Pop-up stores are disrupting retail, but are the risks worth it for commercial real estate owners?

By now, most of us have stumbled across a storefront that is vacant one day and fully stocked the next, often with a new and unrecognizable product or a product that appears to have no obvious utility at all. In our on-demand, just-in-time culture, the so-called “pop up store” has become a de facto way for retail startups to gain fans in person and test-run storefront retail in new markets without making a long-term investment. It’s obvious that pop-up stores are good news for retailers, but are they also good news for commercial real estate owners?

A Short History of the Pop-up

In many respects, there is nothing new about pop-up stores. Christmas markets have existed since the 13th century and the stalls found in these markets are not unlike today’s pop-up stores. The retailers and restaurateurs who set up shop at festivals of all kinds might also be seen as part of the very long history of pop-up stores. In the early 2000s, however, a new breed of pop-up stores started to appear and since then, these stores have radically disrupted the retail landscape.

Comme des Garçons was among the first retailer to fully embrace the pop-up store trend. In 2004, Comme des Garçons started to set up pop-up outlets that lasted no longer than a year in various locations around the world. In the process, they attracted new customers while testing the retail waters in different global hubs. Other companies, like Warby Parker, have used pop-up stores to help transition from an Internet to bricks-and-mortar retailer. In the case of Warby Parker, however, the company did not rent empty storefronts but chose instead to set up stores nested within existing stores.

The success of these companies and many others has demonstrated the value of pop-up stores and since 2010, temporary locations have increasingly become a critical part of the 21st-century retail business model. Retailers now create pop-up stores to scale gradually, move into higher-end retail districts, and test new global markets without the risk that accompanies establishing permanent shops.

Temporary Retail Space Brokers

Given that there is now an app for everything, it is no surprise that since the pop-up store explosion, several companies have appeared to help connect owners to retailers and event planners in need of temporary spaces.

The London-based Appear Here, for example, started to operate in the United States in early 2018. Appear Here is a bit like Airbnb for commercial landlords. Owners list their spaces on the app. If they don’t already have great photographs, Appear Here will even send a photographer over to help capture their space at its best. Once the listing is up, owners can start connecting with renters in need of a space for a store, event, or even temporary restaurant. But Appear Here isn’t the only platform helping owners find temporary commercial tenants. Similar platforms include The Storefront and Splacer.

In early November 2018, The Storefront had a 700-square-foot boutique in Nolita listed at $960 per day and a 1400-square-foot gallery space in Soho listed at $2,400 per day. On Appear Here, a storefront on North Third in Williamsburg was listed at just under $25,000 for the month of December. While these rents will yield a higher return than leaving a space empty, depending on the neighborhood, temporary rents can also lag well below long-term rents. A 2017 article in the New York Times reported that in high-end retail neighborhoods such as Soho, pop-ups often pay as little as $25,000 per month for spaces that were previously rented to long-term tenants for up to $150,000. Also, bear in mind that in addition to the fact that pop-ups often rent for less than long-term tenants, platforms like Appear Here, The Storefront, and Splacer also take a cut. Appear Here, for example, takes 15 percent of an owner’s profits.

The Pros and Cons of Temporary Retail Leasing

If you’re an owner and seriously thinking about listing your property on a temporary space platform—or using your own resources to directly rent to tenants on a temporary basis—it is important to consider whether the potential for return is greater than the potential risk.

• Liabilities: When an owner rents to a long-term tenant, the tenant must have insurance, and if they are an established business, they likely will have insurance. When owners get into the pop-up market, they can’t assume their tenants will already have liability insurance that covers damage to a third party’s property. Whether renting directly or going through a platform like Appear Here, The Storefront, or Splacer, owners are advised to state up front that they require tenants to hold liability insurance that will cover damage to a third party’s property.
• Modifications: When renting to a long-term tenant, one expects that their tenants will modify the space. When renting to a tenant for a night or even a month, modifications are a different story. Again, whether an owner is renting directly or using a platform, they should stipulate what changes can be made and clearly state what condition the property must be returned to at the end of the lease. Also, even if the rental is short-term, asking for a high-security deposit is strongly advised to protect the property and retain its current value.
• Access and departures: If the ultimate goal is to find a new long-term tenant, it is important to address access up front. If an owner plans to keep showing the space to prospective long-term tenants, they should make the terms of access part of the lease with their temporary tenant. Likewise, it is advised that owners include a clause about departures. Some temporary leases state that if a long-term tenant signs a lease, the temporary tenants must agree to leave on as short notice as three days.

For retailers, pop-up stores generally are a win-win situation. For owners, the pop-up store market may be a great way to ride out a sluggish retail market or just a risk one is better off avoiding.