Creating Resilience VIEWPOINT
Lengthening leasing periods: Utilizing vacant street-level units
WHAT’S DONE TO COMPENSATE FOR LOST RENTAL INCOME WHEN STREET-LEVEL STORES ARE VACANT?
CBRE RESEARCH MAY 2023
1. Introduction
Since the onset of the COVID-19 pandemic, there has been an increase in the number of available street-level properties in Japan’s major retail areas Simultaneously, the length of time required for some units to secure new tenants has risen compared to pre-pandemic levels. As a result of an increase in availability and uncertainty concerning the outlook of the economy, retailers have become more selective with respect to lease conditions. To analyze this issue more closely, CBRE recently conducted a survey to identify the common characteristics of long-term vacancies in the nation’s major retail areas* 1 , including Ginza in Tokyo and Shinsaibashi in Osaka The survey covered street-level units leased between Q1 2018 and Q4 2022 This report uses the survey results to analyze trends in lease period lengths, considered by floor space and rent levels, before proposing three options for supplementing lost income from periods in which street- level properties stand vacant, using specific examples from both Japan and abroad
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Lengthening leasing periods
2-1. Timeline: pre-pandemic vs during the pandemic
Leasing periods have increased since the advent of the pandemic Figure 1 shows the trends in leasing period length from Q1 2018 to Q4 2022 (see the reference figure on page 2 below for an explanation of how to read box-and-whisker plots) As street- level retail properties have a high level of individual variability, factors such as above-market rate asking rents or inconvenient unit layouts can lead, in some cases, to extremely long leasing periods (the outliers in Figure 1) In order to minimize the impact of such anomalous data, CBRE has chosen to display leasing period data in the form of boxand-whisker plots, as a more accurate method of understanding trends over time. Those boxes in the graph that appear to have no median bar have been so drawn because the median is the same as either the first quartile (25th percentile) or third quartile (75th percentile) value
Reference: How to read box-and-whisker plots
Prior to the pandemic (Q1 2018 to Q4 2019), the minimum values for leasing periods stood at one quarter, while the first quartile values fluctuated between one and two quarters Median values were found in the range between two quarters and four quarters; third quartile values lay between three and five quarters; and maximum values were anywhere between three and seven quarters
During the pandemic, on the other hand (Q2 2020*2 to Q4 2022), the variance in leasing periods has grown larger Minimum values for leasing periods still stood at one quarter, while first quartile values fluctuated between one and two quarters, as was the case prior to the pandemic. Median values, however, now extended to between one quarter and five quarters; third quartile values lay between three and eight quarters; and maximum values were anywhere between three and 13 quarters While minimum and first quartile values were unchanged as a result of the advent of the pandemic, median, third quartile and maximum values were all significantly longer This data suggests a greater variance between different properties in terms of leasing period lengths
*2 No survey was conducted in Q1 2020 to comply with measures to prevent the spread of COVID-19.
Figure 1: Leasing period lengths (Q1 2018 to Q4 2022) Vertical axis unit: quarters
2-2. By floor area: pre-pandemic vs during the pandemic
CBRE has also examined the issue from the perspective of floor space. For units of all sizes, leasing periods have increased since the advent of the pandemic. Figure 2 shows the changes in leasing period lengths from prior to the pandemic to during the pandemic, broken down by unit floor space Prior to the pandemic, minimum values for leasing periods varied between one quarter and two quarters, while first quartile values fluctuated between one and three quarters After the advent of COVID-19, minimum values were consistent at just one quarter, while first quartile values hovered between one and two quarters, reflecting a general shortening of leasing periods at the bottom of the time scale Median values fluctuated between one quarter and four quarters prior to the pandemic, and between two quarters and six quarters during the pandemic The variation in median values during the pandemic is longer than prior to the pandemic The most significant differences were noted at the upper end of the time scale : the third quartile range extended from two and a half to five and three-quarter quarters prior to the pandemic, to four to eight quarters during its effects. Maximum values, likewise, grew from three to seven quarters to seven to 11 quarters.
