Retailers Looking to Test Run Stores See Opportunity in Short-Term Leases

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Retailers Looking to Test Run Stores See Opportunity in Short-Term Leases


Sept. 1, 2018

By Keiko Morris

Read More: https://www.wsj.com/articles/retaile...ses-1535810400

“Our model is all about testing things, getting smarter, seeing what’s working and not working,” said Rati Levesque, chief merchant at the RealReal, a seven-year-old company which got its start online. “That’s how we run our website.”

- The RealReal opened up a holiday pop-up store in 2016 and proved their hunch was right. The store brought in new customers, deepened the company’s overall engagement with its existing customers and consignors in the region and helped boost their spending and consigning with the retailer, Ms. Levesque said. The following year, the RealReal signed a five-year lease for its store at 80 Wooster St., which also serves as a mini-fulfillment warehouse, Ms. Levesque said.

- As uncertainty continues to hang over the retail real-estate market, retailers like the RealReal are finding more opportunities to negotiate commitments as short as a month to three years and dip their toes into Manhattan’s choice shopping districts where rents were once seen as prohibitively expensive. Since 2016, deals for temporary stores for periods of three years or less have increased sharply, according to a new report from real-estate services firm CBRE Group Inc.

- The CBRE report counted 53 short-term retail deals in 2017, slightly more than quadruple the 13 counted in 2016. As of the second quarter this year, there were at least 28 short-term deals, keeping pace with 2017, CBRE’s research showed. Apparel was the most active tenant category taking advantage of short-term stores. A heavy concentration of short-term deals made from the beginning of 2016 through the second quarter of 2018 took place in the SoHo neighborhood, which has been one of several Manhattan areas hit hard by the retail industry’s upheaval.

- “The obvious positive on the tenant side is that they can test the market,” said Michael Slattery, CBRE’s manager of research. The benefit for landlords is, if tenants like the location, they will extend their leases, he said. Retail landlords who are optimistic that rents will once again rise are willing to make a short-term deal with a good tenant, create buzz in the space and bring in revenues until the market returns in their favor, some brokers said.

- However, for many owners of Manhattan retail properties, the downside of the short-term deal can come when refinancing a property or selling a property because long-term leases offer lenders and investors more certainty. of a building’s future income, real-estate brokers have said. — While retail leases are still predominantly long-term transactions, more landlord flexibility is helping to generate more deals overall, brokers said.

- “It used to be landlords would dig in and wouldn’t back off rent that much, but now there are deals getting done,” said David Firestein, managing partner at SCG Retail. “It feels to me that the market is bottoming out.” — Retailers as well as other businesses from technology firms to entertainment companies are making use of shorter-term deals, using retail space as not just a place to sell goods but boost consumers’ awareness of brands, said Ross Bailey, chief executive of Appear Here.

- Companies such as home-goods company Parachute are seizing the moment as they expand and experiment with their brick-and-mortar strategy. Initially an online only retailer, Parachute now has four locations, including a SoHo store, where it has a two-year lease with an option to renew for five years, the company said. It plans to open 20 stores by 2020. — “As the retail landscape is evolving, property owners appear to be growing more amenable to brands, and their desires to be experiential and experimental,” said Ariel Kaye, founder and CEO of Parachute.

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