Why the Retail Renaissance Can’t Last Forever

It was always Ilana Kohn’s dream to open a store.

After operating her namesake brand for about a decade, she finally had an excuse to make it happen. Kohn had exited department stores after seeing that business falter during the pandemic. But those retailers had served a vital purpose: customers needed a way to see and try on her signature boxy silhouettes. A store of her own was the answer.

Her store, located on Orchard Street in New York City’s trendy Lower East Side neighbourhood, opened in June. Earlier in the pandemic, landlords throughout the city had offered steep discounts to fill a worrying number of empty storefronts. But by the time Kohn signed her lease, the sweetest incentives were already disappearing. She said the rate she pays is a deal, “but not a steal.”

Retailers are rapidly expanding their physical footprints, defying predictions early in the pandemic that Covid-19 would hasten the decline of brick-and-mortar retail. The number of store openings in the US and UK is double that of store closings this year, according to Coresight Research, in a reversal of the past decade’s so-called retail apocalypse.

But the conditions that helped spark the retail revival are starting to dissipate. Rents are stabilising; in the second quarter of 2022, Manhattan retail rents were flat, after over four consecutive years of declines, according to the brokerage CBRE. On the most competitive blocks, tenants can forget about financial incentives from landlords, brokers say. Coveted spots now garner full-out bidding wars. Landlords are looking for more long-term leases, and are less inclined to host pop-ups or one-year trials.

“Right now is one of the most aggressive leasing markets in the last 20 years,” said Chris DeCrosta, co-founder of real estate firm GoodSpace. “And rents have been driven up to pre-pandemic levels or even better.”

A weak economy and signs of slowing consumer demand also may put the brakes on some expansion plans. But experts see the physical retail boom having more staying power. The market today is healthier all around: store leases are priced more appropriately to tenant demand, in contrast with runaway rents in prime shopping areas prior to the pandemic. And this iteration of new stores have evolved from their predecessors: Leases are more collaborative between tenant and landlord, and spaces are designed for more than just transacting sales.

“Brands now really understand stores and they want to maximise on all the different purposes stores can serve,” said Corey Shuster, a broker at Douglas Elliman. “The marketing aspect, for example, is huge.”

Unpacking the Boom

Some of the new stores this year were originally planned for 2020 and put on hold. Other retailers pounced when landlords desperate to fill empty spaces post-lockdown slashed rents and offered other financial incentives to new tenants.

At the same time, many brands saw extraordinary sales growth last year due to a consumer shopping frenzy as society returned to normal. A number of independent brands opened stores this year, including Jonathan Simkhai and Lele Sadoughi. Swedish brand Totême, for instance, opened its first New York store in July on the heels of its revenue nearly doubling in 2021, according to cofounders Elin Kling and Karl Lindman. Later this year and in 2023, the company will open four more stores: two in China and two in South Korea.

Lower rents also made it possible for small brands to find space in premium shopping districts that they could never have afforded before the pandemic, including New York’s Madison Avenue and London’s Bond Street. The average asking rent in Manhattan fell about 13 percent in the second quarter of 2021, versus less than 5 percent in the same period in 2019, according to CBRE.

“It was a supply and demand issue — prices went down, and demand went up,” Shuster said.

Bidding Wars Begin

The real estate market moves fast. Already, the hottest blocks have begun to garner bidding wars. On Bond Street in London, for instance, the stretch between Burlington Gardens and Grove Street now commands more interest than there is supply.

Despite the uptick in demand, brokers agree that rents like will not return to pre-pandemic peaks.

“There are spaces in Soho and on Madison that weren’t open for two or three years before the pandemic that now have multiple offers today,” said Abrams.

And already, the great discounts landlords offered during the pandemic are harder to come by today.

“The deals seven or eight months ago had more incentives, like nine to 12 months of free rent,” said DeCrosta. “These incentives are starting to go away.”

Landlords today are also less likely to offer short-terms leases, the brokers say, especially those in the competitive markets. Ilana Kohn and Totême both signed leases five years or longer.

Building a flagship or a debut store requires a considerable amount of capital, which often requires one to two years to amortise, said Abrams — another reason why first-time brick-and-mortar brands are keen to ink a more permanent lease.

Despite the uptick in demand, brokers agree that rents will not return to pre-pandemic peaks.

“Whereas 20 years ago, you had these big multinational retailers opening 15 stores every quarter, tenants now are being more calculated in what they’re doing, taking it step by step,” DeCrosta said.

A New Chapter for Retail

While the deals may be over, landlords today are far better partners to their tenants than in previous years. One common amenity now is rent escalation, in which tenants pay a low rate in the beginning of their lease and the price increases over time.

“[The landlord] is giving us flexibility, so if we perform better, we pay more,” said Michael Hill, creative director at men’s fashion brand Drake’s, which reopened its Soho store in a new location this week. “We can grow together, rather than [Drake’s] taking that risk upfront.”

Landlords and tenants alike understand that stores today aren’t just for generating sales; they’re an important channel of building brand awareness and customer loyalty too, and this mentality allows brands to be more patient and mindful when it comes to opening their first stores.

In addition to offering customers a way to interact with the brand, Ilana Kohn’s new store serves as a solution to rising costs of social media ads.

“Being DTC and online only, it cuts down your avenues for marketing and makes you 100 million percent dependent on Facebook and Instagram, and that’s just not a great feeling,” Kohn said. “The store is an opportunity to create a marketing channel that isn’t contingent on the whims of Facebook.”

Like Ilana Kohn, Totême waited years to open its New York store. The timing worked out, the founders said, in part because the use case for stores is stronger today than it was three years ago.

“The behaviour [of the customer] has changed,” said Elin Kling. “You do not need to rely on foot traffic as much, because it’s more about building relationships with your customers and offering private appointments.”

Indeed, retail foot traffic is still consistently 10 percent to 20 percent lower than that of pre-pandemic days, Cowen data shows. But brands like Totême are finding that when customers do walk into a store, they’re likely to spend a lot more money than before.

”People are going out and dining,” said Abrams. “Retailers are starting to say, ‘It’s time to get back in the market.’”