Appeared in the September 11, 2023, print edition as 'Free Riders on the Sidewalk'. By Ivan Png. Sept. 10, 2023 3:05 pm ET
Chairs are stacked on top of tables in Palo Alto, Calif.,
My family recently had lunch at our favorite Chinese restaurant in Palo Alto, Calif. Since the pandemic, we have always sat outside, enjoying the lovely California weather.
Prior to Covid, the restaurant didn’t offer al fresco dining. Like many establishments, it won a windfall from the pandemic: a free extension onto the sidewalk and street.
The land grab—and that’s what it is—benefits the owner of the property even more than the restaurant. Essentially, the extension onto the street is an expansion of the landlord’s real estate, like an extra floor but much more accessible and visible.
Less obvious is who loses from the land grab. The city government loses parking revenue. Neighboring businesses lose accessibility and visibility, especially if restaurants extend beyond neighbors’ store fronts. Pedestrians lose sidewalk space; what’s left feels more like a tunnel. Drivers lose parking spaces and roadway.
The extension of restaurants onto sidewalks and streets creates what economists call a negative externality. One party benefits, but it imposes costs on others. If the costs were borne only by owners of neighboring property, then the parties involved could negotiate an optimal solution among themselves.
In reality, the extension imposes costs more broadly—on pedestrians, drivers and others. It would be too costly and complicated for this broad mass to negotiate collectively.
With the pandemic over, local governments are stepping into the breach. In March, Palo Alto began allowing “parklets”—seating areas on parking spaces using up to 350 square feet of roadway. The city plans to charge a license fee of about 70% of the typical commercial rate per square foot.
The devil is in the details. In August, the New York City Council enacted a policy for sidewalk and roadway dining. The city will charge restaurants an annual fee of $5 to $31 a square foot, depending on location. These fees were set according to the median annual rent of ground floor commercial premises.
But even the highest rate of $31 is far less than the average retail rental of $638 a square foot for ground-floor retail space in prime areas of Manhattan. It’s still a giveaway.
How to solve this vexing issue? A simple solution is to peg the rental for use of the sidewalk and roadway to the rental rate that the landlord charges. This would precisely represent the value of the space. The landlord is interested in charging an amount that represents the value of the location. The city can piggyback on the landlord’s market research and negotiation. It is as simple as that.
Mr. Png is a fellow at Stanford’s Center for Advanced Study in the Behavioral Sciences and a distinguished professor at the National University of Singapore.
Appeared in the September 11, 2023, print edition as 'Free Riders on the Sidewalk'. By Ivan Png. Sept. 10, 2023 3:05 pm ET