In large part, the economic need for sprawl repair is being brought to a head by the continuing oversupply of commercial real estate, particularly retail space.  According to authors June Williamson and Ellen Denhum-Jones of  Retrofitting Suburbia, the United States now has a retail supply of 20.2 sq ft per person (2005 data.)  Retail supply was 15.2 square feet per person in 1986, which is a 25% increase in the inventory of retail space within just 20 years.  As a comparison, the United States has six times as much retail space per capita as Sweden (the country with the largest amount of retail space per capita in Europe.)  Clearly, the amount of retail space provided in this country is a distortion of the market and solutions will need to be found to retrofit this over supply of retail space into a productive asset.

Steven Burton of the FDIC, in his article titled Bank Trends - Ranking the Risk of Overbuilding in Commercial Real Estate Markets describes the results of such oversupply:  “The economic consequences of too much supply of commercial property are straightforward. When supply outpaces demand, upward pressure is placed on vacancy rates. Growing volumes of unoccupied space lead in turn to lower rents for newly developed properties and rent concessions for existing properties. Since revenue streams generated by commercial properties serve as the basis of value, lower rents translate into reduced property prices. As revenues fall below levels sufficient to service operating expenses and outstanding debts, loan defaults begin to increase. Finally, lenders are forced to recognize losses either through foreclosure and sale of distressed properties or through foregone interest revenues if loans are renegotiated to cure defaults.”

Information from MIT’s Center for Real Estate http://web.mit.edu/cre demonstrates this dynamic at work in the current market.  The first chart shows the widening gap between supply of retail space (green line) and the demand (red line).  As you can see, this gap began in mid 2008 and continues to the current day.  Curiously, the chart shows a decrease in the amount of retail space.  Does this mean that a significant number of retail structures have been torn down as demand for retail space has declined? Does it represent the conversion of retail space into office space such as call centers?

The next chart shows the declining value of retail space, a trend that is expected to continue as long as supply exceeds demand.  In addition, the growing proportion of on-line retailing will push the down the demand for physical space.

What does this economic data indicate for those involved in Incremental Sprawl Repair?  As I interpret the data, I come to the conclusion that our oversupply of retail space is a long term condition and that conversion of conventional retail space into office, industrial, or housing is the best opportunity to transmute a liability into an asset.  The enduring value of this real estate asset will depend upon the built form of the converted property, attention to detail, and the overall quality of the urban space.