The Urban Economics of Retail

Abstract:

We develop and estimate a novel model that describes land use in urban shopping areas and competition between retail and residential land in a city. Modelling a shopping area as a network of interconnected nodes, we show that pedestrian behaviour of visitors leads to a negative distance decay in retail rents and to clustering of (structural) vacancies at the edge. We further find that competition between retail and residential land can help eliminate structural vacancy through transformation of land use at the edge. This allows the market to tackle the negative consequences of decreasing retail demand. We provide empirical support for these insights using unique property-level data from 300 larger shopping areas in the Netherlands, including downtown retail, non-central shopping districts and shopping streets. The average rent gradient is -15% per 100 meter distance from the centre of the area, and the vacancy odds are twice as high at the edge as in the centre. Shopping areas with attractive amenities and facilities have a flatter decay and a lower odds ratio. Data on land use transformations in the Netherlands during the Great Recession suggest that 3.5 times as many transformations happened at the edges as compared to the centre. As far as we know, this paper is the first empirical study of retail land use. Brick-and-mortar retail is melting down in many countries. Our paper shows how the land market can help tackle the negative consequences of structural drops in retail demand.