When UrbanMeritage LLC and Taurus Investment Holdings moved to plug a 2,000-square-foot vacancy on Newbury Street recently, they got creative. They didn’t slash asking rents, and they didn’t leap at the first tenant who sniffed around the space.
Instead, the landlords offered their prospective tenant what amounts to a trial lease. The tenant, New York-based denim retailer 7 For All Mankind, gets to set up shop at 160 Newbury St. for six months. If business is good, they stay on a long-term extension. If not, they walk away with no hard feelings – and no costly lease obligations hanging over their heads.
“It’s an opportunity for the tenant to test the market, and for the landlord to test the tenant, to see if they have the economics to survive on Newbury Street,” said UrbanMeritage’s principal, Michael Jammen.
The short-term lease by UrbanMeritage and Taurus (which have recently re-branded their Newbury Street joint venture as the Newbury Line) turns the conventional wisdom in retailing upside down. Landlords would normally be looking to lock tenants into a long-term deal – five years of term, say – with multiple renewal options. That cuts vacancies down, and reduces the dead time and costs associated with marketing and filling open space.
Risk And Reward
The risk in a six-month deal is that, once the term is up, the tenant is free to walk, and the landlord is left with a vacancy to fill, again, and very little cash to show for it. The landlord is essentially handing an unmitigated level of power to the tenant.
But, in doing so, Jammen is betting he’ll be able to prove to his tenant that his pitch was right – that they’ll do well on Newbury Street, and want to stay long term.
“We’re very selective in who we put in the building,” Jammen said. “It’s not, ‘Let’s put a sign on the door, and sign up whoever calls up first.’ We’re the largest landlord on the street – we’ve brought tenants to the street that are no place else. When the market was strong, if you put out a sign and waited for someone to call, you probably got a bunch of low-quality tenants. We haven’t lost any tenants yet. We haven’t cut rates. Tenants haven’t asked for concessions.”
Jammen said a deal signed today might be for a slightly lower price than a deal signed last year, but there hasn’t been a wholesale 20-30 percent rent reduction across the Newbury Line portfolio. That stands in sharp contrast to much of the outside retail landscape, where firms like Starbucks and Sleepy’s have demanded their landlords renegotiate leases at favorable terms.
“If we drop rents, we’re not going to double the number of retailers out there looking to expand,” Jammen argued. “Rent is only part of the equation. If $5-10 a foot makes a difference, if $20,000 a year makes a difference, you probably shouldn’t be on Newbury Street.”
He said when he’s in negotiations with prospective tenants “rate is the last thing people ask about. It’s co-tenancy. Right now, we’re talking to people from Spain, Paris, London, SoHo, and for them, it’s a matter of finding the right space. They’re used to being on the best streets in the world. And nobody has asked about the rent.”
