Pop-Up Stores Seize the Opportunity in New York City

Some Retailers Negotiating on Short-Term Leases Amid Elevated Vacancy in NYC Retail Real Estate

It's hard to not see the signs. According to a leading retail real estate expert, New York City retail vacancy hovers at just over 20 percent.

"There is a 22-percent vacancy factor across New York City retail at the moment, and within some submarkets, such as along Fifth Avenue between 14th and 23rd Streets, nearly every corner is available for lease or sublease," says Vicki Siokis Freeman, retail real estate advisor with the HSP real estate group with NAI Global.

SoHo was also hard hit, notes Freeman.

"So many brokers are slugging through the SoHo market, there is an insane amount of space available," Freeman adds. "Seventy percent of emails I received for available retail SOHO NYC properties have the tagline of holiday pop-up. That also speaks to the national retail environment."

Availability within SoHo was 23 percent in the third quarter, according to commercial real estate services firm Cushman & Wakefield. That figure reflects a 1.7% year-over-year increase.

"Trending and hot in retail are food, lifestyle, fitness and streetwear. Certain apparel retailers have done well, but many have not. We are seeing activity, but yes, generally vacancy is too high," notes Colliers International's David A. Green and Zachary Nathan.

Amidst this backdrop, retailers seeking to test a New York City submarket are finding opportunity. Over the past year, pop-ups in the City have become more prevalent, sources say. They have evolved from temporary seasonal shops to creatively structured short-term retail leases. With that, the definition of pop-up retail is changing.

What's pushed the market in this direction?

"We have been experiencing 'the perfect storm' based on the effects of a challenging and changing retail business in general," says Robin Abrams, vice chairman of retail and head of the Abrams retail strategies group at Eastern Consolidated. "Rents became aggressively high. In some cases, increased rents along high-profile corridors increased by 50-100 percent at the height of the market. Vacancy stems from that, retailers could not succeed in selling enough product to meet those rent expenses."

Now in a market facing significant vacancy, sources say that landlords are finally starting to see the disconnect.

"The market is already changing to reflect the dynamics of the current environment. Longer-term pop-ups are evolving into shorter-term leases. Some landlords are feeling that the pendulum may have swung too far on rent and are more willing to enter into shorter-term leases to catch the next upswing," according to Green and Nathan.

As landlords have started to lower their asking rents and offer concessions and flexible terms, tenants are cautiously re-addressing the market, says Abrams. "Many have decided to test their markets through short-term leases," she explains.

"We say to the landlord, this is the landscape -- so being flexible will make it work," says Freeman, adding that, "Smart landlords will take a pop-up tenant to see how it goes."

For instance, if a luxury retailer such as Valentino says it will stay for 30 days, at day 15 it may realize it needs to be in that submarket, Freeman provided as an example.

The historical definition of the pop-up lasted days or weeks and opened seasonally. Traditionally, they opened during winter holidays in November and December or during graduation season in May and June, according to Freeman.

"The definition of pop-up is changing. Pop-ups can go perm," says Freeman, adding pop-ups are more prevalent in the City compared to a year ago.

As the line between pop-ups and short-term leases blurs, deals are being structured with a potential long-term option. Landlords and tenants are becoming more comfortable in negotiating shorter term deals, says Abrams, often using license agreements, "Which are easier to negotiate than lease agreements."

Eastern Consolidated has seen short-term deals range in time from three months to two years, Abrams adds. The end result is a win-win for both landlord and tenant, according to Abrams. The landlord can collect income to cover some of their expenses such as real estate tax and operating costs on the space. It also creates a potential long-term scenario.

"Landlords are embracing these scenarios now and they are becoming an attractive way for a tenant to secure space and open a store but do so in a way that mitigates risk," says Abrams. A tenant may take a one- or two-year deal with potential to go long term, Abrams adds.

Pop-ups have become a popular concept given the increased vacancy levels, says Green, who notes that most landlords see pop-ups as a way to secure tenants for the future.

"Thirty to 60 days is not a moneymaker necessarily, but landlords like to believe that the retailer for the pop-up will become a longer-term tenant. At the very least, a pop-up activates the space, making it more attractive to prospective tenants," adds Green.

"The pop-up can be a bridge to the owner to recoup costs in a short-term scenario as pop-ups are excellent 'bridge' tenants," notes Freeman. "Landlords can work through an uncertain market but still create a revenue stream until they are more comfortable with where the market is going, and the same premise works for a tenant in the realm of not signing a long-term deal."

Although there is risk in renting to a start-up, landlords are mitigating that risk with various guarantees and substantial deposits, Freeman notes.

Pop-ups have also gained strength as a marketing tool, often used in branding, and in those cases they don't have to go long term, says Nathan, citing the recent Snap Chat pop-up store on East 59th Street.

Valentino, for instance, is planning month-long pop-ups in SoHo to market segments of its brand in 2018, according to Freeman. But many pop-up tenants who sign short-term leases are specifically looking for space that gives them the option to go long term.

"Many tenants are specifically going into a space where they know they can go long term. It is part of the experiment to test long-term potential. We had one scenario like that in SoHo. We had a shoe tenant in a pop-up in SoHo that had a successful experience and is now looking to go long-term on Madison Avenue or in SoHo. So the short-term pop-up is a really useful tool for landlords to mitigate vacancy while giving tenants flexibility," says Abrams.

On another space along upper Madison Avenue, Abrams says her team was, "Marketing it for long-term and/or pop-up before we had the lease out so we could relieve some of the landlord's burden. We were very successful using pop-ups to fill the spacethe last pop-up we had in there wanted to go long-term but by the time they proposed that, we already had a permanent tenant in place to take the space."

Tenants using the space ranged from high-fashion sample sales, tenants wanting to test the Upper East Side for two months, to art galleries, she notes.

"Whether this evolution becomes more prevalent is really just a function of supply and demand," notes Green.

Freeman points to the status of New York City retail rents as "still in flux," adding to uncertainty.

Going into 2018, Abrams says she thinks that based on demand there will be a continuation of more flexible deal structures.

"We will see tenants re-engage through the short-term deal mechanism. What may change is what tenants have to pay," says Abrams. "It will be an interesting spring. The rules are still changing - all of us are figuring out what the ‘new norm' for retail will be."

Diana Bell, New York City Market Reporter  CoStar Group