This Pop-Up Retail Data Tells The Real Story Of Why Retail Real Estate Is Struggling
There are two statistics provided by pop-up retail platform Appear Here that at first seem totally paradoxical, but on closer inspection give an insight into why retail real estate is having such a hard time in the U.S. and UK.
The first is that 20% of the brands it has found space for in 2019 have extended their stay beyond the initial lease period. The second is that 6.1M SF worth of requests for space from retailers using its platform, about half of all enquiries, went unfulfilled by landlords in 2018.
Both of those figures speak of increasing demand from customers for a product. But the second speaks of demand not meeting supply.
In efficient markets, that is not supposed to happen. And in a sector like retail real estate, where in a city like New York the amount of vacant space has more than doubled to 11M SF in the past decade, or London where 7% of retail units lie empty in spite of a strong economy, such a level of unmet demand seems perverse.
According to Appear Here founder Ross Bailey, the retail real estate market has not evolved to meet the needs of its customer — retailers and consumers.
Appear Here is one of the world’s largest pop-up retail platforms, and according to Crunchbase has raised $21M of capital across five funding rounds from real estate investors like Meyer Bergman and specialist PropTech VC firm Fifth Wall. It is growing rapidly: Bailey said it will launch in a new city each month over the next six months, with Miami and Amsterdam launching first and cities like Austin, Portland and Stockholm also in the pipeline.
While retailers themselves are struggling to adapt to the new multichannel world, retail property owners are failing to properly tap the demand that is there.
“The current model is broken,” Bailey told Bisnow. “On the one hand people are saying the high street is dead, but how can that be true when at the same time we know that young people are looking for experiences, and want to travel to interesting places and find interesting new brands. There is a different narrative to the current story being told.”
Bailey said retail property owners and the financial model that underpins the sector are suffering because they are trying to cling to an outdated way of doing business, even as the evidence that this way of doing business doesn’t work becomes clearer every day, with retailers demanding rent cuts and asset values dropping.
“People are leaving stores empty and waiting to try and find that winning lottery ticket, a brand that is willing to take a 15- to 20-year lease,” he said.
In some cases there are clear incentives for owners to do this, he explained. In U.S. cities like New York, property owners are often highly leveraged. Take a short term lease, and even if it is at a high headline rent, lenders will write down asset values and demand more collateral to make up for the short tenancy.
In London, because a lot of high street retail is owned by unleveraged institutions or wealthy families, they can afford, for now, to sit and wait to hit the jackpot. This inertia is leading to slower growth in Appear Here’s London business, Bailey said. The company has been in London three times longer than New York, but the latter will soon be the same size as the former, because the amount of space the company is leasing in New York is growing at more than 300% annually.
Bailey highlights a data point that is good news for retail property owners seeing e-commerce take a greater proportion of overall retail sales. The cost of securing customers online is increasing sharply. According to Appear Here, the cost of acquiring customers through Google searches has increased by more than 20% over the past five years, while declining in effectiveness by 70%.
It is not like making money through e-commerce is easy. Asos saw profits plunge 69% in the year to the end of August due to IT issues. And even Amazon’s profits dropped 26% in the third quarter because of increasing delivery costs.
With all this in mind, Bailey said retailers and brands want to take physical space — just not in the way it is being offered to them.
“Landlords need to understand that today the real covenant is audience,” he said. “Brands want to reach the next generation, and physical stores are a way of doing that at a time when online is getting more expensive and less effective. But brands want optionality and flexibility.”
When they get that, even though they can leave earlier, they stay longer, he said. One example is The Better Shop, a concept store selling ethically sourced, sustainable clothing. It did a pop-up in Williamsburg, Brooklyn, on a rolling booking for 12 months, and now has a permanent store on Grand Street. Direct-to-consumer menswear brand Rhone Menswear has been on a rolling lease at Brookfield Place in Manhattan for 24 months.
CORRECTION: Oct. 31, 1:15 P.M. ET: A previous version of this story incorrectly reported how much capital Appear Here had raised in five funding rounds. The story has been updated.