More landlords are starting to look beyond bricks and mortar sales when determining a retail tenant’s rental rate for urban high street retail space. A larger portion of tenant sales are being executed online and this needs to be reflected in how tenants think about the importance of a store and thus, rent, according to Ken Bernstein, president and ceo of Acadia Realty Trust.
Before the rise of e-commerce, urban landlords and retailers weren’t particularly interested in exchanging sales data. “In New York’s meatpacking district, landlords used to be in the meat grinding business – tenants wanted the landlord to get out of the way so they could handle the space,” Bernstein said.
Bernstein raised the idea of percentage rent for urban retail locations, a concept that’s mainly used by malls and other retail centers that hasn’t been a component of high street retail rents. Historically, a tenant would pay a certain percentage above the agreed upon rent amount, based on sales occurring in that store only. In some leases, the percentage would be reduced based on the amount of product returns to that store.
“The way we used to measure percentage rent needs to be reinvented due to online sales – how do you measure sales in Bonobos or Warby Parker stores when most of those sales are occurring online?” said Bernstein. “It’s going to take a few years for the retail market to figure out a fair and sophisticated way to measure the importance of in-store purchases.”
Dyson and Samsung are examples of major retailers in New York that see very little in-store sales, which makes it difficult for landlords to calculate a percentage rent. Some landlords are at a loss as to what percentage of rent to take from similar retailers with unprecedented sales structures. “The Coach and Stuart Weitzman stores [in Midtown] had creative owners who rolled up their sleeves and underwrote the asset acquisition,” said Robert Fudderman, chairman and ceo of RKF. “Saavy landlords get it.”
David Rabinowitz, director and co-chair of the Retail, Restaurant and Consumer Group at law firm Goulston & Storrs, noted that there is now some support for the premise that a retailer does better when it has both an online and bricks and mortar strategy. Rabinowitz recently spoke with a prominent and successful retailer, which began as a catalog company and then developed an e-commerce business and has started opening bricks and mortar stores. “This company has data showing that, when it opens a physical store, it initially sees a dip in online sales for that geographic location, but after the store matures, its online business actually increases without adversely impacting the sales at its physical store,” added Rabinowitz. “This, together with anecdotal evidence from one or two department stores whose online sales in the geographic area where they operated a physical store dropped when they closed that store, leads one to conclude that the successful retailers will be ones that master and offer their customers both strategies.”
Landlord incentives like great build-outs and tenant improvements may attract more tenants to underserved retail markets like DUMBO in Brooklyn where the infrastructure is improving. Panelists agreed that tenant improvement funds should not go towards base building work, but rather improvement of the space’s amenities.