Commercial Real Estate & Advisory

Desperate for tenants, retail landlords are letting leases get shorter and shorter

By Daniel Geiger and Joe Anuta | November 20, 2017

When Jay Goltz decided last year to bring his four-decade-old Chicago furniture store to New York City, he was put off by the risk of signing a long, expensive lease in an uncertain retail environment. A pop-up in the Hamptons—with its summering visitors and affluent residents—seemed like the best way to gauge how his business, Jayson Home, might do in Manhattan before he bet the ranch.

It turned out not to be necessary. In August Goltz struck a deal to take roughly 6,000 square feet at 138 Greene St. in SoHo for just nine months, rather than the five or more years the landlord had initially sought.

“We noticed there were a lot of empty stores, rents were slipping, and we had more bargaining power,” Goltz said. “I thought, Let’s look for a shorter lease, to try a space out. We asked, and we got it.”

Since the freewheeling days of 2014 and 2015, when it seemed retail rents could only go up, the city’s market has undergone a sobering correction. As with every downturn, some landlords remained in denial, leaving their storefronts empty as they held out for rents that became more unrealistic by the day. Ground-floor vacancies on Manhattan’s prime corridors have doubled between 2014 and today, from 99 storefronts to nearly 200, according to CBRE. Savvier owners tried to preserve their face-value rent, an important number used to underwrite loans, but quietly offered tenants incentives like chipping in for a new store’s renovations or forgoing some monthly payments. Eventually, though, reality set in, as it always does. Since the fourth quarter of 2014, average asking rents along the 16 corridors tracked by CBRE have fallen by 30%, to $711 from $1,020.

What happens next is less predictable. A systemic shift is affecting the industry, driven by online shopping and changes in how products are marketed. To overcome these forces, brick-and-mortar landlords and tenants are experimenting in the hopes of finding a viable path.

The idea of experiential retail—giving shoppers more to do than just shop—has been kicking around for some time. But landlords are now wooing tenants that absolutely require physical locations, such as urgent-care clinics (see page 16). Instead of leasing to a restaurant, some owners are marketing ground-floor space to food halls (page 15), whose variety of offerings can attract a wider clientele and make apartments or commercial space in the building more valuable. Mom-and-pops are seeking help from city government, which is considering a suite of merchant-friendly legislation. But as Goltz and many others have realized, short-term leases can be a simple and effective way for the city’s retail market to find its footing in this environment.

Typical long-term leases run five to 10 years and can cost tenants millions of dollars. Temporary agreements, typically one to three years, can act as a hedge against being stuck with a bad location. But a test run can also provide valuable performance figures to gauge how much rent a store can afford, should it decide to stay.

Built-in savings

“These deals are arming retailers with a range of data that allow them to reliably budget what a given location can support in rent,” said Michael Glanzberg, a principal at retail-leasing brokerage Sinvin Real Estate who represented landlord Ascot Properties in the Jayson Home deal.

Gucci, for instance, recently signed a two-year lease for around 11,000 square feet at 375 W. Broadway. But it maintained an option for an eight-year extension. Sources familiar with the deal anticipate the Italian fashion brand will build out the space with luxury interiors, as it has in long-term locations. That could mean a big loss if it decides to leave in 2019. But that risk pales in comparison to making a larger commitment while retail is in flux.

“Building out a typical SoHo store could cost $2 million or more, but a [long] lease is a much larger liability that could cost $20 million or more over the life of a deal,” Glanzberg said. “Having the flexibility to cancel a lease is worth a lot more than the money spent to create a space.”

While Gucci is willing to put in serious money, even for the short term, many other tenants are finding ways to limit build-out costs, giving themselves greater leeway to cancel without losing much up-front investment.

Jayson Home, which opened in September, mostly used a retail installation left over from the previous tenant, furniture store B&B Italia. Fashion brand AllSaints did something similar after signing a yearlong lease for 20,000 square feet at 635 Fifth Ave., in Rockefeller Center, using leftovers from French clothing brand Façonnable.

Saving money on build-outs can also divert more cash into landlords’ pockets. But these days it’s not as much as owners would like. A source said AllSaints’ landlord, Tishman Speyer, had sought a whopping $18 million a year for the space but agreed to the 12-month lease for a “fraction of that.”

Nearby, yoga apparel brand Lululemon Athletica recently leased 8,000 square feet for a year at 597 Fifth Ave. with an option to extend. Reports put the rent at $400,000 a month—so far below what landlord Joseph Sitt was seeking that he has had to use other funds to keep the building’s mortgage current.

“Landlords would prefer to have tenants paying some rent—rather than none at all—while the market corrects itself,” said Brad Mendelson, a retail-leasing broker at Colliers International.

Under the influence

In the past some stores were willing to lose money on a city location to market their brand to the masses of passers-by. Many companies now realize they can better and more cheaply connect with shoppers through digital channels such as social media, especially with the help of influencers—trendsetters on platforms like Instagram who have legions of loyal followers. That is fueling a new type of marketing strategy into hipper corners of the retail market.

“When an influencer posts about a product or brand, it’s become a much more effective form of advertising,” said Adam Rivietz, co-founder of #Paid, a marketing firm that helps create social-media campaigns and partnerships between brands and influencers. “Billboards or the front window in a retail shop are less personal now for shoppers. It’s a brand or product forced in their face.”

The focus on social media—where users’ tastes can shift quickly—has become so strong that some brands are using it to guide their real estate decisions.

Toronto-based online men’s clothier Frank and Oak, for example, tapped #Paid to help it create a campaign for which it hired a dozen Instagram influencers in major cities including Boston, Los Angeles and New York to persuade their followers to buy Frank and Oak gift cards. The company then narrowed its search to the six locations with the greatest response. Last year it opened two locations in Manhattan, on Crosby and Mulberry streets. It has already closed them, taking its fast-paced pop-up strategy to other cities.

While short-term leases might not be the future of retail, they are one of the ways that firms are trying to feel their way through this unique downturn. In some cases the agreements appear to already be producing results and helping landlords and tenants strike more traditional deals. After opening a pop-up earlier this year on Greene Street, The RealReal, a popular online consignment store that specializes in designer and high-end shoes, apparel and jewelry, signed a five-year lease for a store on Wooster Street that it opened Nov. 10. To increase the location’s appeal, the firm is seeking a liquor license and will have a café to encourage shoppers to lounge, attend classes and get advice from experts who can authenticate and value items.

“We had our pop-up for 20 days, and we knew we wanted to have a store longer term because of the response,” said RealReal founder and CEO Julie Wainwright. “In our new space, you can have a glass of wine, get your watch inspected by our gemologist or your handbag authenticated and talk to our experts. We all want to shop. It just has to be the right environment.”