The primary dynamic is your #4: it costs the landlord money to sign a retail lease. Also, retail spaces are high-visibility; people notice the 4% retail vacancy rate much more than they notice the 19% office vacancy rate.
The amount of residential space per American is 13X the amount of retail space per American. So a new 5-over-1 with 50% ground floor retail (i.e., 10-to-1 ratio of residential to retail space) still does not generate enough incremental retail demand to fill its retail spaces. Planners who require that much additional retail aren't being realistic about retail demand.
My city, Ottawa, has thus problem both in the grungy, old mixed-use buildings on Bank Street and in the brand-new, luxurious districts in the west end. It's obvious why the grungy buildings' stores aren't renting: the plate glass is cracked and DIY repaired with duct tape and the store is cooled by a portable AC unit with a long exhaust hose jury-rigged to a hole crudely carved into the exterior wall. As the author points out, the only likely tenants for a spot like this are sketchy cellphone repair stores.
The neighborhood surrounding these grungy stores further explains the low rental interest. The streets are cluttered with trash, long-ago discarded furniture and rusting bike frames stripped of their parts. No residents or businesses have the "pride of ownership" to clean up the area and the city government is more interested in doing PowerPoint presentations and five year plans about urban renewal than on actually making mundane, street-level improvements.
The luxurious new buildings in the west end with commercial floors that sit vacant are puzzling. There are new residential buildings with hundreds of potential customers, the ground floor's store's exterior is well-built (new plate glass, high-end doors, etc.). Yet the stores sit empty for years. In addition to all the points raised by the author ("pretend to extend"; space is too big; space is cold shell with no walls or paint and requires too much renovation work to use as store; business space is too costly to subdivide), I wonder if there are also leasing restrictions on the type of business, from the perspective of prestige and cachet.
Let's imagine that Pat is a wealthy dentist who has just bought the $2.5 M penthouse at a brand-new condo with commercial ground-floor space to rent. Pat would be fine with there being a Starbucks, a Versace boutique and a wealth management firm on the ground floor. Pat would *not* be pleased if there was a used bookstore specializing in anarchist and counter-culture books, a thrift store, and a Dollar General, as it would bring the "wrong type of people" to the building (the hoi polloi from the humbler apartments down the street). So perhaps there's a "Prestige businesses only" covenant on the commercial space.
Thanks for the comment! I'm not familiar with the example of a condo building retaining ownership of a ground floor commercial space. In similar examples in the US, the ground floor commercial is usually separately condo'd and sold, or perhaps retained by the developer (because no one will buy it).
In terms of I suppose "snob" leasing, well unlike residential, you're allowed to be as discriminating as you like about the businesses moving into your space (and that seems pretty much just fine, given how wide the range activities you might find in a storefront; and the range of associated code compliance, meaning that spaces aren't really interchangeable--I suppose residential is more of a single use and "commercial" is everything else! Churches, retail, office, bar (seedy or nice), etc.)
Would love to read a piece from you telling a more detailed version of your transition from local government planner (zoning planner) to developer. How did your experience and skill set translate, how did you find the right opportunity, what was this like from a financial/family/risk/etc perspective. What do you wish you had known when you made that transition? Thanks!
From my side, what I keep running into is this: everyone wants “activated ground floor retail,” but almost nobody’s aligning capital, architecture, and leasing strategy to actually make it work.
We overdesign spaces, overprice them, outsource marketing, and then wonder why nothing leases. But behind every empty storefront is a rational actor navigating cost, risk, and optionality. The problem isn't stupidity. It's misaligned incentives across the stack.
This is a really valuable set of insights. Empty store fronts are blighting; to those who pass by, it invokes a feeling of instability and excess gone rotten. Zones with lots of them can seem dystopian, even where the buildings are new.
