009 at 11:59 am
My son got some Stephon Marbury clothing and shoes from Steve and Barry’s a few years ago that lasted surprisingly well. The shoes were pretty sharp.
September 1st, 2009 at 12:51 pm
I’m with the other commenters, I see lots of empty storefronts at strip malls.
September 1st, 2009 at 12:52 pm
Matthew has clearly not been to Texas.
Not only do we have vacancies all over in the strip malls…
We also have completely vacant strip malls everywhere. Some of them are old ones that are decaying. But some are brand new strip malls built on spec that have yet to find a single occupoant.
September 1st, 2009 at 1:02 pm
And a strip mall, as opposed to the more permanent buildings Matt highlighted yesterday, or even an enclosed mall, are a lot harder to turn into something else if/when the mall fails, and they’re often built only to survive ~20 years or so.
September 1st, 2009 at 1:07 pm
Matt’s post has a Tory flavour. Concentrating land and property ownership into few hands will internalise many externalities for the general benefit. We may all shelter in the shade of a few might oaks!
September 1st, 2009 at 1:17 pm
If this is true, then there is a simple solution: internalize the externality. If local governments tax empty storefronts, owners won’t hold out as long for high rents, and the storefronts will materialize.
September 1st, 2009 at 3:03 pm
No, Bobbis, we don’t want to subscribe to your Austrotologist newsletter.
A few strip malls in town (with a main grocery store property) have been turned into gyms recently. Not quite the expected transformation.
I’d be interested in the other side of the coin: the kind of decisions that create symbiotic strip malls, where you get the ethnic grocery and the ethnic restaurants and suchlike, with the downside that Tyler Cowen will end up a regular.
September 1st, 2009 at 3:08 pm
As many posters have pointed out, Matt lives in some fantasy land where the strip malls are full rented. He needs to watch more videos from Jim the Realtor.
September 1st, 2009 at 3:24 pm
Matt, you really should read your commenters sometimes. those who responded yesterday made clear that malls are in TERRIBLE trouble. You don’t have to believe us–consult Reis or any retail data base. they are DYING vacancies already.
the mention of Steve and Barry’s, above, is the perfect refutatin of your externalities whizbang, since that idea was the entire economic basis of the S and B leases across the country. All those stores are now empty and NObody can get them re-rented. meanwhile, the other retailers who were the externalities cushion (they could pay more rent ’cause S and B were bringing in the shoppers) are now screwed ’cause there ain’t no shoppers. so THEY can’t pay the old rents either……..and so on.
Malls, including strip malls of course, are totally f’d.
retail, a huge employer of young people, is thrashing about on the ground gasping out ‘help’ but no one is hearing.
there’s a use of stimulus funds that would be right on: take the recent cash-for-appliances idea and make it ten times as large, add furniture and other big employment industries, and like that.
fat chance.
September 1st, 2009 at 4:31 pm
Q: Why is it hard to find tenants for a retail form factor that hasn’t been built since the Coolidge administration?
A: I don’t know Matt, but I’m sure it has something to do with a half remembered Econ class lecture at Harvard.
September 1st, 2009 at 7:11 pm
I was reading articles about stores closing in strip malls three years ago. I’ve seen stores closed in mall-malls too.
September 1st, 2009 at 7:11 pm
Two years ago. 2008 was a long year.
September 1st, 2009 at 7:24 pm
Re: you so rarely see vacant storefronts in strip malls.
Matt where do you shop that you don’t see vacant stores in strip malls? There are some strip malls that are 100% vacant, and in fact that trend started well before the recession.
September 1st, 2009 at 10:17 pm
There are papers on this, it fits the economic way of thinking well. For instance Eric Gould:
“Internalizing Externalities: The Pricing of Space in Shopping Malls” with B. Peter Pashigian, Journal of Law and Economics, April 1998.
“Contracts, Externalities, and Incentives in Shopping Malls”
with B. Peter Pashigian and Canice Prendergast, Review of Economics and Statistics, August 2005.
September 2nd, 2009 at 8:06 am
Just adding another assent to the “WTF are you talking about?! There are tons of vacancies in strip malls!” point.