Can Cities Save Their Retail by Capturing the Value It Creates?

Walk down any interesting city street and you'll find what makes urban life worth living: the quirky coffee shop, the independent bookstore, the restaurant that becomes your regular spot. These aren't just places to buy things—they're the third spaces that define neighborhood character and create the social fabric of cities. Yet across America, these retail establishments are disappearing at alarming rates, taking with them what makes our cities distinctive.

[[IMAGE:1]]

The Retail Death Spiral

The numbers tell a grim story. In one San Francisco shopping district, nearly half of stores shuttered within four years. This isn't just a San Francisco problem—it's happening everywhere. Online shopping continues to capture market share, remote work reduces foot traffic, and crime eats into already-small margins. The businesses that make neighborhoods like Hayes Valley or Williamsburg special are barely surviving, even as the areas themselves become more desirable.

The irony is brutal: as these neighborhoods thrive and property values soar, the very retail that made them attractive struggles to stay afloat. A substantial portion of the value created by these retailers flows not to the business owners but to property owners and homeowners who benefit from having interesting shops nearby.

Consider Hayes Valley in San Francisco. It boasts some of the city's most interesting retail—Marine Layer, Ritual Coffee, Wise Sons Bagels, Salt + Straw ice cream. But these shops go in and out of business constantly. The neighborhood thrives, rents go up, and stores struggle. Why? Because when an interesting new store opens, it creates value that spills over to everyone nearby. Property owners see their commercial rents rise. Homeowners see their property values increase. But the retailer who created that value captures only a fraction of it.

The Value Capture Problem

This is the fundamental issue: retail suffers from what economists call "leaky value capture." When you enjoy browsing an independent shop—even if you don't buy anything—you're receiving a leisure value. Compare this to a Walmart, where value comes primarily from purchasing necessities. Interesting retail creates spillover benefits that flow to others.

Those Victorian homeowners on Fell Street two blocks from Hayes Street's commercial corridor are capturing substantial value from the retail activity below. Their property values increase because of the interesting shops, cafes, and restaurants that make the neighborhood desirable. Yet they pay nothing toward maintaining that retail ecosystem.

This dynamic extends beyond retail. Consider public transportation infrastructure like Caltrain in the Bay Area. The government spent billions building regional rail service, but most stations are surrounded by low-density housing. The few hundred homes within walking distance capture enormous value from the infrastructure, while the train system runs unprofitably and needs taxpayer subsidies across the entire region.

Learning from History: Unified Ownership Models

History offers solutions. When ownership of a main street is splintered, value leaks away to unaffiliated parties. This failure of splintered pedestrian main streets in the 1960s and 1970s led to the rise of shopping malls and strip malls—not because people preferred indoor shopping, but because unified ownership could capture spillover benefits.

Shopping malls use "anchor stores" like supermarkets and department stores that make lower profits and pay lower rents. But they bring in customers that benefit all other shops. A single entity can capture the resulting spillover, allowing them to survive where splintered outdoor main streets could not.

This model is making a comeback. Developers are increasingly building projects that combine housing and retail under unified ownership. The developer can select commercial tenants not just on the rents they'll pay, but on the value they'll provide to residents in surrounding apartments. This cross-subsidization allows interesting retail to survive because the housing profits offset the retail losses.

Hong Kong's Mass Transit Railway exemplifies this approach. They buy land around new station sites before building, using the rail-plus-property model to fund one of the few profitable transit services in the world. Tokyo goes further: private metros, trams, and buses fund infrastructure investment by speculating on property values they expect to rise as a result.

Zoning for Value Capture

Donald Shoup's concept of graduated density zoning offers another tool. This gives properties the right to build more on their plots if they're part of a larger assembled plot. Effectively, larger developments internalize more externalities. This mirrors how New York City's old light plane-based zoning worked from 1916-1961—the larger the plot, the more value it could capture and reinvest.

Local governments could accelerate this by waiving transfer taxes in exchange for bigger property tax takes in areas where unified ownership would maximize public value. This would encourage the assembly of larger parcels while ensuring communities benefit from the increased value creation.

The most promising approach may be hyperlocal taxing authorities. Two-thirds of new American homes are in community associations—homeowners' associations, co-ops, condominium associations. These organizations charge annual fees and impose restrictions because they create amenities: quiet, cleanliness, safety, public pools, parks.

Business Improvement Districts already apply this model to commercial areas, with businesses opting into higher taxes or fees to support projects that make local businesses more successful. But these districts haven't captured value that spills over to nearby residents, even though residential real estate vastly outweighs commercial.

Imagine a hybrid: a homeowners' association-business improvement district that could tax the increase in land value and funnel it back into supporting retail or common infrastructure. Special Purpose Bonds, like those that funded the Golden Gate Bridge, offer a model where voters approve bond-funded investments paid back through property taxes.

The Future of Retail as Commons

We're asking too much of retail. We want it to be entertainment, a gathering spot, a third space, and a culture-forming institution—all while paying commercial rents. As the "selling stuff" model becomes less viable due to internet-based alternatives, the "commons" version may rise instead.

We're already seeing this shift. The Commons in San Francisco took over a former clothing shop and runs a member-based "home outside of home." These models work for private spaces but won't fully capture spillovers, meaning they'll be underprovided without institutional support.

These value capture models could help neighborhoods directly provide what people actually want without forcing a high-margin retail business model alongside it. They offer a path to capturing, in a more direct way, the benefits a space gives to its surrounding community.

The stakes are high. If we don't solve this value capture problem, we'll continue losing the retail that makes cities interesting. We'll have empty storefronts, fewer parks, and less public transit. But if we get it right, we can preserve the third spaces that make urban life worth living—not through nostalgia or protectionism, but through smart economics that align incentives with what we actually value about our neighborhoods.