October 6, 2010 / 3:19 PM / 8 years ago

"Pop-up" stores fill commercial real estate vacuum

CHICAGO (Reuters) - As a small business owner Nancy Rhodes is always looking for a bargain. So with a commercial real estate crisis gripping her hometown of Phoenix, she took advantage of desperate landlords to open a temporary store with a short-term lease and a steep discount on rent.

Perfume vendor Sonny Ahuja is seen at the counter of his pop-up store in Milwaukee, Wisonsin in this undated handout photo. REUTERS/handout

“I’m cheap, I’m really cheap,” said Rhodes, whose 21-year-old business, Furniture Affair, gleans couches, chairs, tables and other goods from model homes and retailers looking to unload floor samples. “It was a very aggressive offer. I said ‘I’ll pay it right now, all of it, take it or leave.’ And they took it.”

Rhodes, whose primary location is in Phoenix, plans to open a new 5,000-square-foot temporary store later this month in the suburb of Tempe. She negotiated a month-long lease for a spot near a popular IKEA furniture store that she said cost roughly 25 percent of the rent she would pay in a peak market. Rhodes intends to use the space as an alternative to costly advertising, giving newcomers a little taste of what they might find in her mainstay 30,000-square-foot location.

“It could be a revolving store,” said Rhodes, who is considering other temporary sites. “Next month in Gilbert, next month in Scottsdale. There is vacant real estate space everywhere.”

REAL ESTATE HANGOVER

Commercial real estate vacancies are hovering around 13 percent nationally, according to the National Association of Realtors (NAR), up from 12 percent a year ago, despite the economy showing signs of recovery.

George Ratiu, an economist with the NAR, said that’s because there is a six-month lag on recovery in the commercial real estate market. So-called “pop-up” stores are not a new phenomenon, he said, noting that for years seasonal sellers of Halloween and Christmas merchandise have taken advantage of short-term leases.

Today’s temporary stores are being opened by a broader range of businesses, including year-round retailers like Furniture Affair, as well as online stores seeking to explore the viability of brick-and-mortar locations, he said. Even big national sellers, such as Toys “R” Us and Borders, have been testing temporary concepts to push seasonal merchandise out the door.

“With the size of the downturn in commercial real estate, they’ve become sort of mainstream,” Ratiu said. “This is certainly a trend that we’re noticing across the country.”

Users of temporary space tend to be uncomplicated retailers or service businesses with little need for retrofits, he said, adding that temporary leases typically run a week to a month and a half. However, Ratiu has seen agreements as short as one day from those seeking to liquidate merchandise quickly, including pop-ups in Manhattan that push clothing and other wares with Twitter and other social media.

POP-UPS ON THE RISE

Christina Norsig, a long-time operator of pop-up stores selling kitchenware and table-top furnishings in New York City, in February founded PopUpInsider (www.popupinsider.com), an online network that matches tenants with landlords willing to fill space on a short-term basis.

Norsig noted that landlords, who pay to advertise available space on her website, appear less worried about getting the full value of rents and more concerned with removing the potential stigma associated with darkened spaces in malls and other locations.

On the flipside, there are some risks that go along with operating stores on a temporary basis, said Sonny Ahuja, a Milwaukee-based perfume retailer who has operated seven temporary locations since 1996. He currently runs one pop-up shop in addition to an online store, Grand Perfumes (www.grandperfumes.com).

Temporary lessees in malls don’t benefit from the advertising that comes with being included on directories and site maps, which are standard services for full-time tenants, said Ahuja. In addition, pop-ups often have a clause in their agreement that says they can be asked to vacate quickly - sometimes within 24 hours - if the landlord finds a full-time tenant.

“When the economy was peak, it happened a few times,” he said. “But each and every time I was given a different location in the mall.”

Ahuja said benefits such as steep discounts and the ability to vacate for the slow season offset those sacrifices, adding: “Summer is not huge for perfume.”

And given the proliferation of businesses tossing their hat in the temporary real estate ring, it would appear many are willing to take the risks.

“This is the next natural form of retailing,” said Norsig, who opened her first pop-up store in 2003 inside a former Manhattan delicatessen. “It really has exploded.”

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