Mall Landlords Can Benefit from Retail Space Sharing

Article originally posted on National Real Estate Investor on June 12, 2019

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Rising vacancies are giving rise to sharing retail space, a concept involving multiple digital brands sharing space with shorter term rental agreements.

Traditional bricks-and-mortar retailers normally sign a lease of around five to 10 years, according to Jeff Berta, senior director of real estate development at Structured Development, a real estate development company. But emerging brands are instead opting to sign a license with an already existing retailer, as opposed to a lease. This license can last anywhere from a week to multiple months, allowing retail center landlords to fill up space with new brands and brands to test new locations and demographics without an expensive long-term lease commitment.

Emerging digital brands often want to open physical locations, but may not have the financial power to sign traditional long-term leases, especially in popular markets.

Opening one new physical store in a market results in an average of a 37 percent increase in overall traffic to that retailer’s website. For emerging brands, defined as those less than 10 years old, new store openings drive an average of a 45 percent increase in web traffic following a store opening, according to ICSC research.

“Usually, [the license] can be as long as a week, or as long as a year, it all depends on the retail host that has a lease, they set the terms,” says Jay Norris, CEO of Guesst, a digital platform for retail space-sharing. “So, think about this like Airbnb for retailers, meaning, if you own a home, you’re the one who sets the terms for how long you want a guest to stay at your house.”

Products that are being tested through shared space locations range from clothes to home goods to food, and target demographics can range across the entire population, depending on the products the brand sells. The emerging brands pay either a monthly rent or a percentage of sales, or a combination of both. Due to short-term licenses, however, these agreements can be negotiated more frequently.

“Each brand arrives with its own cache and following, this grows from surrounding itself with like-minded brands,” says Richard Rizika, partner and co-founder of Beta, a commercial real estate agency. “This often creates word-of-mouth advertising that is accretive to the shopping center. Unique or original, pop-up stores stand out in a traditional shopping center environment and can attract new customers to the shopping center and change with each pop-up environment.”

Along with bringing more activity to the center, sharing space arrangements can help landlords struggling with vacancy capitalize on the trend because it brings in a tenant, albeit for the short term. Shopping centers with retail marketplaces can showcase new and emerging brands, giving customers unique shopping experiences, an important trend in today’s retail world. Retail marketplaces also provide flexibility, so centers appear fresh as retail concepts within them continue to evolve.

“It offsets [operating] expenses,” says Berta. “And it also provides you some level of income versus no level of income.”

But not having a typical long-term lease in place can put a strain on the landlords, as the space sharing only provides a short-term solution for vacant spaces.

“Challenges would be the lack of commitment. It’s probably going to be a 30-day type of agreement, so you can’t really use that from a financing perspective, so, it doesn’t necessarily add intrinsic value to the building or to the property as a long-term lease would,” says Berta. “A long-term lease provides future income, which gives you value [for] your property.”

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