Job Market Paper

"Option Value and Storefront Vacancy in New York City" (with Daniel Stackman) [draft]

Coverage: Marginal Revolution

Abstract: Why do storefronts remain empty for more than a year in some of the world’s highest-rent retail districts? We construct and estimate a dynamic, two-sided model of storefront leasing to investigate possible explanations using data from New York City. The model incorporates salient features of the retail leasing market: heterogeneous tenant quality, high move-in costs, search frictions, asymmetric contract dissolution costs for landlords and tenants, and aggregate uncertainty in downstream retail demand. We estimate the model parameters by matching quarterly vacancy rates, lease-up rates, and tenant exit rates from a comprehensive, high-frequency storefront tracking service, combined with micro data on commercial leases. We find that tenant heterogeneity and move-in costs jointly explain long-run vacancy by generating dispersion in match surplus and therefore option value for landlords. In a counterfactual exercise, eliminating either feature results in vacancy rates of close to zero. Search frictions and aggregate uncertainty play much smaller roles. Finally, we use the estimated model to quantify the impact of a retail vacancy tax on long-run vacancy rates, average rents, and social welfare. Vacancies would have to generate negative externalities of $29.68 per square foot per quarter (about half of average rents) to justify a 1% vacancy tax on assessed property values.

Working Papers

"Bleaker on Broadway: The Contractual Origins of High-Rent Urban Blight" (with Daniel Stackman; his job market paper) [draft coming soon]

Abstract: We document the rise of storefront vacancies in prime retail locations, a phenomenon we refer to as high-rent blight, in America’s largest and most expensive urban retail market: Manhattan. We identify a little-known contracting feature between retail landlord and their bankers that generates vacancies in the downstream market for retail space. Specifically, widespread covenants in commercial mortgage agreements impose rent floors for any new leases landlords may sign with tenants, short-circuiting the price mechanism in times of low demand for retail space. Quasi-experimental estimates suggest that binding rent floors imposed by mortgage covenants substantially reduce the probability of occupancy. We microfound this contracting feature as the solution to a moral hazard problem between landlords and banks. We show that while rent floor covenants increase vacancies, their absence reduces credit supply to landlords.

“Gentrification and Retail Churn: Theory and Evidence” (with Edward L. Glaeser and Michael Luca), NBER Working Paper 28271. [ssrn]

Abstract: How does gentrification transform neighborhood retail amenities? This paper presents a model in which gentrification can harm incumbent residents by increasing rental costs and by eliminating old amenities, specifically distinctive local stores. Rising rents represent redistribution from tenants to landlords and can therefore be offset with targeted transfers, but the destruction of neighborhood character can – in principle – reduce overall social surplus. Using Census and Yelp data from five cities, we document that while gentrification, as measured by rising education levels and rents, is associated with an increase in the number of retail establishments overall, it is also associated with higher rates of business closure. Closure rates are not higher in gentrifying areas than in richer areas, but closure rates in stable, poor areas are unusually low. We see little evidence that gentrification is associated with a changing retail mix, however, or in increased prices, at least as measured by dollar signs on Yelp reviews. Consequently, while we the overall welfare losses created by lost local character remain a theoretical possibility, the evidence does not suggest that these losses are large in our cities, and that the redistribution between tenant and landlord associated with rising rents is more important.


Abstract: The years following the Great Recession were challenging for forecasters. Unlike other deep downturns, this recession was not followed by a swift recovery, but instead generated a sizable and persistent output gap that was not accompanied by deflation as a traditional Phillips curve relationship would have predicted. Moreover, the zero lower bound and unconventional monetary policy generated an unprecedented policy environment. We document the actual real-time forecasting performance of the New York Fed dynamic stochastic general equilibrium (DSGE) model during this period and explain the results using the pseudo real-time forecasting performance results from a battery of DSGE models. We find the New York Fed DSGE model’s forecasting accuracy to be comparable to that of private forecasters, and notably better for output growth than the median forecasts from the FOMC’s Summary of Economic Projections. The model’s financial frictions were key in obtaining these results, as they implied a slow recovery following the financial crisis.