Should NYC Landlords Take a Gamble on Short-Term Leases for Retailers?

It’s no secret that New York City retail real estate is a difficult market right now, with empty storefronts a common sight in even the most frequented shopping neighborhoods.

While some brokers are praising the popularity of pop-up stores as a means of rejuvenating the market, a recent report by Optimal Spaces argues that these leases are simply obscuring the true vacancy rate in Manhattan.

Senior managing director Stephen Sunderland, who wrote the report, compares vacancy rates to those of unemployment. “People will always give you the most optimistic number,” he said. “But just as unemployment rates don’t tell you who is working a temp job or who is underemployed, vacancy rates don’t tell the whole story.”

Although the November report claims that total available Manhattan retail space has increased to 1.53 million RSF (rentable square feet), from 1.5 million, the rate for the city’s downtown area has seen a small decrease (from 0.36 million to 0.35 million). Yet downtown Manhattan is also where the majority of pop-ups are located — and so Sunderland warns against reading this too positively.

Short-term leases are appealing to brands — offering the opportunity to test out retail strategies without long-term commitment — but it can be a different story for the landlords.

Some have mortgage covenants that preclude lower rental rates, making it impossible to negotiate with potential tenants. This can eliminate them from competing for pop-up business. Others have to wrestle with making their space viable for temporary tenants.

Faith Hope Consolo, chairman of the retail leasing, marketing and sales division at Douglas Elliman, acknowledges the difficulty of the downtown market. “Soho, which has been known as the epicenter of luxury boutiques with a real European panache, has unfortunately gained a new reputation for its retail vacancies that are on the rise due to skyrocketing rents and online competition,” Consolo said.

Yet she sees reasons to be optimistic about what’s ahead.

“Pop-ups don’t necessarily mean temporary stores. [They can be] more of a testing ground for what [retailers] want to achieve,” said Consolo.

With brands like Allbirds, Margaux and Everlane all turning their New York pop-ups into permanent stores, there’s convincing evidence that temporary leases don’t necessarily stay that way.

According to the Optimal Spaces report, there were 28 short-term leases signed across Manhattan in the second quarter. (In 2017, there were 53 total deals of this kind.)

“It’s a great concept, temp to permanent, to see if the market and space are viable,” Sunderland said. The real question is whether more landlords will be able to take the risk.

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