Modus

Pop goes the storefront?

The retail industry is going through a shake-up as shopping habits change and tenants are looking for shorter, more flexible leases on premises

Author: Gregory Scruggs

07 October 2021

Paper pop up shop model

Artwork by Ollanski - Folio Art

In November 2018, home décor aficionados found a novel treat in suburban Boston. Online furniture and home goods retailer Wayfair had installed a temporary shop in the central atrium of the Natick Mall ahead of the holiday season. Shoppers encountered brightly coloured mock living rooms, bathrooms, kitchens, and even gardens framed by eye-popping yellows and greens. Design experts offered how-to advice on home improvement projects.

“As the first physical opportunity to visit Wayfair in person, it was a big draw,” recalled Katie Kurtz, senior vice president of business development for Brookfield Properties, which owns the shopping mall. The atrium shop ran for one year and was so successful that the Boston-based company decided to move into a so-called ‘inline store’ with a longer-term lease. A second temporary Wayfair store also ran in a Brookfield-owned mall near New York City, but did not lead to a permanent location.

Wayfair’s retail experiment was a pop-up, which retail consultant Melissa Gonzalez, CEO of the Lionesque Group, defines as “a temporary retail experience of one year or less with defined goals – creating a marketing moment, celebrating a product release, testing a new market, or exploring the viability of a physical retail location.”

Pop-ups have always been a niche retail player serving seasonal needs like Halloween costumes or Christmas decorations. But the concept gained wider currency after the Global Financial Crisis in 2008, which left storefront vacancies around the world. That downturn forced commercial landlords to consider much shorter leases, in turn creating an opportunity for boutique brands and major retailers alike to experiment with their physical footprint. For example, German footwear brand Adidas sold limited-edition Lionel Messi boots at pop-ups in Barcelona and New York in 2016.

As online commerce has eaten into brick-and-mortar sales figures, flexible leases became even more integral to a successful retailer’s strategy. That delicate balance was upended by the COVID-19 pandemic, which forced shoppers out of stores and onto increasingly seamless e-commerce platforms. While an uneven global recovery is underway, the result has been a raft of empty storefronts on high streets and in shopping centres across the world, especially in prime locations near big city centres and downtowns.

The British Retail Consortium reported a 14.5% retail vacancy rate in the UK during the second quarter of 2021. In early 2021, CoStar predicted that US retail vacancies would reach a seven-year high. However, CBRE Research reported only a slight increase in total US retail vacancy during the pandemic, well below post-crisis figures. “Despite the hit to goods centres, the bulk of US retail is well-performing suburban strip and grocery anchored,” says CBRE Research’s global chief economist Richard Barkham MRICS. While upmarket shopping streets that were having a hard time captured media attention, businesses such as grocery stores and pharmacies continued to do business.

Pop-ups offer flexibility

With the pop-up toolkit in their back pocket, commercial landlords are putting a positive spin on a challenging situation. “Right now we have more flexibility than we would have had before the pandemic, in terms of space,” says Kurtz. “We see this as an opportunity for us to be able to go out and try new brands and see what works for both parties. It’s exciting for us to go out and see what kind of new blood we can bring in.”

For landlords, the principal enticement of a pop-up is the prospect of converting a tenant to a long-term lease, as was the case with the Wayfair pop-up (the permanent store was closed in December 2020, another pandemic retail victim). Gonzalez estimates that one-third of her North American clients, which include well-known and up-and-coming brands like Amazon Fashion, Nordstrom, The RealReal, and Walmart, ultimately go permanent.

“Success isn’t a short-term lease, it’s long-term tenancy,” she says. “For landlords, proof of concept is seeing that the pop-up was the test that the brand needed in order to validate and sign a longer-term lease.”

Brands like indoor bike purveyor Peloton and mattress manufacturer Casper have successfully tested pop-ups in Brookfield shopping centres that led to long-term arrangements. Without disclosing specific figures, Kurtz says that short-term leases do offer a lower cost of entry for retailers.

Shopping mall real estate tends to be better suited to pop-ups than more unique historic retail properties, such as those in European city centres. Robert Travers MRICS, Cushman & Wakefield’s head of EMEA retail, conducted an inventory of stock for potential pop-ups early in the pandemic. The results were meagre: only 5% were suitable sites, and even less in markets like Paris. “The problem with pop-ups is finding a store in mainland Europe that meets basic capital expenditure (CapEx) requirements to open straight away,” says Travers. “If you have to spend loads of money to retrofit a space, it’s not worth it for six months.”