Commercial spaces in newer buildings usually require rents that relatively few tenants can afford, a problem worsened because, as you note, the spaces are usually too large and unfinished. As a result, even well-financed tenants wind up in trouble because they have to borrow more to finance expensive build-outs in the hopes that a splashy space will attract enough patrons to justify the expense. This leads to more empty storefronts with declining traffic to the area. And, of course, the cute little shop and innovative new restaurant cannot even think about such spaces, even though they are the type of new business that people often want.
In NYC, many new buildings are condos, which usually are eager for commercial tenants to offset building expenses. But the spaces are still too expensive and ill-suited for all but the biggest, least interesting commercial tenants. Older buildings with smaller, less expensive spaces have more luck. Stretches of 2nd and 3rd Avenues have ground level (and second story) flat glass curtain walls for block after block with only national chains, banks and lots of blacked out windows hiding spaces no one can afford. This supports your conclusion that developers really don’t have much incentive to change.
Some cities are starting to impose taxes on undeveloped commercial space but I don’t know if this is producing any results.
I'm not super familiar with the NYC situation and I would assume it's at least somewhat unique in the US. You'd really want to get into the weeds to understand the incentives that are keeping those spaces dark.
Taking vacant commercial space would start to change the incentives, but I think wouldn't necessarily have the outcome we'd desire. For one, people would convert those commercial spaces to residential right quick! I'm working on a future piece on "what we might do about this problem."
NYC is somewhat unique but boxy glass buildings are going up everywhere from Charlotte to Oklahoma City and many of the same problems will arise. Cities want to encourage new construction but developments tend to create block after block of lifeless curtain walls. Developers seeking to garner approvals or zoning variances create plans and models with Corbusier-style plazas without ensuring viable retail spaces resulting in empty eyesores in many places, often commercial deserts that repel rather than welcome. One advantage in NYC is that parking garages are minimal and underground.
Seth, this is an excellent piece—thank you for sharing your insights. It's incredibly helpful to have your perspective on this issue, which matters so much. When vacant storefronts become commonplace, it really does pose a serious challenge to the health and vitality of our communities.
Would you be open to us republishing this on the Strong Towns site and directing readers back to your Substack? I think our audience would find it extremely valuable.
As a corresponding resource, I’d recommend Andrew Price’s piece on fine-grained urbanism: https://andrewalexanderprice.com/blog20210412.php. It aligns with your observations—particularly around why we often seek more storefronts even though, as you note, it creates added complexity and more leases to manage.
Great summary! An additional note on the "Architecture that Misses the Market" point: another layer to right-sizing retail space, particularly restaurants, is the building code, which calculates occupant load based on square footage and use. Certain occupant load thresholds trigger additional requirements such as more bathrooms, sprinklers, panic hardware, etc. etc. all of which incur additional expense that can add up to kill a project.
But that occupancy threshold is generally only triggered in the case of nightclubs or entertainment venues. Restaurants, retailers, boutique or dive bars, public-facing offices, and the like never trigger occupancy thresholds. Their business (or alcohol) licences specify occupancy to levels below the local building code.
There are a couple of different thresholds. In our local code, which is based off IBC, they are 50 and 300. With the first threshold, it's often a matter of how you lay out the floor plan and what type of seating you're using. It's also only ever restaurants that I've run into this issue with, offices and retail are classified differently and have different occupant load factors (EDIT: typo).
One novel way we’re working on to fill commercial is partnering with a business accelerator/venture capital entity targeting our tenants. This created an environment with a moderate to high need for some membership based coworking, serval small offices and enough mix of residential tenants and outside neighbor traffic on a daily basis to contemplate small box entities on top of that. Of course, our plan was to focus on addressing residents needs and I’m generally not interested in commercial carrying our projects pro forma.
Interesting question, I think (following George's political economy, though I'm not a 100% LTV disciple) that a building represents a combination of land rent (through excludability, and relative to the alternative--unenclosed land, emigration, etc.) and the use value of the improvements (which are in some sense replicable, even if the land is unique).