2-3. By total rent: pre-pandemic vs during the pandemic
Finally, CBRE parsed the data through the lens of total rent levels. For units of all rent levels, leasing periods have clearly increased since the advent of the pandemic. Figure 3 shows the changes in leasing period lengths from prior to the pandemic to after the pandemic, divided by rent level Prior to the pandemic, minimum values for leasing periods varied between one quarter and two quarters, while first quartile values fluctuated between one and three quarters After the advent of COVID-19, minimum values were consistent at just one quarter, while first quartile values hovered between one and two quarters, reflecting a general shortening of leasing periods at the bottom of the time scale No significant changes can be seen in median values, with the pre-pandemic range standing at one and a half to four quarters, and the post-pandemic equivalent at two to four quarters Once again, the most significant differences can be seen at the upper end of the time scale: the third quartile range extended from three to six quarters prior to the pandemic, to four and three-quarters to seven quarters during its effects. Maximum values, likewise, grew from four to seven quarters to nine to 11 quarters.
2-4. An analysis of leasing period length during the pandemic
The above analysis of the data reveals that, irrespective of floor area or total rent levels, some units have taken considerably longer to lease during the pandemic than was the case prior to its onset. In this section of the report, CBRE considers the common characteristics of available units which took six quarters or longer to fill during the pandemic The reason for looking at six quarters or longer is because maximum values stood at or above six quarters during the pandemic for all floor space and rent brackets, and because CBRE’s brokerage experience suggests that six quarters is considered a comparatively long time for a unit to stand vacant
A total of 76 units fit this criterion. Some 32 of these units (42% of the whole) are both smaller than 50 tsubo and command total monthly rent payment of less than JPY 5 million. Generally speaking, such small units tend to have little trouble finding tenants, due to the scarcity of such small size, which also serves to restrict tenants’ rent burden. At the same time, however, they are so small that only retailers dealing in merchandise of a smaller size can consider leasing them This leaves a limited range of potential tenants: specifically, retailers of wristwatches, jewelry and other small-sized items Should these retailers consider a property inappropriate in terms of location, for example, it can mean the property may take a long time to secure a tenant
The next most common category was units between 100 and 200 tsubo, commanding total monthly rent payment of between JPY 10 million and 20 million. There were nine such properties, representing 12 % of the whole sample . These units tended to be found either in secondary areas or in high street locations far from where luxury brands are concentrated Such properties in locations more suited to luxury goods brands tend to find plentiful demand and often confirm new tenants with little delay Away from these areas, however, retailer interest quickly wanes, leading to much longer leasing periods Units of over 100 tsubo in secondary areas tend to be too large for retailers looking for space in such areas Most such retailers have limited funds and are looking to keep operating costs to a minimum
A further four properties ( 5%) were in the very large category of over 300 tsubo, commanding total monthly rents of JPY 30 million or more. A total of 13 such properties came available during the pandemic, nine of which secured luxury brands or sporting goods brands as tenants within four quarters. In each case, the relatively large floor space and excellent locations of these properties fit the tenants’ need to establish new flagship stores encouraging hands-on customer experiences for brands looking to expand their presence in Japan and Asia Those units which took longer to secure tenants were all found in less attractive locations
3．Effective use of vacant units
During the COVID-19 pandemic, some 80 8% of all units soliciting new tenants had periods in which they stood vacant following the termination of one contract and the start of the next This is an increase of 16 2 pps from the pre-pandemic figure of 64.6%. This section of the report will now consider three options for owners to supplement lost income from periods in which street-level properties stand vacant, using specific examples from both Japan and abroad.
3-1. Pop-up stores
The first option is leasing to pop-up stores, which use the unit for a limited period Figure 4 shows that a total of 195 popup stores were opened*3 in 2019, prior to the pandemic, a surge of 85 7% from the previous year While this number dropped by 52 8% to 92 in 2020, the first year of the pandemic, it has been on the rise again since, to 134 locations in 2021 and 172 in 2022 By area, pop-up stores have been most frequently seen in Omotesando and Harajuku, but have also appeared in Ginza and Shinsaibashi Several of the long-term vacancies detailed in this report did, in fact, contract popup stores to fill the gap in the interim between tenants While most pop-up store operators sign contracts for periods of between one and three months, some have been for as long as three years. In terms of the industries producing pop-up store operators, the fashion, luxury brand, and outdoor and sporting goods sectors make up 80% of the total. In some areas, anime media producers, toy capsule retailers, and food retailers have also opened pop-up stores
If retailers are looking to use a pop-up store for the purposes of promotion or test marketing, then they may even be willing to pay rents that exceed market rates If, on the other hand, sales are the primary purpose of the store, profitability will be the proprietor’s major concern, making them less likely to pay market rates There are two main methods by which properties are leased as pop-up stores: ➀ leased directly to the tenant by the owner, and ② leased or consigned to intermediaries such as advertising agencies. In many cases, tenants ask owners to make concessions in terms of the installation of air conditioning and lighting facilities, or the adjustment of floor levels to remove steps between the entrance and the road
3-2. Digital signage
An alternate strategy is to lease the space for digital signage advertising. While such cases remain limited, there are several in Omotesando, Harajuku, and Shibuya. The suitability of a property for digital signage is determined by a range of factors including pedestrian numbers on the facing street, entrance width, and the amount of glass used in the unit’s frontage Advertising periods vary in length from two weeks to around three months, and the ease with which signage can be erected and removed allows for a significant amount of flexibility based on the length of time the unit is likely to stand vacant and on the owner’s strategies for the property This is because, for companies wishing to use properties for their digital signage, the costs for capital investment and the transportation of required machinery are not particularly high In other words, this particular strategy allows for investment costs to be recouped fairly quickly At the present time, this method has already been used to advertise automobiles, consumer electronics, and tourism, but should see an expansion into other industries.
