“This is one of those articles that came about as I was walking around South Street,” says William Bunting, assistant professor of legal studies at the Fox School.
While walking down South Street recently, Bunting encountered a number of empty storefronts. Always the researcher, he wondered why retail vacancies were on the rise—especially in increasingly volatile urban markets—and how municipal legislations combat against that.
In his article, “How the Law Can Better Protect Small Business Owners Against Location Risk in the Brick-and-Mortar Retail Sector,” forthcoming in the American Business Law Journal, Bunting found that current laws in place were not very effective. Instead, he suggests new ways for governments to address vacancy issues and support small businesses.
“The problem of rising retail vacancy rates and the plight of small business owners has worsened in many cities in the United States, but the broader macroeconomy in these same cities has experienced significant growth,” Bunting explains.
Bunting asserts that uncertainty in the brick-and-mortar retail sector has increased in the past couple of years. “Nobody really knows what a particular street is going to look like in ten or fifteen years and this uncertainty can be attributed to two different reasons: the rise of e-commerce and the changing demographic and socioeconomic characteristics of many cities in the U.S.,” he says.
Bunting explains that landlords might be unwilling to “lock themselves in” and rent to brick-and-mortar retail stores if they struggle to predict if it would be profitable for them to do so. Even before the pandemic hit, landlords were holding out renting to small businesses in hopes of attracting large retail chains. “The pandemic has worsened this problem,” says Bunting.
He suggests that an increase in such location risk leads to an increase in storefront vacancies and eventually a ‘vacancy trap’.”
“A ‘vacancy trap’ happens when vacant storefronts impose certain negative externalities on nearby businesses, and the local community that increases the likelihood of additional storefront vacancies,” explains Bunting.
Bunting believes that sometimes such a ‘vacancy trap’ requires no government intervention. “Developers observing these vacant storefronts might come in and buy all of these properties and this could be one potential solution to solving this issue,” says Bunting, “But that is not always possible.”
So how can the law help?
First, the study examines existing current legislative measures, critiques them and then proposes other possible solutions.
Current government reforms include vacant property tax (where landlords who own vacant stores are charged a tax), rent control (preventing landlords from charging higher rents) and zoning reclassification (rezoning commercial properties for residential or industrial use).
“These (current reforms) are very blunt and require fairly intrusive government intervention,” says Bunting, “And while these approaches do help reduce commercial vacancy rates, they tend to do so at the expense of an efficient matching of landlords and tenants.”
Bunting suggests that the implementation of more nudge-based policies can help local governments reduce storefront vacancies.
For example, municipalities can give landlords and tenants template commercial lease contracts that contain a percentage rent provision where landlords assume a part of the profit the store makes on rent or create a website that publicly highlights those landlords who are not doing a good job keeping up the visual appearance of their properties.
“We wanted to come up with ways to change the incentives of the landlords as opposed to current coercive reforms,” says Bunting, “There is a lot of uncertainty for landlords too and they could use without the threat of external punishment by the government.”