That said, one of the places of departure for me from pure Georgism is that it's obvious on the ground that the land value is NOT purely socially determined. We put a lot of work into creating a valuable location (both through on-site investment/work and off-site work (planting trees, etc.) and advocacy).
So I suppose it depends on whether you think land rents are a bad thing or a natural and useful consequence of scarce land. I think I tend toward the later perspective, and so I'm like yeah, and that's kinda ok?
Confusingly, the nature of financialization vs. cash flow creates different incentives than the classic agricultural landlord economic rents, where I don't think there's any reason you would rationally hold land out of leasing. And you're not witholding the land at all, you're just seeing the ground floor as a sunk cost for whatever is going on upstairs.
If understand microeconomics correctly, economic rents assumes that land will be fairly priced in the long run, implying that superior location, improvements, and access to infrastructure are already priced into real estate. Then again, I have never understood the specifics of land economics. @Andrew Burleson would able to correct me about any of this.
My favorite anecdote is the original segment of the Red Line in Houston. The line on the map was approved in 2000, it broke ground in 2001, and it opened in 2004. While there was substantial development in Midtown, most of it was blocks off the light rail corridor and the development remains weak over 20 years after opening. There are still rail stations facing surface parking, empty fields, and vacant storefronts.
If the land was fairly priced, there should be more development.
Oh, yeah, that's a slightly different problem I think: Why do people sit on underutilized land. I don't know that I have a complete theory, except don't underestimate the combination of 1) people want to get the max value for the land, 2) they don't have the resources to do the work themselves, 3) their carrying costs for doing nothing are low.
Basically, we see land trade ~efficiently only when the seller has a life event: death, divorce, retirement, etc. and needs to make a market, instead of waiting for a "make me sell it" price.
The primary dynamic is your #4: it costs the landlord money to sign a retail lease. Also, retail spaces are high-visibility; people notice the 4% retail vacancy rate much more than they notice the 19% office vacancy rate.
The amount of residential space per American is 13X the amount of retail space per American. So a new 5-over-1 with 50% ground floor retail (i.e., 10-to-1 ratio of residential to retail space) still does not generate enough incremental retail demand to fill its retail spaces. Planners who require that much additional retail aren't being realistic about retail demand.
My city, Ottawa, has thus problem both in the grungy, old mixed-use buildings on Bank Street and in the brand-new, luxurious districts in the west end. It's obvious why the grungy buildings' stores aren't renting: the plate glass is cracked and DIY repaired with duct tape and the store is cooled by a portable AC unit with a long exhaust hose jury-rigged to a hole crudely carved into the exterior wall. As the author points out, the only likely tenants for a spot like this are sketchy cellphone repair stores.
The neighborhood surrounding these grungy stores further explains the low rental interest. The streets are cluttered with trash, long-ago discarded furniture and rusting bike frames stripped of their parts. No residents or businesses have the "pride of ownership" to clean up the area and the city government is more interested in doing PowerPoint presentations and five year plans about urban renewal than on actually making mundane, street-level improvements.
The luxurious new buildings in the west end with commercial floors that sit vacant are puzzling. There are new residential buildings with hundreds of potential customers, the ground floor's store's exterior is well-built (new plate glass, high-end doors, etc.). Yet the stores sit empty for years. In addition to all the points raised by the author ("pretend to extend"; space is too big; space is cold shell with no walls or paint and requires too much renovation work to use as store; business space is too costly to subdivide), I wonder if there are also leasing restrictions on the type of business, from the perspective of prestige and cachet.
Let's imagine that Pat is a wealthy dentist who has just bought the $2.5 M penthouse at a brand-new condo with commercial ground-floor space to rent. Pat would be fine with there being a Starbucks, a Versace boutique and a wealth management firm on the ground floor. Pat would *not* be pleased if there was a used bookstore specializing in anarchist and counter-culture books, a thrift store, and a Dollar General, as it would bring the "wrong type of people" to the building (the hoi polloi from the humbler apartments down the street). So perhaps there's a "Prestige businesses only" covenant on the commercial space.
