Matt Yglesias asks an interesting question: why don't markets clear in urban storefronts? That is, why do properties sit empty when presumably any rent is better than no rent?
He suggests there may be some regulatory problem, and I suspect that indeed, things like registration and inspections may mean that it isn't cost-effective below some minimal rent. I also suspect that some landlords, like some homeowners, just can't give up the dream of the way things used to be. But I mostly think that Felix Salmon and Justin Fox are right: the real issue is lease length. A landlord who locks in a multi-year lease in a down market does himself more harm than good.
So why not, as Fox and Salmon suggests, go to short term leases, at least until you find a better tenant?
Marcus Westbury has manged, in Newcastle, to implement the obvious solution to this problem: short-dated leases, often just 30 days long, which roll over so long as the landlord hasn't found a permanent tenant. That's good for the neighborhood, and helps drive up prevailing rents, so everybody wins -- except, of course, for the commercial real estate agents, who are disintermediated and who in any case are never going to make any money brokering 30-day deals. But many businesses are never going to find that kind of deal acceptable, even if they're already in the space in question -- remember that Kenny Shopsin, for instance, refused to extend his lease on the space he had occupied for years in the West Village by one year. "A one-year lease," explained Calvin Trillin with no further elucidation, "is obviously not practical for a restaurant". Yet somehow a brand-new teahouse in Newcastle manages to operate on a shorter lease yet.
I actually think Felix Salmon is rather answering his own question: most renters don't want short term leases, because they have to make capital investments in the space. A tea-house is a pretty low-intensity business, because the kinds of outfits that take 30-day leases truck in their baked goods and prepared foods, so they can get by with basically a fridge and a sort of souped up toaster oven. A restaurant requires major investment so that the nice inspectors from health and safety and the fire department don't shut you down.
The problem for the renter on a short term lease is that once they've made the capital improvements, the landlord has them over a barrel. If they have to move, they will have to do it all over again, plus lose business because some people won't follow them, and almost certainly have a delay while they get their inspections up to date. If their leases are short term, the landlord will hold them up for above-market rents.
This is what economists call the problem of co-specialized assets. In theory, you could get around it by having the landlord do the capital improvements. But the landlord does not want to rent a commercial space outfitted as a restaurant; he wants to rent a commercial space with which you can do anything you damn well please.
There are two further problems. First, the kind of tenant who can move in without doing much to the place is quite likely to fail, because probably seventeen other tea shops have had much the same idea. (They're also likely to pull up stakes and skip out on the rent, but presumably you've gotten that up front). They may not be overworried about taking care of the place. But most importantly, the place will not show particularly well to anyone who is envisioning something other than a tea shop. If you're trying to woo a high-end clothing store, you don't want your potential renter to be edging past tattered chairs and piles of crumbs. This is why residential real estate agents encourage sellers to vacate the house whenever possible, and (outside of New York, with its 2% vacancy rate) large landlords let the apartment go empty before they try to rent it again.
The more interesting question is what Matt Yglesias asks: why doesn't the same thing happen to strip malls? One possible answer is that it does, but we don't notice, because neither of us are very familiar with the world of malls. But I think his and my impression is likely correct: malls are less likely to have many empty storefronts than urban areas.
One guess is that malls are likely to be owned by professionals who are better managers of their retail yield than individual landlords. First, they are professional retail managers, not just owners of property, and second of all, malls place a very high value on having foot traffic. Stores in malls benefit greatly from spillover traffic, which is why anchor stores like Macys are big focuses of the industry. Urban stores do too, but there's no one landlord in charge of them. A building on Broadway and 86th Street is not going to lower the rent on its vacant space because the fish store on one block up will see an 8% rise in sales.
The other guess--or perhaps it's more of a corollary--is that because malls are not so dependant on casual foot traffic, there is less worry about lock-in. That is, a restaurant in the Paramus Park Mall is not getting any significant number of its customers from the area immediately surrounding the mall. Any other mall with decent foot traffic of the right demographic is a very good substitute for one they're already in, so they can leave if the landlord gets too frisky. Plus, the space they rent very likely is a space specifically designated for a restaurant, allowing them to demand some capital improvements from the landlord that an urban tenant can't. In the city, a pizza place that hates its landlord has to worry about finding and building out a new space, and then charming customers away from the 22 other restaurants within a ten block radius.