Tuesday, September 26, 2017

Prospecting White Elephants: Some Thoughts on Pop-Up Brokers

Dan McCombie is a research associate at Larisa Ortiz Associates

Last week I read an article by Matthew Flamm in Crain’s Business where he talked about the rise of a class of real-estate brokers specializing in pop-ups for vacant spaces. This struck me as an interesting development since we have several entries on the blog discussing how vacant retail storefronts—otherwise known as White Elephants—can have detrimental effects on the health of neighborhood downtowns. My understanding is there are two main reasons for this.

First is that it results in shorter shopping trips. A blank storefront can be an uninviting visual eyesore that discourages foot traffic. Perhaps it’s located in the middle of a corridor in such a way as it feels like it segments it into two unrelated districts.

Second is that it reduces the number of shoppers visiting the district. A hole in the tenant mix reduces retail density, creating one less reason why a shopper might think to make a trip. Maybe a coffee shop closes down next to a bookstore, and this prompts people to patronize the bookstore less.

Source: Thisopenspace.com

There are plenty of other reasons too. Vacancies are obviously an issue for landlords because they represent lost revenue with potential snowball effects. Imagine the impact when a large mall anchor like Nordstrom or Macy’s decides to close up shop. Once it’s out, it’s only a matter of time before the smaller in-line stores see their sales diminish and also start disappearing. It’s an extreme example but demonstrates why vacancies are problematic, and also why some landlords might consider subsidizing certain tenants or encouraging pop-ups to retain a healthy tenant mix.

So the presence of pop-up brokers sounds good, right? In effect, they provide a real service to commercial corridors by rounding up all the White Elephants into a directory and curating them to prospective retail tenants. These tenants can be small start-ups looking to test the market, e-commerce retailers looking to transition into brick-and-mortar, or more well-established brands who are looking for an experiential pop-up opportunity to engage their customers in new ways. And whether or not you believe we’re in the middle of “retail Armageddon,” it’s a creative solution for the growing number of vacancies in neighborhoods like SoHo where the perception is this trend will only continue.

Available vacancies clustered in lower Manhattan
Source: Thisopenspace.com

And these brokers have managed to turn it into a process as seamless as booking a hotel room or an uberPOOL. In past posts we’ve advocated that commercial district managers take on the task of populating vacant spaces; but now we’re seeing a quintessentially private sector solution which is fast, easy, and done on an app in minutes. And that has given me pause….

…It feels a bit inaccurate to say this is a solution for ailing districts and long-vacant spaces in search of a tenant. Perhaps it’s true that was part of the initial inspiration, but now it sounds like it’s becoming a high growth industry unto itself. I think Matthew Flamm’s use of Airbnb as the residential analog to these new companies is appropriate. My initial understanding of Airbnb is that it was just another component of the growing gig economy and a way for cash-strapped Millennials to make a few extra bucks off their couch, their car, their whatever it may be. But now I understand it can be an agent for speculation too—like when the gap between a rent or mortgage payment and the going rate on Airbnb becomes too great for people to turn down. I’m not taking issue with anybody who might purchase a condo with the express intention of having it listed on Airbnb as an investment, but I am expressing caution about companies that see an advantage in maintaining a steady supply of vacant storefronts, or landlords that believe they can make a better profit through punctuated short-term rentals. It feels like profiteering off the White Elephants.

Downtown revitalization is not in the mission statement of these pop-up brokers. One explicitly states on its website that prospective tenants should be wary of inquiring after un-vetted spaces precisely because they’re probably “situated in low footfall area[s]” or have “zero potential for retail or brand marketing.” The assertion suggests their portfolio doesn’t include spaces that are unattractive, but is rather a professionally curated assortment of opportunities in a pay-to-play scenario. Again, I’m not decrying a company’s attempts to distance itself from the competition, but trying to make the distinction between a company providing a service to an individual client and a district manager looking out for the health of the larger district. That being said, the potential for dynamic shopping and unexpected retail under this pop-up model sounds fun. And I’ve read many broker success stories about clients who turned a successful short-term rental into a long term lease agreement.   
Most of these pop-up brokers are active in dense urbanized areas. If you’re a commercial district manager in a town of less than 20K, it might be a minute before you see a private pop-up broker looking for vacant spaces, and so this screed is probably for naught. And if you’re a district manager in a large city or a neighborhood like SoHo, the troubling number of vacancy rates may warrant a larger discussion about rental rates in that district, and whether “retail Armageddon” is a legitimate characterization, or if it’s more likely a self-inflicted wound and one that can be addressed through some retooling (to which I recommend reading Larisa’s latest post).

To summarize it all up, I think the development of pop-up brokers is an incredibly interesting phenomenon. Are they solving the vacancy problem caused by structural changes happening in retail? Or are they profiting off the presence of White Elephants? No reason why it can’t be both. If Airbnb and the changing state of retail provide any sort of indication, we can be sure they’ll be around a while yet. I believe that's a good thing if at the end of the day it means less vacant storefronts.    

Past blog posts that explore vacancies and pop-ups:

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