Tuesday, October 20, 2009

Retail goes “boo.”

In the spirit of the Halloween season, I can’t resist but to reference a recent article from Retail Traffic magazine, which observed that, amidst these prolonged economic doldrums, retail landlords who are suffering from extensive vacancies are succumbing to the allure of “pop-up” stores. These tenants earn this name because they tend to pop-up for short times, with no intention of lasting beyond the specialized two- to six-month leases they’ve been able to negotiate. While the photo below derives from a suburban Indianapolis pop-up, I don’t plan to index it as such for this blog post because it could just as easily come from anywhere else in the country.

Seasonal stores such as these are among the most ubiquitous pop-ups, capitalizing on the particularly high vacancies in suburban strip malls: costumes for Halloween, tree-trimming for Christmas, or fireworks for Independence Day (in the states where they’re legal). It doesn’t require much scrutiny for those who know branding and exteriors to see that this tenant is leasing an old Circuit City store. No doubt landlords across the country are filling the footprint from the now-defunct chain with Halloween stores; in this economy, it is unlikely that any other large enterprising retailer has swept the nation, permanently filling an old big box store like Circuit City. Step inside of “Halloween USA” and the transience of this tenant becomes more apparent:

Minimal investment in signage; none in interior design. The store will probably close within a few weeks after Halloween, once inventory is more or less liquidated. A Christmas-themed outlet may immediately replace it, possibly managed by the same tenant but with a new inventory. Such has historically been the destiny of pop-us, of which everyone is familiar even if we have lacked a word for the term (largely out of indifference, no doubt).

Other off-again, on-again storefronts are a bit more subtle. Jackson Hewitt and H&R Block, among others, offer year-round tax preparation office in rare scattered locations, but far more familiar (because of their ubiquity) are the seasonal ones operating from late winter until shortly after that notorious April 15 deadline. Incidentally, the majority of these seasonal tax preparation offices do not function as pop-ups but remain shuttered the other six to eight months to a year, with signs up, furniture in place, and not a sign of life until the next tax season. These offices appear to operate under standard one-year or multiyear leases with no intention of remaining open the full year. The fact that a business can sustain itself on a conventional lease with only seasonal hours suggests the industry shares a few common characteristics: 1) operating costs are low and revenue during the “peak” is quite high; 2) the clientele drawn to these tax preparation services is also lower income; 3) the regional management benefits doubly from choosing low-caliber, largely vacant, or otherwise blighted retail centers to locate the seasonal offices because the rents are low and these tend to be more visible to their targeted clientele. This devastated strip mall in Plainfield (featured in a previous blog entry of mine on retail failure in successful suburbs) is a perfect example; witness the H&R Block sign peeping out behind the façade of a vacant WalMart:

The Retail Traffic article, however, focuses its attention less on the aforementioned retail quirks and more on what is unique to this current profound recession: pop-ups from nationally recognized brands appearing in prime retail sites. Everything from Gap to Gucci are experimenting with new product lines through temporary outlets in major cities, while Toys ‘R’ Us plans to open 70 pop-ups this holiday to fill vacancies left by now closed rival KB Toys. I’m not aware of any major-brand incarnations yet in second-tier cities such as Indianapolis, but if the economic doldrums continue, here is what I anticipate we might see:

- Increasing diversity of holiday-themed pop-ups filling in the smaller outlets. I think I can safely assert that, over the past two decades, Halloween decorations have elevated from a niche market to a fully mainstream phenomenon. Though not as omnipresent as Christmas, a simple scan across suburbia (and urban America too) reveals that Halloween is everywhere, and it’s not limited to children’s costumes on October 31. I have recently seen incipient traces of this same trend with Easter, where the saturation level of decorations may be on par with Halloween in 1985. These seasonal pop-ups will begin conservatively, taking leases in the smallest vacancies in less desirable strip malls, but if there’s a growing market for other holiday decorations, no doubt a vendor will find it and attempt to exploit it in the lowest-risk manner possible. First it might be Easter, but what next? Valentine’s Day, or St. Patrick’s Day? Thanksgiving? Bastille Day?

- Major brands will experiment through pop-ups, peddling risky new product lines in safe Midwest test market cities like Indianapolis, Columbus, or Kansas City. Upscale brands may also see pop-ups as the window to second-tier markets where the demand and purchasing power are less concentrated. The struggling strip malls of wealthy suburbs in the aforementioned cities are far more likely to attract, for example, high-end Italian designers for limited times during peak periods (such as the Christmas shopping season), and such brand names would choose the wealthy suburban strip mall location—where space is abundant, vacancies are high, rents are lower, and a consumer base is assured—long before they would move into the much more limited trendy urban retail corridors.

- Smaller cities and larger towns with high retail vacancy may witness pop-ups as a status quo. In less diversified economies that are highly susceptible to recessions, major retailers may remain unconvinced that a long-term lease is a wise commitment. Such communities (particularly cities under 50,000 inhabitants) may find they no longer inspire confidence for expansion of big box retailers like Home Depot or Petsmart; instead they get scaled down, temporary versions of such vendors until the economy improves. Bricks-and-mortar investments are simply not worth it if the trade area holds no promise of long-term stability, yet towns and cities of this size still suffer an abundance of vacant retail space that strives to be filled, even if only for limited time frames.

Such speculations on my part are based purely upon the cynical notion that this recession will last for years to come. Landlords hardly see pop-ups as desirable during normal economic circumstances, and when real estate fundamentals recover, none of the above points are likely to prove realistic. But the current fiscal crisis has hit home better than any previous recession the nature of how ridiculously overbuilt the American retail environment truly is. And pop-ups at least represent a lemonade-out-of-lemons method of experimentation that may elicit the sort of discoveries that allow those in commercial real estate to learn from past mistakes.