Essays in Urban Economics and Industrial Organization

Abstract

This dissertation consists of three independent chapters related to the provision (or underprovision) of urban retail amenities. Chapter 1 (co-authored with Daniel Stackman) asks why storefronts remain empty for more than a year in some of the world's highest-rent retail real estate markets. Landlords with vacancies derive option value from two sources of uncertainty. First, increasing downstream retail demand may drive up market rents tomorrow. Second, different tenants may have different willingness to pay for the same space, creating an incentive for landlords to wait for a particularly high rent offer. We construct a dynamic search and matching model capturing landlords' tradeoff between signing a lease today and the option value of waiting, incorporating key market features including asymmetric commitment to the lease term and high move-in costs. We estimate the parameters by matching quarterly vacancy rates, lease-up rates, and tenant exit rates from a comprehensive, high-frequency storefront tracking service, combined with micro data on commercial leases. In a counterfactual exercise, we find that reducing the variance of the match quality distribution by 50% reduces long-run vacancy rates by 33% on average, while reducing the variance of the aggregate state variable has almost no effect. Finally, we use the estimated model to quantify the impact of a retail vacancy tax on long-run vacancy rates, average rents, and social welfare. Vacancies would have to generate negative externalities of $18.72 per square foot per quarter (about 30% of average rents) to justify a 1% vacancy tax on assessed property values. Chapter 2 (also co-authored with Daniel Stackman) documents the rise of storefront vacancies in prime retail locations, a phenomenon we refer to as high-rent blight, in Manhattan over the 2016 to 2020 period. We then ask whether this increase in the retail vacancy rate can be attributed to a particular feature of commercial mortgage agreements. In a stylized model, we show that banks impose tenancy covenants (which establish rent floors for new leases landlords sign with tenants) in lending agreements to prevent landlords from impairing the value of collateral in the event of default. These clauses short-circuit the price mechanism in times of falling demand for retail space. We present quasi-experimental estimates suggesting that binding rent floors imposed by mortgage covenants substantially reduce the probability that vacant landlords choose to lease out their space. Finally, we estimate a structural model of landlord borrowing, leasing, and default decisions. In a counterfactual exercise, we show that eliminating covenants between 2016 and 2020 would have reduced the February 2020 vacancy rate by 11.4% (1.5 percentage points) relative to its realized level. Chapter 3 (co-authored with Edward Glaeser and Michael Luca) asks how gentrification transforms neighborhood retail amenities. We present a model in which gentrification harms incumbent residents by increasing rental costs and by eliminating distinctive local stores. While rising rents can be offset with targeted transfers, the destruction of neighborhood character can -- in principle -- reduce overall social surplus. Empirically we find that gentrifying neighborhoods experience faster growth in both the number of retail establishments and business closure rates than their non-gentrifying counterparts. However, we see little evidence that gentrification is associated with changes in retail mix or prices -- suggesting limited welfare losses.