This paper explores how fluctuations in real estate values affect changes in the physical retail space and the number of retail stores. Higher property prices increase operating costs for physical stores -return on investment (ROI) effect- but simultaneously boost the collateral values of properties owned by retailers – collateral effect-, easing credit constraints and encouraging investment. Using data for 54 countries, we find that higher real estate price growth is associated with stronger expansion in both total retail space and the number of retail stores, indicating that the collateral effect dominates the return-on-investment effect. The strength of this relationship varies with the level of digital and financial development and the extent of price controls in the retail sector. Despite the rapid expansion of online channels, our findings suggest that physical stores continue to play a key role, particularly in environments where investment is financed through collateralized credit. County-level evidence from the United States supports these findings, showing that real estate prices have a stronger impact on retailers that rely primarily on physical locations than on those that have the flexibility to operate through online channels along with physical locations.
