How the Law Can Better Protect Small Business Owners against Location Risk in the Brick-and-Mortar Retail Sector

Abstract

This Article examines how the law can help reduce retail vacancy rates in volatile urban real estate markets. Two potential drivers of high vacancy rates along retail corridors in otherwise healthy real estate markets are identified: (1) location risk, and (2) positive feedback effects. This Article suggests that local governments can pursue a nudge-based approach to encourage landlords and retail tenants, especially small business owners, to adopt percentage rent or some other form of profit-sharing to more efficiently allocate location risk. To address positive feedback effects in which each storefront vacancy increases the likelihood of an additional storefront vacancy, a case is made for slightly stronger government intervention. Current legislative responses to the problem of retail vacancy are also considered, including vacant property taxes, commercial rent control, and zoning reclassification, and the advantages and disadvantages of each are examined.