While this strategy provides less in the way of income for building owners than pop-up stores, it removes the necessity to invest in interior decorating or redesign Additionally, advertisements for the property itself also serve to heighten its visibility
3-3. Stores focused on service or experience
The final strategies for the use of vacant store space have not yet gained much traction in Japan, but are beginning to be widely seen in cities such as New York and London The first of these, commonly seen now in locations such as New York, is what is known as “medtail”, a portmanteau combining the words “medical” and “retail”, in which landlords fill vacancies by leasing to medical service operators As well as a means of mitigating income loss, these operators have the potential to become permanent tenants, should they attract customers and prove successful.
Driven by increased consumer concern over individual health fueled by the pandemic, several medtail operators have opened premises in units vacated by banks and other defunct businesses The decline in market rents has also served to accelerate this trend Floor area required for these operators varies between around 50 tsubo for simple diagnostic services, to over 200 tsubo for physical therapy training centers The major motivation for such medical services to
venture into retail settings is to encourage customers to make use of these services by lowering the physical and psychological barriers to their access Although no contract was actually signed, enquiries were made for space in Ginza from a disease-prevention medical service provider It is likely that medtail will soon spread to Japan as a new form of diagnostic service
Finally, there is the option of leasing to user-experience entertainment providers, which has been widely seen in London and elsewhere . Using Augmented Reality (AR) technology to create a convincing sense of immersion, they have drawn significant attention in recent times. While facilities making use of AR technology do exist in Japan, there are very few at the present time which are housed in street- level locations in major retail areas. In London, these facilities have been established to allow customers to experience the capabilities of 5G, through the creation of such natural terrain as rainforests and deserts using AR The superior speed and data capacity of 5G has accelerated transmission speeds to the point where super -high resolution video has become possible Operators are now using this technology to create spaces providing highly- immersive user experiences Limited- time events run by media operators have been established in prime locations on London’s high streets, and have provided landlords with relatively high rents However, confirmation of allowable building usage under the Building Standards Act and the Fire Service Act would be essential before any such services could be operated in Japan
As technology continues to develop, it is possible that locations in major Japanese retail areas could be used in the future to showcase this technology in the form of user-experience services
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Conclusion
This report has identified the fact that leasing periods have increased since the advent of the pandemic. While no major differences can be seen in terms of minimum and first quartile leasing period lengths, median, third quartile and maximum values for leasing periods have all become significantly longer during the pandemic, irrespective of floor space and total rent levels Significant variance is starting to be observed, with some units finding tenants just as easily as prior to the pandemic, and others taking much longer
This report also considered three possible strategies for the effective use of vacant street- level units: pop-up stores and digital signage, which have already been used in several locations within Japan, and medtail or user -experience entertainment services, now increasingly widely found in such cities as New York and London. In addition, numerous other sources of retail leasing demand have emerged in the world’s major retail areas during the pandemic and may soon become more prominent in Japan
Flexibility from owners in terms of lease periods and retailer industry will be the key to minimizing the financial damage caused by long leasing or vacant periods for street-level properties The emergence of new retail players is likely to provide the catalyst required to revitalize struggling retail areas
Appendix
Research overview
Subject of a survey
： The survey covered street-level units leased between Q1 2018 and Q4 2022 in major retail high streets and secondary areas (please refer to the below maps for details)
Survey method ： On-site inspection and interview surveys
Ginza
Contact
Kaoru Kurisu Director
Retail Team Leader
kaoru.kurisu@cbre.com
Hiroshi Okubo
Head of Research hiroshi.okubo@cbre.com
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