Many retail landlords felt a sense of relief in the fall of last year. They were willing to make concessions to tenants, and even allow pop-ups. This strategy seemed to work.
The country’s storefront scene was recovering by the end of the third quarter 2021. Due to the return of international tourists and a pent-up consumer demand and vaccinations, shoppers were flocking back to shopping malls and downtown areas, and potential tenants were signing leases. In some areas, asking rents were rising, despite having plunged in 2020.
Omicron, a variant of coronavirus, may complicate recovery. Landlords might need to take temporary measures to fill in empty spaces.
Foot traffic has plummeted at the Oculus in Lower Manhattan, a transit hub that also houses a shopping mall, according to Diana Grasso from Westfield World Trade Center. “You saw the impact almost immediately,” she said.
She and other retail real estate managers had been through a similar roller coaster ride when the Delta variant interrupted the “hot vax summer” and prompted companies to postpone return-to-office plans, dealing another blow to the businesses that depend on commuters.
However, Omicron cases quickly outpaced Delta’s. Coresight Research’s new report shows that visits to coffee shops and other businesses have already declined as people avoid public spaces. And although it is too soon to say what the variant’s ultimate impact on real estate will be, some landlords are already adjusting their expectations.
After losing a few tenants to the pandemic, Ms. Grasso enlisted a non-profit organization to bring minority-owned businesses to Oculus during the holiday season. Now she is considering a longer-term place for the businesses in one of the building’s vacant spaces.
“We want to potentially have a full, in-line space where we can continue to bring in these types of businesses,” she said.
Experts believe that Omicron’s setback might not be as severe as that of Delta. This is due to the fact more people have been vaccinated, and the variant causing milder symptoms.
“Consumer behavior will be less impacted than it was over the summer,” said Michael Baker, a senior retail analyst at D.A. Davidson, a financial services firm. “I do think there will be a step back, but a smaller step back, a shorter step back.”
Brick-and mortar stores were already in trouble prior to the pandemic. Consumers shifted to online shopping. As lockdowns closed down stores, e-commerce sales boomed, this trend continued in 2020.
Real estate experts say that the resulting rash in storefront vacancies taught landlords how to be more flexible when dealing with retail tenants. Some landlords reduced the rents of long-term tenants, or waived rents. They offered lower rates, free rent, and customized spaces to attract new tenants.
Leasing terms were also reduced by landlords. According to data from CoStar Group, the average lease term for apparel shops was 5.3 years in 2016 and 2017. It has fallen to 4.8 in 2017.
“For many years, it was, ‘Either you sign a 10-year lease or we have nothing to talk about,’” said Ariel Schuster, a vice chairman at Newmark, summarizing the old attitude of many landlords. “Everyone has to be more adaptable.”
Then there are the stopgap measures — anything to keep the space occupied.
“That’s a desperation play,” said Michael Brown, a partner at the consulting firm Kearney. “That’s the Realtor saying, ‘I don’t have anything better to do with the space.’”
Some landlords have made digital advertising available to storefront windows in order to generate some extra revenue. Storefront occupants have always used flashy signs to attract attention for their own businesses. Companies are now using interactive ads to advertise movies, sneaker brands, and automakers in their storefronts. Landlords receive a percentage of the amount charged to advertisers.
Other landlords are allowing their empty windows to be filled with artwork — efforts that generate good will and make vacant spaces look less bleak. Philadelphia tourism and marketing agency commission artworks to pay tribute to local Black and Brown-owned businesses.
John J. McCullough is the general manager at Nightingale Properties. He agreed to have artworks taken from the program installed in the windows three of his downtown buildings. “We saw it as a win-win,” he said. “It was an opportunity to help out these small-business owners. And we get more eyes on our space.”
Some landlords welcome pop-up shops, and not just during the holiday season. Retailers have embraced the trend as part of their marketing campaigns — luxury brands use them to kick off collections, e-commerce companies to introduce themselves, and companies of all types like the opportunity to test out a site. But landlords and their lenders, who are used to the financial security of long term leases, are not always on board.
However, landlords tried pop-ups during the pandemic to bring life to abandoned ground-floor spaces. While they may not be able to make as much money from the arrangements, at least they were getting some revenue. These deals are often quick licensing agreements and do not require capital expenditures. Plus there’s always the chance that a pop-up may become a permanent tenant, a trend known as pop-to-perm.
“A lot of real estate groups want to have a relationship with the next Warby Parker, the next Casper,” said Melissa Gonzalez, founder and chief executive of the Lionesque Group, a retail consultancy. “This is how you get those relationships.”
Storefront, a digital listings platform where landlords advertise retail space suitable for pop-ups, saw more owners listing spaces, said Nicholas Roberts-Moore, the company’s head of marketing.
ChaShaMa, an organization that provides free space to artists in New York, began donating some of its storefronts to minority-owned companies. That is how Daryl Wright, a custom tailor who specializes in men’s suits, was able to set up a ground-level shop in a building in Manhattan’s garment district owned by GFP Real Estate.
“I have this giant building,” said Eric M. Gural, a co-chief executive and principal at GFP. “I can do something with the storefront that’s meaningful to the neighborhood and doesn’t hurt me in the pocketbook too much.”
James Cook, JLL’s director of retail research, stated that pop-ups are encouraged by downtown economic development organizations as well as suburban malls.
The Downtown Raleigh Alliance in North Carolina started two pop-up programs to address storefront vacancies — which had risen to 14 percent in 2020 from 10 percent before the pandemic — and help budding local businesses. The organization started matching landlords and entrepreneurs in the first year of 2013.
Brookfield Properties filled the Oakbrook Center near Chicago with a traveling exhibition on the Sistine Chapel. Such events “draw people from miles away,” said Katie Kurtz, Brookfield’s senior vice president for retail business development.
However, landlords who engage in short-term activations ultimately hope to land long-term tenants. Sometimes it happens.
Downtown Raleigh Alliance helped Johnny Hackett Jr. for three months at a discounted rate in the fall of 2020.
Hackett paid $3,000 per month for the trial and opened Black Friday Market. He carried art and apparel from dozens of Black vendors. The store did so well, Mr. Hackett signed the five-year lease at $4,500 per month. His vendor was so successful, she was even promoted to the top. taking over the empty storefront next door.
“You just need to roll a little bit with a tenant you think is solid and in the long run is good for the community,” said Greg Hatem, Empire’s founder and managing partner.
Source: NY Times