Thanks for the comment! I'm not familiar with the example of a condo building retaining ownership of a ground floor commercial space. In similar examples in the US, the ground floor commercial is usually separately condo'd and sold, or perhaps retained by the developer (because no one will buy it).
In terms of I suppose "snob" leasing, well unlike residential, you're allowed to be as discriminating as you like about the businesses moving into your space (and that seems pretty much just fine, given how wide the range activities you might find in a storefront; and the range of associated code compliance, meaning that spaces aren't really interchangeable--I suppose residential is more of a single use and "commercial" is everything else! Churches, retail, office, bar (seedy or nice), etc.)
Would love to read a piece from you telling a more detailed version of your transition from local government planner (zoning planner) to developer. How did your experience and skill set translate, how did you find the right opportunity, what was this like from a financial/family/risk/etc perspective. What do you wish you had known when you made that transition? Thanks!
Thanks for the comment. I will add that to my stack of ideas. Hopefully I can share some useful insights for folks!
From my side, what I keep running into is this: everyone wants “activated ground floor retail,” but almost nobody’s aligning capital, architecture, and leasing strategy to actually make it work.
We overdesign spaces, overprice them, outsource marketing, and then wonder why nothing leases. But behind every empty storefront is a rational actor navigating cost, risk, and optionality. The problem isn't stupidity. It's misaligned incentives across the stack.
Indeed! Stay tuned for my next piece on what we might do. It addresses the whole stack.
This is a really valuable set of insights. Empty store fronts are blighting; to those who pass by, it invokes a feeling of instability and excess gone rotten. Zones with lots of them can seem dystopian, even where the buildings are new.
Commercial spaces in newer buildings usually require rents that relatively few tenants can afford, a problem worsened because, as you note, the spaces are usually too large and unfinished. As a result, even well-financed tenants wind up in trouble because they have to borrow more to finance expensive build-outs in the hopes that a splashy space will attract enough patrons to justify the expense. This leads to more empty storefronts with declining traffic to the area. And, of course, the cute little shop and innovative new restaurant cannot even think about such spaces, even though they are the type of new business that people often want.
In NYC, many new buildings are condos, which usually are eager for commercial tenants to offset building expenses. But the spaces are still too expensive and ill-suited for all but the biggest, least interesting commercial tenants. Older buildings with smaller, less expensive spaces have more luck. Stretches of 2nd and 3rd Avenues have ground level (and second story) flat glass curtain walls for block after block with only national chains, banks and lots of blacked out windows hiding spaces no one can afford. This supports your conclusion that developers really don’t have much incentive to change.
Some cities are starting to impose taxes on undeveloped commercial space but I don’t know if this is producing any results.
I'm not super familiar with the NYC situation and I would assume it's at least somewhat unique in the US. You'd really want to get into the weeds to understand the incentives that are keeping those spaces dark.
Taking vacant commercial space would start to change the incentives, but I think wouldn't necessarily have the outcome we'd desire. For one, people would convert those commercial spaces to residential right quick! I'm working on a future piece on "what we might do about this problem."
NYC is somewhat unique but boxy glass buildings are going up everywhere from Charlotte to Oklahoma City and many of the same problems will arise. Cities want to encourage new construction but developments tend to create block after block of lifeless curtain walls. Developers seeking to garner approvals or zoning variances create plans and models with Corbusier-style plazas without ensuring viable retail spaces resulting in empty eyesores in many places, often commercial deserts that repel rather than welcome. One advantage in NYC is that parking garages are minimal and underground.
Seth, this is an excellent piece—thank you for sharing your insights. It's incredibly helpful to have your perspective on this issue, which matters so much. When vacant storefronts become commonplace, it really does pose a serious challenge to the health and vitality of our communities.
