Although COVID-19 may be seen as the tipping point in the decline of traditional retail models, this trend has been creeping up over the past several years as online shopping has become more ingrained in our culture. Retailers and their landlords have had to rethink some of the traditional retail models. One of the trending solutions? Pop-up retail space.
What is a pop-up?
A retail pop-up is a temporary retail storefront that operates on a short-term lease. Pop-up retailers can fall under a diverse range of retailers, from coffee shops to beauty suppliers, but the goal is to reach new tenants and engage in new business for a fraction of the cost and without long-term commitments.
Although the concept has been around for a while, it was traditionally utilized by start-ups and other small businesses using small spaces to test their product or service. Now major and luxury retail brands like Gucci (NYSE: GUC) and North Face (NYSE: VFC) are opening pop-ups in retail spaces measuring several thousand square feet. The key is that the retailer and landlord have agreed upon a short-term lease rather than the traditional long-term lease model of the past. A pop-up lease can be for just a few weeks up to a few months but rarely lasts for more than a year.
How does the pop-up model help?
With retail vacancy rates reaching a seven-year high at the start of 2021, filling vacancies is the key to long-term success for retail landlords. The pop-up model offers landlords the opportunity to fill a space, even if it's for a short time. Color Edge found that most spaces will rent five times faster when listed for a short-term lease than a traditional long-term lease approach.
There is also the potential for one of the more successful pop-ups to make a buzz in the local area, which ideally would lead to them extending the lease. Even if they don't, it's likely to see demand increase for the real estate once the short-term tenant vacates.
The retailers themselves will find significantly lower entry costs for renting the property and some of the other associated costs when opening a store. Storefront found it was 80% cheaper to open a pop-up store rather than a traditional brick-and-mortar location. That's a staggering savings for both start-up and established retailers to take advantage of. The tenant can test new ideas, ensure their business model will succeed, launch a new product, or try out a new location.
These pop-up retail spaces tend to draw increased foot traffic, so sales are generally higher, whether it's an experience-type space with an entry fee or physical goods being sold, meaning structuring a percentage lease can allow landlords to benefit from increased sales. It can also allow an established or online retailer an outlet to quickly unload inventory that's going out of season or that otherwise needs to be liquidated without having to offer much in the way of discounts.
The Millionacres bottom line
Pop-up retail spaces have become a wonderful meeting ground for both landlords and tenants to meet consumer interest while still making the lease terms profitable and appealing for both parties. Whether it will save the faltering brick-and-mortar retail model is yet to be seen. One thing is clear though: It's provided an avenue for retailers and commercial real estate investors to keep things rolling, at least for now.