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Analysis: Short-term mall tenants may be long-term trend

NEW YORK (Reuters) - In the tony Mall at Short Hills, New Jersey, shoppers can enjoy an $8 hot chocolate at La Maison du Chocolat or take it easy at a Continental Airlines members’ lounge during a break from holiday shopping.

But they should not get too comfortable because the stores are temporary and only around for a few months.

Temporary and even shorter-term “pop-up” tenants have come a long way from the kitschy family run craft stores that used to appear in shopping centers during the holidays. Today, short-term tenants are increasingly national retailers who generate significant revenue and traffic for landlords.

"This was really the provenance of mom-and-pop operators," said Marc Feldman, senior vice president of new business development for mall owner Developers Diversified Realty Corp DDR.N. "Now you have international companies moving into this territory. I predict that we will see a number of national companies relying on seasonal operations in the coming years."

La Maison du Chocolat, based in Paris, has three permanent U.S. locations in Manhattan. The Short Hills store is its first outside New York and the second temporary store. The first was in the Empire State Building and operated from December 2009 through April 2010.

The Short Hills store could become permanent depending upon a number of factors including space available and performance, said Nora Hovanesian-Mann, La Maison Du Chocolat director New York operations.

Continental Airlines also is experimenting with the strategy. Its temporary lounge allows its club members to check in, shop, and have their purchases wrapped before going to nearby Newark Liberty International Airport to catch a flight.

The growth of temporary and short-term tenants is partly the result of a power shift to tenant from landlord as retailers consolidate, close stores and fewer look to expand.

"Tenants are calling the shots," said Naveen Jaggi, CB Richard Ellis-Retail CBG.N senior managing director.

A short-term lease can help a retailer reduce risk by paying a flat fee and take the location for a test run. A retailer can test the success of a new store concept without signing a standard 10-year lease and sinking thousands of dollars into store interiors.

Toys R Us has embraced temporary tenancy. It opened about 90 Toys “R” Us Express temporary stores in 2009. About a third are still open. This year, it is expanding its express stores to 600. It also opened 10 FAO Schwarz pop-up stores in high-end shopping centers and malls.

Temporary stores help landlords generate income from dormant space and reduce the number of dark stores, which can affect shopping center traffic. Landlords do not want to commit to long-term leases in a soft rental market and miss out on higher rents in future. They often are required to look like permanent stores.

“Most properties aren’t 100 percent filled,” Keefe Bruyette & Woods analyst Benjamin Yang said. “So having a temporary or pop-up tenant to take that less desirable space in a mall to generate some income is really a good thing for the shopping center owner. Wall street does not look down upon it.”

Short-term tenants have helped Developers Diversified tackle vacancy it was left with from buying up vacant Mervyns stores and after the bankruptcy of tenants such as Circuit City.

BEYOND HALLOWEEN AND HO-HO-HO

It’s not just a winter holiday phenomenon. Halloween stores generated $2.6 million revenue this year for Developers Diversified, up 25 percent from a year earlier.

Masquerade LLC, based in Aston, Pennsylvania, operates 50 Halloween Adventure stores, in New York, Pennsylvania, Maryland, Delaware and New Jersey. Its leases for Halloween stores start about August. After Halloween, it converted many of those stores to some of its 19 Smart Toys, most of which are temporary for Christmas sales.

Some online retailers are mulling short-term stints in shopping malls as a marketing tool, said Greg Apter, president of Hilco Real Estate.

“They know that at a certain time of the year the foot traffic is going to be there to justify a good retail brick-and-mortar location,” said Apter, who declined to identify the retailers because of the early stages of the discussion.

Holiday stores also help draw shoppers to malls, Michael Glimcher, chairman and chief executive officer of mall and shopping center owner Glimcher Realty Trust GRT.N.

“For us, it’s all about how many times we can get them through the door,” he said. “So if this creates another reason for them to come to our mall and we make money doing it, that’s great.”

Glimcher said well-established national tenants that move into the temporary tenant space has benefited landlords.

“We get better quality goods,” he said. “We get one company that’s going to pay the rent. We don’t have to chase them down.”

But in the back of the landlord’s mind usually is the hope that the temporary tenant will turn into a permanent one.

“That’s really the end game or the goal for the owners when they bring these pop ups into the centers,” Yang said.

Editing by Bernard Orr

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