Would you be open to us republishing this on the Strong Towns site and directing readers back to your Substack? I think our audience would find it extremely valuable.
As a corresponding resource, I’d recommend Andrew Price’s piece on fine-grained urbanism: https://andrewalexanderprice.com/blog20210412.php. It aligns with your observations—particularly around why we often seek more storefronts even though, as you note, it creates added complexity and more leases to manage.
Hi Norm - of course, please cross post!
I love Andrew Price's work on this.
Great summary! An additional note on the "Architecture that Misses the Market" point: another layer to right-sizing retail space, particularly restaurants, is the building code, which calculates occupant load based on square footage and use. Certain occupant load thresholds trigger additional requirements such as more bathrooms, sprinklers, panic hardware, etc. etc. all of which incur additional expense that can add up to kill a project.
But that occupancy threshold is generally only triggered in the case of nightclubs or entertainment venues. Restaurants, retailers, boutique or dive bars, public-facing offices, and the like never trigger occupancy thresholds. Their business (or alcohol) licences specify occupancy to levels below the local building code.
There are a couple of different thresholds. In our local code, which is based off IBC, they are 50 and 300. With the first threshold, it's often a matter of how you lay out the floor plan and what type of seating you're using. It's also only ever restaurants that I've run into this issue with, offices and retail are classified differently and have different occupant load factors (EDIT: typo).
One novel way we’re working on to fill commercial is partnering with a business accelerator/venture capital entity targeting our tenants. This created an environment with a moderate to high need for some membership based coworking, serval small offices and enough mix of residential tenants and outside neighbor traffic on a daily basis to contemplate small box entities on top of that. Of course, our plan was to focus on addressing residents needs and I’m generally not interested in commercial carrying our projects pro forma.
To what degree are land owners collecting economic rents?
Interesting question, I think (following George's political economy, though I'm not a 100% LTV disciple) that a building represents a combination of land rent (through excludability, and relative to the alternative--unenclosed land, emigration, etc.) and the use value of the improvements (which are in some sense replicable, even if the land is unique).
That said, one of the places of departure for me from pure Georgism is that it's obvious on the ground that the land value is NOT purely socially determined. We put a lot of work into creating a valuable location (both through on-site investment/work and off-site work (planting trees, etc.) and advocacy).
So I suppose it depends on whether you think land rents are a bad thing or a natural and useful consequence of scarce land. I think I tend toward the later perspective, and so I'm like yeah, and that's kinda ok?
Confusingly, the nature of financialization vs. cash flow creates different incentives than the classic agricultural landlord economic rents, where I don't think there's any reason you would rationally hold land out of leasing. And you're not witholding the land at all, you're just seeing the ground floor as a sunk cost for whatever is going on upstairs.
I hope that's not just a confused muddle!
If understand microeconomics correctly, economic rents assumes that land will be fairly priced in the long run, implying that superior location, improvements, and access to infrastructure are already priced into real estate. Then again, I have never understood the specifics of land economics. @Andrew Burleson would able to correct me about any of this.
My favorite anecdote is the original segment of the Red Line in Houston. The line on the map was approved in 2000, it broke ground in 2001, and it opened in 2004. While there was substantial development in Midtown, most of it was blocks off the light rail corridor and the development remains weak over 20 years after opening. There are still rail stations facing surface parking, empty fields, and vacant storefronts.
If the land was fairly priced, there should be more development.
Oh, yeah, that's a slightly different problem I think: Why do people sit on underutilized land. I don't know that I have a complete theory, except don't underestimate the combination of 1) people want to get the max value for the land, 2) they don't have the resources to do the work themselves, 3) their carrying costs for doing nothing are low.
Basically, we see land trade ~efficiently only when the seller has a life event: death, divorce, retirement, etc. and needs to make a market, instead of waiting for a "make me sell it" price.