Pop-Up Stores Raise a Question for Landlords

As the holiday season approaches, temporary stores selling Halloween, Thanksgiving and Christmas merchandise are sprouting up in malls across the country. But whether pop-up stores are a positive or negative trend for retail landlords is an open question.

The issue took on new significance when home-furnishing retailer Crate and Barrel said it would operate pop-up stores for the first time in its roughly 50-year history. The temporary stores, which will be much smaller than a typical Crate and Barrel store, are set to open this and next month in Las Vegas, Des Moines, Nashville and Albany, N.Y.

Crate and Barrel plans to open a pop-up store this holiday season in the Town Square Las Vegas mall. CoStar Group

Small retailers, artists and craftsmen have long operated pop-up stores, kiosks and carts to sell seasonal products in malls. But as a rising number of large retailers embrace pop-ups, some landlords and analysts worry the trend is another sign of a declining need for permanent retail space.

The pop-up concept “has tremendous cost advantages for the retailer without the financial risk,” said Burt Flickinger III, a managing director with the Strategic Resource Group, a consulting firm that specializes in consumer goods and retail. He said pop-ups, along with the growth in Internet shopping, are sparking a “retail revolution that’s making land-based retail less relevant every year.”

A spokeswoman for Crate and Barrel declined to discuss its strategy except to say these temporary stores were a good way to test markets.

For retail landlords, pop-ups can help fill a void. Crate and Barrel recently leased 6,700 square feet in the Town Square Las Vegas mall. Jamiesen Mapes, Town Square’s marketing director, said he would prefer to sign tenants to long-term leases because they provide predictable cash flow. But with just over 80% of the mall’s 900,000 square feet of retail space occupied, the mall is willing to consider leasing space on a short-term basis, he said. Besides, Crate and Barrel’s short-term lease eventually could turn into a permanent one. “You want to fill [the space] permanently but if it’s sitting vacant it isn’t doing you or your center any good,” said Mr. Mapes.

But there is a downside to pop-ups. Retail tenants, especially large ones, often get bargain rates when they rent for the short-term, which could prompt long-term tenants to ask for discounts, too. Mr. Flickinger estimates shopping centers in hard-hit retail markets such as Las Vegas might offer discounts of as much as 40% on rents to bring in a brand name retailer on a short-term basis. Crate and Barrel and a spokesman for the mall declined to comment on the terms of the lease.

Crate and Barrel isn’t alone. Toys “R” Us Inc. also plans to open about 200 temporary stores this holiday season, an initiative that it started in 2009.

Short-term retailers have been around for decades and the concept has grown popular for a range of reasons. Malls bring in seasonal retailers to boost holiday sales and add to the festive atmosphere while retailers use pop-ups to gain a presence in expensive markets such as Manhattan.

Some analysts say they expect the growth of pop-ups to slow as retail occupancies rise. Overall retail vacancies in 63 major U.S. markets stood at 6.8% in the third quarter, down from a recessionary peak of 7.7% in the first quarter of 2010, according to CoStar Group Inc., a real-estate research firm. “The pop-up idea probably peaked in 2010 because that’s when you had the most real estate available for it,” said Cedrik Lachance, an analyst with Green Street Advisors Inc. “As more of the space is leased, it becomes more difficult for retailers to find pop-up locations.”

But Christina Norsig, chief executive of PopUpInsider LLC, a brokerage firm that specializes in short-term leases, says there is a place for pop-ups even in an improved economy. “It serves a lot of purposes,” said Ms. Norsig. “Not every idea can stand alone in permanent space and pop-ups generate revenue between leases and turn the lights on.”

Source: Wall Street Journal By MAURA WEBBER SADOVI Oct. 22, 2013
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