Why Strip Malls Don’t Have Empty Storefronts

Strip mall, Vero Beach, Florida (cc photo by Sylvar)

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.