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May 20, 2019

Traditional retailers are being forced to innovate as they continue to battle high costs and increased online competition.

In the latest example, Foot Locker recently put up Series C funding for Rockets of Awesome, a kids’ clothing subscription service. In addition to giving Rockets of Awesome “mini-stores” within Kids Foot Locker mall outposts, the investment helped the company with its plan to open its first standalone brick-and-mortar store later this year ahead of the back-to-school season.

“Traditional retailers have been plagued by rising costs and slowing growth,” says Mihir Shah, the co-CEO of JLL Spark. “Meanwhile, more nimble direct-to-consumer brands have carved out substantial markets using a digital-first strategy. As brick and mortar brands look to reinvent themselves with an expanded online presence, it’s logical that they look to incubate and capitalize on new brands that can help them expand their market.”

Pros and cons for landlords

The impact is benefitting commercial real estate owners as traditional retailers refresh existing stores in line with their new investments, and even open new stores to accommodate them.

“Commercial real estate locations, particularly malls, are hungry for new and fresh product,” says David Zoba, JLL’s Global Chairman, Retail Leasing Board and former senior Vice President of global real estate and store development at GAP Inc. “Investing in startups gives legacy brands the chance to upgrade their average retail unit, because there’s a halo effect. All of a sudden, you are cooler, hipper, more exciting. That piques interests and gets bodies in the door,” he says.

Perhaps one of the best examples of this is GAP’s acquisition of Athleta. That brand started out as a catalog, moved online, and now a strong brick and mortar presence with over 150 stores. For landlords, that’s a lot of square footage.

The hype also gives landlords an incentive to get in on the ground floor, literally. Smart landlords recognize exciting startups that will drive traffic to their properties and essentially bankroll some – or even all – of their capital expenses to build out a store, Zoba says.

Yet, there are some compromises for landlords as start-ups often seek shorter leases than traditional retail tenants. It’s increasingly rare now to underwrite a five- to ten-year lease in a retail space with regular rent bumps and full taxes.

They’re new, they’re lean, and they don’t have much credit, says Zoba.

“A lot of these fresher concepts are getting deals that were very rare 10 years ago,” he says.

A golden ticket for retail?

Can this pivot back to brick and mortar help stem the much heralded ‘demise of the high street’?

The new investment will help, but it “doesn’t necessarily mean it’s a cure-all,” says Zoba. Some old-line mall owners are still seeing huge increases in vacancy as department stores continue to struggle.

Legacy brands who acquire online retailers with just one product – think Warby Parker’s glasses, Allbirds’ sneakers, Away’s luggage – won’t take enough space to backfill spaces of that size.

“These new brands can’t handle much more than 2,000 square feet,” says Zoba. “It’s not going to solve the problem.”

As a result, more landlords may be looking emulate Foot Locker and invest in Series C funding to help incubate brands.

“It’s a different entry point for a promising concept,” says Shah.

“Household names like Sears and Macy’s could not compete with the online delivery model. When you can’t beat them, join them.”

Click to read about the four ways fast food consolidation impacts commercial real estate.

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David Zoba

Global Chairman, JLL Retail Leasing Board

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