A few point to lock-in for both the landlord and the tenant. The landlord is afraid of locking in to low of a rent by offering a long term lease in a bad market. Tenants are afraid of short leases because they have lock-in lots of investment to make their space just right and don’t want the landlord jacking up the rent.
Matt Yglesias doesn’t buy that answer
If you look at suburban strip malls, the same long lease dynamic applies, but widespread strip mall vacancies are normally a sign of specific economic distress. The current recession has less to a lot of them, but in normal economic times you tend not to see this. Instead, even depressed areas reach a low-rent equilibrium.
The difference is that a mall has a single owner who internalizes all of the externalites associated with vacant storefronts (and trash and crime, etc). An ugly mall is a less popular mall and thus commands lower rents overall. Typically its worth for the mall owner to take a hit on one store if he can make it up in higher rents for the others. This, of course breaks down when demand for the whole mall declines.
The externality problem means that, in general, communities will be more pleasant, though much more expensive, if one landlord owns the whole shebang. I think this one reason many people find University campuses to be so nice.