Do Pop-Up Stores Make for Good Tenants?

With Halloween just around the corner, the holiday season has begun. With it comes the holiday pop-up store, which experts say make for good tenants, especially in a down economy.

The temporary stores have most commonly opened for one to three months to sell seasonal merchandise from Halloween to Christmas. Over the past few years, especially during the 2008-09 recession, the appeal of pop-up stores broadened to a wider tenant base, including large and small apparel retailers, fashion designers and other entrepreneurs perhaps looking to test the waters for a line of merchandise.

The recent Target(TGT) pop-up shop in midtown Manhattan -- in which the store's Missoni merchandise was so popular it had to close the shop after one day -- is a clear indication of the value and potential conflict of these temporary stores.

TechCrunch reported last week that eBay's(EBAY) PayPal is looking to open a store in downtown Manhattan to showcase some of the tools and technologies the payments company is getting ready to debut. The store is expected to launch Nov. 1 and stay open until mid-February.

More mainstream use of pop-ups by consumer product firms creates "a tremendous opportunity for landlords," says John Nolan of Core Marketing. "The savvy leasing agent will work in conjunction with the pop-up store team to ensure that potential future tenants and agents are at the [launch]. If used properly the pop-up becomes a marketing vehicle for the retailer and offers a great halo effect for the landlord."

Yet it is a challenge to educate landlords on the value of allowing short-term tenants, according to Christina Norsig, CEO of PopUpInsider, an online exchange and blog for temporary real estate.

"I think there is a fear from many landlords that once they commit to a temporary tenant that they won't be able to associate a long-term lea! se" with the space, Norsig says.

What's more likely is that as the landlord looks for permanent renters, a temporary business will offer the landlord extra revenue and "make the property look better," accelerating the rental process, she says.

"Not everyone has the vision to walk into an empty space and see it as a business," Norsig says.

Pop-up stores will continue to evolve, particularly as the economic recovery continues to stall out and commercial vacancy rates remain high, experts say.

"Retail properties still have a ways to go to fill the empty space. I do think pop-up stores are valid and a good option for landlords," says George Ratiu, an economist for the National Association of Realtors. "While obviously landlords prefer longer leases, these provide a good source of income."

The NAR predicts retail store vacancy rates to fall just 0.7 percentage points, to 12.2%, by the third quarter of 2012, according to an August forecast report. Vacancy rates vary, in some cases widely, depending on metro area.

According to REIS, the commercial real estate data provider the association partners with for forecast modeling, markets with the highest retail vacancy rates include:

• Columbus, Ohio: 16.3%
• Indianapolis: 15.6%
• Cleveland: 15.4%
• Dallas: 15.3%
• Cincinnati: 15%

The number of stores using the option for holiday merchandise continues to increase. Nikoleta Panteva, senior analyst at IBISWorld, predicts that 1,600 pop-up stores will have opened in the U.S. for Halloween alone this year -- about two-thirds of which are owned by Spencer Gifts. IBISWorld has been tracking pop-up shop openings for the past three years.

"By opening up pop-up locations they're able to reach markets where they don't have permanent stores," Panteva says. "Highly saturated markets like Manhattan and L.A. -- usually very expensive to rent year-round -- [become] affordable when you're do! ing it f or a month or two months."

Last year, retailers were using space left behind by recession-hit retailers such as Circuit City and Linens 'n Things for their temporary needs. This year retailers are increasing the length of time Halloween pop-up shops stay open, she says.

"It's a lot longer than previous years," Panteva says. Some Halloween pop-up stores "started opening up in early August, rivaling sales for back-to-school. The retail environment is still a little bit difficult. They're trying to do anything they can to capture sales."

Panteva says final projections are not completed for pop-up shops for the December holidays, but the number is expected to be even higher than the 2,000 stores predicted last year.

No one's sure where the growth stops.

Pop-up stores are increasingly being used as part of initiatives to revitalize downtown areas in cities such as Atlanta and Seattle, Cleveland and Pittsburgh, says Carole VanSickle Ellis, news editor of the Bryan Ellis Real Estate letter. The hope is that by putting in temporary shops and merchants, areas will become appealing to more permanent retailers.

This summer Pittsburgh launched Project Pop Up Pittsburgh, geared toward filling vacant storefronts and spaces in the downtown area. The grant program, funded through the Urban Redevelopment Authority among others, aims to fill 15 vacancies for a six- to 12-month period, with the goal of long-term occupancy.

Panteva noted that last year Best Buy(BBY) ended up keeping their holiday pop-up shops selling mobile devices open even after the holiday season, but says that's rare. Retailers are more likely to come back to the same location the following year for a temporary store.

Pop-Up Insider's Norsig says the temporary shops are -- ironically -- not about to go away.

"This is a permanent fixture in the evolution of retail," she says. "It's an effective w! ay for b rands to market their collections and an efficient way for owners to use their space."