Landlords Can Be Retailers And Never Sell Any Goods

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At one time (and even today), when you saw a closeout bookseller or a Halloween store at a shopping center, a good guess was that the property was sucking wind or its functional equivalent. Though these are generally unattractive uses, they do bring revenue and customer traffic. So, the impact of their presence lies in the eyes or the pockets of the observer.

Temporary uses don’t have to tarnish a shopping center. If you call the Halloween store a “pop-up,” its image improves. There’s an idiom from as early as 1833, adjusted to 21st Century English: “Call me anything you want, just don’t call me late to dinner.” That would seem to apply to filling a property with rent-paying, foot traffic generating tenants.

Temporary tenants don’t have to be solely discount or low brow ones. Landlords have the power to create a shopping environment. Seemingly perennially vacant spaces can be converted to above-market rental opportunities. And, this isn’t just for the large properties. Permanent pop-up spaces can be created. Outfit a single store or more for use by a continuing series of fashion retailers. That would be like having a regular tenant that turns over its inventory every month. Just as furnished houses rent for more than vacant houses, “furnished” stores can rent for more than empty ones. Earn money on more than real property. Rent the improvements and the fixtures as well.

Fashion doesn’t tickle your fancy? Then, how about pop-up restaurant space? Invest in a fully equipped, first-class commercial kitchen with front-end restaurant fixtures. Then, rent the space out for a month at a time. Be even more adventurous, outfit a kitchen that can be rented every Tuesday by one “chef,” and every Friday by another. That’s seven tenants each week on a rotating basis. With a single day in the space, a once a week tenant could pay more than 1/7 of what a full-time, long-term tenant would pay. How about creating incubator space just like the high tech people do. You might even want to exchange use of the space for a percentage of any permanent restaurants growing out of your shared kitchen (or any shared retail space).

You can call the spaces “pop-up” or call the spaces “concept,” but whatever you choose, call them Kaching-Kaching, the sound of a cash register. Restaurants, art, jewelry, fashion, shoes, whatever – create a permanent marketplace of your own.

Think out of the box. When you’ve got an empty space and can’t easily rent it, you get hurt, and, importantly, so do your tenants. Quality traffic rises all boats.

These kinds of opportunities aren’t just for property owners. There’s a business in operating shared spaces. After all, many mall food courts are “that” business. One master tenant providing fit-up space to a variety of operators. The master tenant pays “wholesale” rent and charges “retail” rent to the restaurants. Why not be a tenant operating time-shared space?

What brought this to mind was Macy’s announcement last week that it would be bringing its brand to community shopping centers (strip malls) and closing about 125 mall stores over the next three years. Supermarket-based properties, especially ones with drug stores, remain stable, somewhat (but not wholly) insulated from today’s evil villain: THE INTERNET. They have decent foot traffic because people keep running out of food and toothpaste. We can’t speak for Macy’s and its planned 15,000 square foot “Market by Macy’s” stores (carrying apparel, accessories, home goods, and beauty products), but we think its thought is that customers, once at the property, will visit these smaller stores. Sephora and others are thinking the same thing.

What’s the connection? Why did the Macy’s announcement drive today’s blog posting? That’s simple. Foot traffic is the key to brick and mortar success. Tenants create foot traffic, but they don’t have to be the only ones. Landlords can do the same and make money doing so. Some tenants own their own properties. More landlords can own their own retail businesses and not even have to run them.

Why does Ruminations think today’s topic belongs in a blog focused on retail real estate law? Here’s our thinking. There was a time before condominiums, cooperatives, time shares, fractional ownership, and commercial mortgage-backed securities. Entirely new real estate industries and practice areas have been built on these concepts. Smart readers, especially those fearing declines in brick and mortar real estate, need to think outside the box. Retail real estate, and by extension, retail real estate law, doesn’t have to be stagnant. There are new ways to think about drawing customers away from their desktops. So, by example, some of the simple ideas we’ve tossed out today might work better with licenses, not leases. Or, perhaps, with an entirely different way to structure an occupancy agreement. Our readers can make that happen. Go for it!

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Comments

  1. Re-purposing of retail space has always been at the heart of successful property operation. Although the idea of “pop up” retailers is not new, it is a concept that occasionally enjoys a resurgence, as may be happening now. And as you have alluded, some foot traffic and some revenue generated from an otherwise vacant space is always better than a vacancy that generates neither. Among the challenges for landlords, however, is that most such tenants have, historically, not been of the Macy’s caliber but, instead, of the mom & pop caliber. And the mom & pops generally are weak traffic generators, because they a lack an established market brand as well as sufficient capital and the expertise (and commitment) required to sustain a robust inventory and build that needed brand awareness in an abbreviated occupancy situation.

    You describe scenarios in which space is shared by a bevy of rotating operators, which arrangements may well support the landlord’s rent roll and may, occasionally, reveal a new, potential, long term addition to the tenant mix. That’s all very positive. One of the downsides, however, is that, a lack of consistency of presentation – a constant churning of merchandisers from one day to the next lack, often leads to confusion among shoppers as to what they might find in that space on any given day, which confusion dampens traffic generation. Might landlords fare better with experienced, well-capitalized, well-branded pop up merchants? We’ll see.

    • Alan Betus says:

      What you say in the last sentence is of course the goal for landlords when they are unable to find credit-worthy “named” permanent tenants with cache. But, I think that in today’s marketplace reality (at least for all but the best properties in the best markets) what you describe is a unicorn – something that is highly desirable but difficult to find or obtain. And, even for Class A malls in top tier cities it’s becoming more difficult by the day to find these tenants.

      If you can’t find these types of occupants, why not be more proactive and create a marketplace for other types of occupants? Other than investment dollars the risk is low because you’re trying to lease/license undesirable space that is and will continue to be vacant, or find tenants that don’t exist in great quantities.

      Landlords are banding together today to buy entire retailers out of bankruptcy and then run them as an on-going concern. If that can happen, why can’t a landlord successfully retrofit a space and as a test or incubator, add some restaurant equipment and have a “chef of the week” concept, or create a “Goods by and For Locals” space that switches operators and offerings every few weeks? What you see as a possible confusion among shoppers I see as a possible great way to freshen up the everyday (sometimes stale) offerings of the traditional mall. One person’s treasure and all that.

  2. We are certainly seeing the trends you describe in this posting. But I think landlords are going there reluctantly and only because they don’t have better options. Landlords would still prefer long term traditional leases but they are having to settle for pop ups and other new concepts. They are even more reluctant to go a step further and themselves create, operate, and manage the pop ups, for a series of transient licensees, as you suggest. That’s a very different business from traditional commercial real estate leasing. Why would traditional landlords be any good at it? Maybe it’s an opening for management companies, like the shift in co-working from leases to management agreements. And maybe mall owners are better at it than traditional high street landlords. If I had to predict, I’d expect a slow take-up of vacant retail space (especially in NYC), mostly with traditional stores/retailers. But pop ups and alternatives will remain a (small) part of the market. But what do I know?

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