A Simultaneous Model and Empirical Test of the Demand and Supply of Retail Space
Benjamin, John D., Jud, G. Donald, Winkler, Daniel T., The Journal of Real Estate Research
John D. Benjamin*
G. Donald Jud**
Daniel T Winkler***
Abstract. Much of the burgeoning distress of the 1990s in the United States retail space markets reflects a mismatch in the amount and location of retail space demand and supply. Understanding the demand and supply for retail space is critically important to academics, professionals and others associated with owning, operating and financing retail space. Using data from nineteen major metropolitan statistical areas (MSAs) for the period 1986-95, this article develops a simultaneous model of retail space demand and supply which includes the influence of vacancy rate. The model and results provide evidence about how demand and supply for retail space respond to changes in retail sales, rental prices, land-use regulation and land availability, and the cost of capital. The results show inelastic price elasticities of demand and supply for retail space.
Much of the burgeoning distress of the 1990s in the United States retail space markets reflects a mismatch in the amount and location of retail space demand and supply.1 According to the International Council of Shopping Centers (ICSC) (1996a), shopping center space that captures about 70% of non-auto retail sales is being produced at a rate twice that of the U.S. population growth. Over the last decade, it has risen from 15.2 square feet per person in 1986 to 18.9 square feet per person as of January 1996 (a 24.3% increase while the U.S. population grew only 10.3%).2 Further, the excess supply of retail space or retail space saturation problem is compounded by stagnating or declining real retail sales.3 Pershio (1991), Wurtzebach (1993, 1995), Roulac (1994), Delisle, Grissom and Neyman (1995), Litt and van Dijkum (1995), Wheaton and Torto (1995) and other researchers have commented on the coming shakeout in retail space generated from an imbalance of the demand for space relative to changing supply both in the amount of retail space and its location.4 This mismatch in the demand and supply for retail space has the potential to reduce rents, raise vacancies and challenge the financial worthiness of retail landlords and creditors.5 Understanding the demand and supply for retail space is critically important to academics, professionals and others associated with owning, operating and financing retail space.
Although many academic studies have focused on the demand and supply elasticities for housing, few investigate the demand and supply of retail space.6 Given the relevance of market elasticity estimates to retail space investors and lenders, there exists a need to better understand the dynamics of retail space demand and supply.
In this article, we present a simultaneous model of retail space demand and supply including the influence of vacancy rate. In section two, we analyze prior research on shopping center demand and supply. Section three presents a simultaneous model of the demand and supply for retail space. Section four describes the data and empirical model, and section five presents the empirical results. The implications of our findings are discussed in section six, while section seven provides a summary and conclusions.
Demand and Supply for Retail Space
Demand and supply fundamentals are some of the major determinants of investment returns to real estate. Many retail space market researchers, as earlier described, believe that the per capital supply of retail space is too great for the existing population demand. According to ICSC (1996b), extreme volatility has characterized the history of new retail supply. Changing rental rates, retail sales and other factors have influenced the demand for retail space while the economic climate, land availability, capital market cycles, interest rates and tax law changes have influenced the supply of new retail space. New retail space supply is also responsive to demographic, sociological, economic trends and local conditions. …