Retail Space Demand and Supply: An Integrative Model
John D. Benjamin, G. Donald Jud, and Daniel T. Winkler
Retail space participants such as developers, owners, property managers, and lenders operate in an evolving
and increasingly competitive marketplace. To construct new retail space or to expand existing space,
investors must commit large amounts of capital in an uncertain demand and supply environment. Over the
past decade, dynamic demand and supply movements have surprised market professionals and government
regulators along with academicians.
A large number of studies have estimated demand and supply elasticities for single- and multi-family
housing. However, very little research has examined the demand and supply of commercial real estate.
This is surprising given the relevance of market elasticity estimates to developers, lenders, and others
involved in the commercial market.
This paper is unique in developing an integrated model of retail space demand and supply that explains
how prices and quantities are determined in the commercial market. A number of studies have focused on
the economic and demographic determinants of demand and supply but have ignored the role of prices, or
rents. An extensive review of these studies can be found in Eppli and Benjamin (1994). The studies,
however, are silent on the role of prices and rents, because none of the models include price variables in the
In order to focus more closely on the role of prices and rents, we posit a supply and demand model for
retail space. The demand for space is derived from the demand for retail goods and services. Demand is
determined by the rental price of retail space and the level of retail sales. Sales, in turn, are determined by
relative prices, incomes, and demographic factors. The supply of retail space is influenced by the rental
price of space and the relative cost of producing it. To estimate the model of retail space demand and
supply, we use data from 17 metropolitan statistical areas (MSAs) for the years 1