Empty storefronts find new savior in an unexpected place

Madison Reed’s first store, in New York City’s Flatiron District.
Source: Albert Cheung

It took just five weeks to transform the 1970s-inspired accounting office into a modern hair salon.

After covering the drab white paint with coats of gray and purple, and knocking down the wooden doors that had divided the space into offices, online beauty retailer Madison Reed opened its first physical shop last week.

The 1,500-square-foot space in Manhattan's Flatiron District is just the latest example of an e-commerce start-up taking the leap from clicks to bricks. But it isn't making the jump alone. It enlisted the help of The Lion'esque Group — a firm that helps digital-first retailers find vacant space and transition into physical pop-up stores.

Founded in 2009 by former investment banker Melissa Gonzalez, Lion'esque has helped brands cut the ribbon on more than 100 temporary stores. It also is one of several companies reinventing the role of temporary stores, which no longer merely plug holes in landlords' portfolios. Instead, the tenant base is shifting toward trendy up-and-coming brands, and are increasingly seen as a way to bring excitement to a street or property.

"The landscape's shifting," Gonzalez told CNBC.

Not the same old pop-up

Though pop-up stores have been around for more than a decade, they've changed dramatically since their inception. That's largely thanks to the growth of online retail, which has helped new brands build a following.

Even as online sales growth is handily outpacing that at bricks-and-mortar, digital start-ups recognize the role physical stores can play in growing their brands. Online brands that have planted a flag in the ground include Rent the Runway, Bonobos and Warby Parker. Temporary storefronts are often the first step for these brands' expansion, as they provide an opportunity to test the waters at a lower cost, and with less risk.

"What you saw in the past was the same old name repackaged as a pop-up store," said Naveen Jaggi, president of JLL's retail brokerage. "As we know pop-ups today, it's these hip, these cool brands."

For their first foray into bricks-and-mortar selling, these brands typically choose dense, urban markets where there's an influential shopper base. The potential to snag these consumers outweighs the higher rents that retailers pay to secure that space, according to JLL, a commercial real estate firm.

Although these temporary stores come with shorter leases — and therefore, lower costs — the monthly asking rents could be 25 percent to 40 percent higher than a 10-year rate, Jaggi said. The average asking rent for ground floor space in the Flatiron District was $377 per square foot in the third quarter, according to Cushman & Wakefield.

"From a visibility standpoint ... you will get no better opportunity to capture that brand awareness than in New York City or San Francisco," Jaggi said.

Madison Reed’s first store, in New York City’s Flatiron District.
Source: Albert Cheung

In many cases, it's not only about exposing a brand to a new group of shoppers. For California-based Madison Reed, which specializes in professional at-home color care, Manhattan is home to one of its website's largest existing customer bases.

Madison Reed's store puts a spin on traditional pop-up locations in that it's part beauty salon, part retail shop — meaning it can provide more than one revenue stream for the firm.

"We wanted people to have a physical experience with our products and with our brand," co-founder Sabrina Riddle said of the six-month test. "We'd love for people to come back and get a service, but we're just as happy if they want to do it back home."

Still, diving into the world of physical shops can be a challenge for online start-ups, which are typically not well versed in real estate contracts or store operations. Many brands also struggle translating their strong marketing message from the web to the store, Gonzalez said.

"They never made that style guide," she said.

But they also have advantages. For instance, because Madison Reed is rooted in the web, it's seamlessly integrated its online capabilities into its physical stores. When customers go into the salon to get their color touched up, the brand builds them an online profile. That way, they can easily reorder the color if they choose to do their upkeep from home.

"Since these guys are often coming from the online world, they're so adept at creating digital environments," James Cook, director of retail research at JLL, said about online start-ups transitioning to bricks-and mortar stores.

Landlords starting to play ball

A rendering of bio, a community of retail shops opening in New York City in 2017.
Source: Courtesy of bio

As the brands exploring these concepts have gotten more high-brow, savvy brokers and landlords are recognizing the value they bring to their properties.

Not only do landlords benefit from filling vacant space, but the rotating storefronts can be used as a means to bring repeat foot traffic to their properties. Some, like Westfield, have even dedicated space in their malls to rotating brands.

"This is the first year that I've gotten a lot more incoming calls," Gonzalez said.

Landlords also stand to benefit from the money brands invest to renovate in the space, which is sometimes dated. Not only that, but if a retailer starts to take off and roll out more stores, they're likely to stick with the firm that gave them their first shot, Jaggi said.

Still, Gonzalez said she's had more luck working with brokers, as landlords typically wait until the very last minute in hopes of securing a longer-term tenant. It gets even more difficult when brands want to sign on for a longer lease, so they have more time to gather data and get a return on their investment.

"If you want a one-month lease, simple," she said. "Once you get to six months and longer it gets more challenging because in their mind, they're thinking 'OK, I'm going to be locked in for all this time and have to say 'no' to somebody else.'"

Online shopping activity highest in survey history
Online shopping activity highest in survey history

The Lion'esque Group and rivals like San Francisco-based Storefront are benefiting from a rising number of retail vacancies in New York and store closures in other parts of the country. But there are other pop-up firms with slightly different business models. Story, for example, is a spot on Manhattan's West Side that highlights rotating brands.

Perhaps the next evolution is taking shape in the trendy SoHo neighborhood with a project dubbed "bio." Instead of using up-and-coming labels as a means to fill vacant space, Lightstone sought prime real estate for bio to build a community of emerging brands from the ground up.

Replacing what was formerly an Anthropologie store, tenants in this 10,000-square-foot space will sign 12-month agreements that can be renewed upon expiration. It will fuse food and retail, including tuxedo rental site The Black Tux.

Not only does this concept help retailers form a more lasting relationship with shoppers, but it allows them to spread out the expenses among other labels — and potentially reap the benefits of a neighboring brand's buzz.

"At the end of the day, traffic is the name of the game," Erin Armendinger senior vice president of bio, told CNBC. "When you have complementary brands next to each other that's really what you want to do."