For Lease

24 March 2009

In the past, I've asserted that San Diego is seriously over-built. Hillcrest, the neighborhood in which I live, has many commercial sites that have been empty for some time. As an œconomist, I naturally wonder why the landlords haven't lowered the rent to a point where some party takes occupancy.

One possibility would be that the landlords were hoping for an up-turn in the economy. The possibility would make them more reluctant to commit to long-term leasing contracts at what would be present market-clearing rates, and might make them reluctant to even rent month-to-month, as there would be difficulties getting short-term renters out as quickly a more desirable renter might want to begin using the site.

Part of what would make it difficult to remove month-to-month renters would be local and state laws and regulations governing evictions. And other interventions in the market could be holding rents and vacancies at unnatural levels. For example, the structure of tax law might make sometimes make it advantageous to leave a property idle.

In any case, the numbers of vacancies, and durations of some of them, would be difficult or impossible to explain based simply on reference to market forces.

308 Washington Street, half-a-block from where I live, was a Hollywood Video rental store when I first moved to Hillcrest. (Most or all of their wares were VHS tapes at that time!) At some point, they hived-off perhaps a fifth of the site for digital electronic game rentals. Eventually, this section became a separate store, 302 Washington Street, and then Hollywood Video vacated that section, which was then rented to a UPS franchise store. Some time in late 2007 or in 2008, Hollywood Video shut down the store at 308 Washington Street. Since then, the building has stood about four-fifths empty, with a large sign advertising its availability.

Finally, yester-day, I saw a crew in the site gutting things in what I take to be the first stage of a renovation.

The last time that someone was poking-around in 308 Washington Street, I asked Scott, who works at the UPS store, lives in the same complex as I, and frequents the same coffee house (Babycakes) if he knew who the party was, and he said that rumor held it to be PetCo, which we agreed would be cool. Last night, Art, who lives in the same complex and works part-time at the coffee house express hope that the new store would be, er, a Denny's Restaurant, and didn't like the idea of a pet supply store there, in spite of being a dog-owner. Art sees PetCo stores as essentially big boxes like Wal·Mart stores. Well, there's some truth to that. On the other hand, Denny's Restaurants are open all day, almost every day of the year, and can be associated with a lot of traffic. Our immediate neighborhood could become more congested and louder late at night with a Denny's Restaurant. But I don't think them a likely renter there.

[Up-Date (2009:03/26): Scott tells me that word remains that 308 is to be occupied by a PetCo store.]

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5 Responses to For Lease

  • gringo says:

    This has been going on in Downtown Tijuana for quite some time, long-term commercial vacancies. Fifteen years ago, there were tourists, now there are none. Commercial buildings now stay vacant for quite some time, and I often wonder the same as you do, why wouldn't the rent come down to the point where someone opens a business there? My reasoning was that, after all, some rent income is better than no rent income.

    Apparently, the owners of these properties are so well-off that they are content to patiently wait unitl tourism returns someday. It defies logic, and it defies free-market theory.

    • Daniel says:

      I don't think that one wants to abandon logic here, nor infer that the landlords are themselves being pronouncèdly irrational, and it's more likely that theory is misapplied than that it is grossly wrong.

      Here in San Diego, the structure of taxation and regulation is likely to be the key to the explanation for the deviation from what theory predicts of free market behavior. In Tijuana, more old-fashioned corruption may play more of an additional rôle. Would landlords be able to recover their costs if they rented, or would burdens imposed by the legal framework and by criminals have them running deeper in the red?

      • gringo says:

        I agree that the reasoning behind the vacancies remaing as such could be (and probably are) different. And irrationality is relative, it's sort of impossible to apply a set of dynamics in the U.S. to the dynamics in Mexico. I talk to a lot of Americans about this, they find it difficult to come to terms with. Sometimes, so do I.

        That being said, corruption is also relative. In the U.S., accountants cook the books and it is labeled as "accounting errors", sometimes someone gets punished but mostly they don't. In Mexico, it's called "business". Having lived here for almost seventeen years I can, never the less, assure you that the commercial vacancies and the corruption have nothing to do with each other, aside from whatever normal role such corruption plays in everyday business here.

        I reckon that we'll remain confounded by this, at least here in Baja, until I find something more concrete to draw on. I do know this: A handful of families own most of the land in Centro de Tijuana, and they are incredibly wealthy. So far, I've concluded that they just don't need the money. Anything else is anyone's guess.

        • Daniel says:

          I was, actually, just thinking about the normal rôle of more old-fashioned corruption. For example, if someone (in or out of government) has to be paid-off in order to do business, this is very much like an additional tax. In theory (I really have no idea what the actual numbers would be in Tijuana), these sorts of things could raise the costs (on lessees or on landlords) to the point that buildings stayed empty.

          Indeed, a lot of corruption in America is institutionalized (as law, as regulation, or as professional codes of conduct), and then less often recognized as corruption, and certainly less often acknowledged to be corruption.

          • gringo says:

            I'm going to Centro de Tijuana tomorrow, I know a guy who owns a bar there, I'll try to get some information as to how he works it out, tax-wise, and I'll report back. It's an interesting study.

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