Matt Yglesias asks why so many storefronts below new condos remain vacant.
Two considerations. First, many businesses are not viable even at zero rent. Suppose I open a donut shop. Total sales need to exceed baking supplies, maintenance, utilities, and labor costs, and they need to exceed it by a sufficient amount to overcome the opportunity cost of not doing something less stressful than managing a donut shop.
Second, Urban Planners really, really, really like vertical mixed-use. It provides clear visual rebellion against the earlier generation of planners who really, really, really liked single uses, preferably as well-separated as possible. In many places planners will give you a “bonus” for providing retail spaces under residential. Maybe extra height, extra FAR. In other places planners require that you add mixed-use. Dallas did this, and as a result they have some very pretty streets that provide actual, built examples of the sketches you see in planning documents about the “transformation” that will happen to a certain street after bike lanes are added.
Sometimes it works.
The problem is, if you provide a bunch of financial incentives for the construction of retail space, you’re going to get a lot of retail space. And if you increase supply enough, you will eventually rents so low that they become attractive to unsavory businesses.
Say you’re looking to open a new Banana Republic store. Certainly, you’d like to pay next-to-nothing for a lease. But the places where you can find a next-to-nothing lease aren’t generally the places where it would be profitable to operate a Banana Republic. Conversely, given the obscene markups in porn it would be quite possible for a store in the Galleria to be profitable, and indeed there’s one next door. But in general there’s no benefit to locating a porn store in a major mall, you’d just as soon pick some place cheap like Sharpstown or Tidwell and 45.
If you’re the owner of a single story retail center, this is not a problem. You lease to whoever’ll pay. Five years ago in Montrose, there was a leather shop on Westheimer at Stanford and a porn store three blocks east at Mason. With rising rents, those tenants left, and have been replaced with yet another tattoo parlor and a booshy wine bar.
In theory, the glut of commercial space in San Diego could follow the same trajectory. Except SD’s glut of commercial space isn’t in stripmalls, it’s in residential blocks. Any commercial use poses a nonzero externality to people who live on top of it. And if the Slate comments section is to be believed, the HOAs for the condo buildings largely control those spaces.
What you get is a curve that looks like this.
As the “market price” for the rental space declines, so too does the opportunity cost. A retail space which could go for a couple grand a month not leased is a couple grand a month out of your pocket; one that only goes for 500 is only 500 lost. Conversely, as demand for the space goes down, the externalities of potential tenants increase. The clothing store doesn’t impose many externalities, but bars do, and there’s only room for so many clothing stores in a given yuppie neighborhood. The intersection of the two curves is the point at which it’s “not worth it” to lease the space. For a condo board this would be the point at which a given commercial use causes sufficient distress to the residents to negate the rent it brings in.
How do you move these curves? Well, in this relatively simplistic model, you don’t. Rather, what you do is stop requiring developers to build vertical mixed-use. If I walk downstairs in my “single use” apartment block and round the corner to a “single use” commercial storefront, I have not gone any farther than if my apartment was on top of that storefront. But placing the uses on separate parcels simplifies building codes, insurance, ownership, and leasing.
Removing the financial incentives for ground-floor retail can raise “market rents” (the theoretical rent at which all the spaces could be filled) by causing less retail space to be built in the first place. And as market rents increase the quality of the tenants will naturally also increase so that the externality cost goes down. At some point supply will be reduced to the point that rents exceed externalities at which point all the space is leased.
In a city like Houston you have no financial incentive for mixed-use and in fact the relatively inflexible parking requirements tend to militate against mixed-use, and even then you have Post Midtown which is some very nicely developed VMU. But it is important to note that only a part of the Post Midtown street frontage is actually VMU; much if it is quite residential. And Post Midtown, in turn, is only a small portion of the total neighborhood housing stock. Camden has developed more units and is institutionally skeptical of vertical mixed-use. That can still yield some nice buildings, but it’s not the sort of “activated streetscape” that’s hot in urban planning right now.
So this is, at root, a failure of regulation. Except rather than planning and zoning regs that favor low-density suburban districts, it’s a reg that in theory favors walkable urban districts. And who knows, perhaps foot traffic in that part of San Diego will eventually rise to the point where those spaces become leasable to the type of tenants the residents want. However, in order for that to happen, more people will need to move to the neighborhood, and newer buildings will need to not include retail space. As long as more condos = more retail, the balance will never change, and that neighborhood will have a permanent glut of retail. Cities with this problem have no choice but to stop incentivizing it. Which is to say, they need to do it the way Houston does.