Close up of paper model city
“We have more flexibility than we would have had before the pandemic, in terms of space … it’s an opportunity for us to be able to go out and try new brands and see what works.” Katie Kurtz, Brookfield Properties
Airbnb for retail space

Some nascent industry players are pushing landlords to consider pop-ups as a standalone goal. The Storefront is a digital marketplace for physical spaces – an online catalogue of empty storefronts, galleries, and event spaces to host pop-ups. Their business model encourages landlords to accept rapid turnover at a price per square metre up to 50% higher than a standard lease, essentially an Airbnb model whereby multiple short-term rentals generate more revenue than a single long-term tenant.

While the pandemic essentially halted leasing activity, The Storefront has seen an uptick around events like Paris Fashion Week and in traditional retail and tourism capitals like London and New York, with strong activity in secondary hubs like Toronto and Los Angeles. Political unrest in Hong Kong has also been an unexpected boon, as institutional landlords have found their long-term retail tenants fleeing for Shanghai and Singapore and are now more willing to consider pop-ups. Brands are also more willing to consider less prime locations now that social media has eclipsed foot traffic as a mechanism to increase sales.

“After only working with small and mid-sized real estate institutions and brokerage firms, in 2021 we have big institutions finally listing their inventory on The Storefront and the market is educating them to this possibility,” says Storefront CEO Mohammed Haouache. But there are difficulties in convincing landlords to accept a more active role. “They aren’t equipped or don’t want the burden of becoming like a hospitality service for retail,” he says.

Still, he remains bullish that pop-ups will expand to encompass more than just a play for landlords to reel in long-term leases. “Right now, I believe pop-ups and short-term leases in major cities represent less than 10% of retail activity,” he says. “But speaking to my clients, like owners of significant shopping malls in Europe and North America, some believe that by 2030 up to 50% of rental revenue will come from pop-up stores.”

Travers is sceptical that pop-ups alone are the way of the future for retail, but he embraces more flexible ways of doing business in the wake of the current industry shake-up. “There is a need for shorter leases,” he says. “In London you could have an entire street owned by one company. No one wants the entire street empty because it will take years to rectify.”

“Success isn’t a short-term lease, it’s long-term tenancy.” Melissa Gonzalez, Lionesque Group
Are long-term leases a thing of the past?

While retail leases once ran as long as 20 years for a flagship store, Travers sees those days as long gone. He has observed that typical 15-year retail leases in the UK and North America have come down to 5-10 years. In Francophone Europe, the typical retail lease lasts for nine years with the right to break the lease every three years. Germany tends to operate on a 12-year lease with a six-year break clause, while Spain runs on a 10-year lease cycle with a five-year option to split.

On the operational expenses (OpEx) side, shifting price per square metre has been a sticking point in the retail recovery and the relative willingness of landlords to experiment with pop-ups and other short-term leases. Many Spanish city centre commercial properties are owned by families who carry no mortgage debt and make a profit solely on rental revenue, which motivates them to pursue more flexible lease terms. “Since the beginning of 2021, we are back to levels of leasing activity comparable to 2018 in Barcelona and Madrid prime properties because there has been a repricing with stabilised rents down 10-15%,” says Travers.

With much of the rest of global prime commercial real estate in the hands of institutional investors, the Spanish experience is more the exception than the rule. “I was expecting prices to collapse and reflect the reality of today’s market, but prices have not collapsed,” says Haouache. “Industry players have not adjusted to the risk factor associated with commercial real estate today.”

In today’s uncertain market, Travers advises his clients to offer leases up to three years with an option to review and encourages new lease terms whereby vacating retailers leave fixtures and fittings in place, rather than restore the space to its original state, to better facilitate pop-ups. 

“Pop-ups are just a function of the need for flexibility. There’s a role for the store and a role for online. Stores are about branding and authenticity. Online is about choice, speed, and volume. Retailers need both and are trying to figure out the most appropriate way,” Travers says. “That flexibility is inherent in real estate all over the world.”

Get Modus features sent straight to your inbox by signing up for the newsletter.

 

Close up of paper model city
“Pop-ups are just a function of the need for flexibility. There’s a role for the store and a role for online.” Robert Travers MRICS, Cushman & Wakefield
Let's stay together

Is low rent better than no rent? Read more

Retail high street with sun rise

Related Articles

MODUS

go to article Why has the price of gas skyrocketed?

MODUS

go to article Sidewalk spread: how city businesses beat the pandemic

MODUS

go to article Pop goes the storefront?

This website uses cookies to collect information about your browsing session. By collecting this information, we learn how to best tailor this site to you.  To learn more, view our 

Cookie Policy.