Property Management Companies Property Managers And Landlords – Pop Up Store Phenomenon

by Property Management on March 5, 2011

Optimal Spaces

Optimal Spaces

Property management companies, property managers and landlords,there were huge canyons of empty retail space that needed to be filled. Property management companies and landlords were slow to adjust prices which compounded the problem. The Pop Up Store answered the needs of interim needs of retailers and landlords.

Stephen Sunderland, Senior Managing Director and Founder of Optimal Spaces a Tenant Representative Commercial real estate brokerage firm, has been finding value for retail clients for 27 years.  Most recently during the downturn, the pop up phenomenon occurred.
In 2007, Manhattan Retail rents were high.  Fifth and Madison Avenue rents went to all-time highs before falling.  Landlords would not negotiate.   Stores would go dark in high rent districts.  You could see huge canyons of vacancies on Madison and Fifth Avenue and other high rent retail districts.  Rents stayed high, while jaws dropped and people wondered how landlords could afford to keep such valuable space vacant.

Eventually, Manhattan Retail rental rates dropped by 40%to 50%.  Foreigners, given the low level of the dollar had always wanted to enter the Manhattan market and did.  Existing foreigner took advantage of the dollar and expanded. Some were forced to give extra security deposits, as landlords were nervous as tenants had recently defaulted.

Why didn’t landlords lower their retail rents and fill their spaces sooner?
Landlords did not want to cannibalize their existing rent roll.  If they gave rent concessions to one tenant, they might have to give rent concessions to the remaining tenants.  One tenant would tell another tenant which could cause a cascading failure of cash flow.

With Loan covenants, both banks and Commercial Mortgage Backed Securities loan covenants prevent landlords from unilaterally making changes to leases or lowering rents without permission. Landlords cannot make changes to significant financial changes to existing leases without creating an event of default in their loan documents.   Even if a landlord wanted to, he would risk a breach of loan by doing so.  The ostrich approach.  The Landlord hoped the market would quickly return to the good old days and by doing nothing that was the best approach.

TYPES of POP up stores

1.   Sample sales
2.   Showcase = During Fashion week
3.   Launch of new products  Maybelline in Time Square
4.   Marketing strategies= Pop Tart Store in Times Square
5.   Seasonal stores i.e. = Halloween stores, fur sales
6.   Temp to permanent = Perfume  in Grand Central

Why Landlords Like Pop-up stores.

Property values are determined by rents multiplied by a capitalization rate. “cap rate” the lower rent, the lower the value of a building.
Long-term cheap deals kill property values.
Pop-ups generate interim cash flow.
Landlords don’t have to cut the rents  as they are being flexible on term which is what the tenant is asking for.
It is inexpensive for landlords to rent pop-up stores,  There is less free rent, less or no work letter, less vacancy, and lower brokerage commission.
The pop tenant may stay on to become a permanent tenant and in that case the landlord saves money again in vacancy, free rent, and construction allowance.
Pop-up stores keep the rest of the building looking good. Terrible for building image and rest of building to see vacant store; it is an eyesore.

These pop up stores now give foreigners and domestic retailers an opportunity to establish themselves with less investment exposure and determine if they can establish a following before investing substantial funds.  So it is a win win on both landlord and tenant sides.  .

Real Estate Cycle Manhattan
Cause
Slowness of landlords to react, slowness of lenders to allow changes, big banks and retailers out of the market place leaving a void.

Effect
Existing stores retrench.   Chains Stores give up marginal locations.  Stores go Bankrupt or close.  I.e. Block buster, Barnes and noble. Circuit city, 1800 mattress, Filenes. Landlords worry about credit quality having recently experienced loss and demand greater security deposits and increase security deposit requirements which limits new entrants to market.

Existing stores ‘Relocate’: Stores move to larger quarters and lower prices and lock in new long- term deals. For example, Optimal Spaces moved Fotocare in the Flatiron District to double the space for less rent. They got double the space by moving two blocks within the flatiron district.

New entrants Foreign Retail Real estate companies enter the New York Market Place.  We rented a store to an Argentian just off Madison Avenue and English Shoe Company in Soho who was attracted by the fall of the US dollar and the fall in the retail rents.
New nationals expansion into New York.  National Chains who lack a New York presence are using the fall of Manhattan rents as a opportunity to establish a New York presence.  Optimal Spaces recently completed a lease for the Goddard schools, a chain of 360 preschools on the Upper West Side of Manhattan where they rented 10,000 SF.
Existing stores like Duane Reade and banks have also expanded.  Banks again start taking additional locations.  Vacancies start diminishing.  Rental rates start rising and the cycle begins again.

Only two ways outs of the cycle.  Either the economy improves or landlord and banks reacts faster to market conditions.

Source: Optimal Spaces, March 1, 2011

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