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Pop-Up Stores Fill Vacant Space, Create A Win/Win Model In A Down Market (8/18)

At a time when retail landlords are struggling with record vacancies, a novel sales strategy employed by some tenants is helping them fill the gaps and earn some additional rental income. Pop-up stores, which allow a retailer to sign a temporary lease lasting anywhere from two months to six months, have traditionally been scoffed at by mall and shopping center owners who could take their pick of permanent tenants. But in today’s environment, with retailers wary of new store openings, pop-ups are becoming a hot new trend and landlords are finding it suits them just fine.

“I am seeing more and more retailers testing out a temporary location, rather than locking into a long-term [lease],” says Jerry Welkis, partner with Welco Realty, Inc., a New Rochelle, N.Y.-based brokerage firm and member of the national X Team retail services network. “It’s a win/win kind of thing, because if a landlord has vacant space, he can get good tenants in and then get them out when he needs them out, and get some income as well.”

Earlier this year, casual apparel seller Gap Inc. secured temporary locations in Los Angeles and New York City to market its new product line, 1969 Premium Jeans. The stores will remain open through September. Luxury seller Gucci is planning to launch a traveling sneaker store in October, which will debut in New York City, move on to Miami and eventually appear in London, Berlin, Paris, Hong Kong and Tokyo, among other cities.

Meanwhile, this holiday shopping season, toy seller Toys “R” Us might open up to 70 pop-up stores on a national basis in markets previously occupied by defunct rival KB Toys, according to Welkis, whose firm worked with Toys “R” Us on two such locations in New Jersey. Footwear retailer Nine West has also been looking to do more pop-ups under its Bannister Shoes name. The chain uses the temporary locations to sell leftover merchandise. Target has used the strategy as well. For example, it opened up several temporary bodegas in New York City last year as a way of establishing a presence in Manhattan—where it currently operates stores.

Pop-up stores allow retailers to increase revenue during critical sales periods, including the back-to-school, Halloween and holiday shopping seasons, without taking on the risk of a permanent location, says Matthew Bordwin, managing director and national co-head of the real estate services team in the Melville, N.Y. office of KPMG Corporate Finance LLC, a middle-market investment bank. Down the line, if the temporary stores prove successful, they might lay the groundwork for permanent stores. Meanwhile, smaller, regional retailers might see temporary stores as a way to gain access to high-profile retail centers whose landlords would not otherwise view them as viable tenants.

There is a certain level of convenience as well, as most temporary locations don’t require any build-out work, and rental rates tend to be relatively affordable. There’s usually a fixed rental rate that encompasses common area charges and taxes and tends to be about half of what is paid by permanent tenants at the same center, plus anywhere from 4 percent to 7 percent in a percentage of sales rental fee, according to Welkis. But landlords, fearful about how an empty space in the middle of their property is going to affect shopper traffic, are more than happy with the arrangement right now.

“The landlords are open to anything, they are open to any retailer that has a concept and some money because they have empty space and empty space doesn’t pay the rent,” notes Bordwin.

In fact, as some national retailers have begun to take larger chunks of space for their temporary quarters—sneaker seller Reebok, for example, is looking for locations totaling at least 20,000 square feet—pop-ups are even helping fill up some vacancies in big boxes, says Welkis. The big-box category has been the most heavily hit by bankruptcies and liquidations this year, with the national vacancy rate hitting 7.3 percent in the first quarter, according to research from Marcus & Millichap Real Estate Services and the CoStar Group. That’s an increase of 280 basis points from 4.5 percent in the first quarter of 2008. But while pop-up shops will likely become a common sight as the retail industry heads into the holiday shopping season this fall, don’t look for the trend to hold up once real estate fundamentals return to more normal levels, says Jeff Green, president of Jeff Green Partners, a Mill Valley, Calif.-based consulting firm. For landlords, pop-ups represent a desperate measure and they will start saying no to them as soon as some permanent tenants appear on the horizon.

“This is a really unique time,” Green says. “I am not sure we’ve had such a long, deep recession [before] and one in which the consumer really put on the brakes in terms of shopping. The developers are not totally thrilled with this idea, but they realize they have to do something to increase their income. It’s not something they will want to do long-term.”

--Elaine Misonzhnik

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