podcast | Jul 20, 2020 |
Retail is broken. Is the pandemic our chance to fix it?

The commercial rent crisis, in microcosm: In 2001, when Michele Varian opened up a store in SoHo to sell her collection of home goods, rent was $40 per square foot. Last year it averaged around $300 per square foot. Only after negotiating concessions with her landlord was Varian able to get her own lease down to the still-crazy rate of $26,000 per month before finally cutting bait and moving to Brooklyn along with most of her clientele.

It’s a pattern repeated all over New York City, and indeed, all over the country. In desirable neighborhoods, landlords are able to take out bank loans with favorable terms based on the projected market value that the area demands. Quickly, rent goes up. Soon, none of the people who made the neighborhood desirable to begin with can afford to stay, and the area becomes overrun with national chains and empty windows.

The effect has a particular impact on the design community, Varian tells host Dennis Scully on the latest episode of the Business of Home podcast. “I carry a product from over 100 small independent companies—we don’t know which of those could be responsible for changing the way we all behave and live in this world,” she says. “If you don’t give opportunities to those companies, the world is going to be more and more the same.”

Many shop owners are in Varian’s position. Very few push back to try to do something about it, but Varian has a scrappiness born of her Detroit upbringing. (“In Detroit,” she says wryly, “everyone is an underdog.”) No surprise, then, that her latest venture, a tech platform called Guesst, is a partnership with another Detroit native, childhood friend Jay Norris, who was having his own qualms about real estate—from the other side of the table.

Working as a commercial broker, Norris found himself frustrated by the “cookie-cutter brokerage system,” as he put it. “It’s aim and shoot—don’t add any value, just do a deal. Don’t get to know your tenants too much, don’t help them sustain their businesses and prosper.” Working with Varian (who, at the time, Norris jokes, was like “the Mayor of SoHo”), he arranged for unique “retail roommate” deals where multiple brands could collaborate to shoulder the incredible burden of a downtown lease.

The deals were satisfying. There was only problem: They didn’t make much money. “This is great for everyone but myself. As a broker, you make revenue on commissions,” says Norris. “So I said: The only way this could really work is if we built a marketplace, similar to Airbnb and Uber, where the retailer can be a host and a brand can license space to find this host and consummate a deal.”

That’s precisely what Varian and Norris did: build a marketplace where brands can connect with retail shop owners to arrange for unique buying and selling arrangements. Instead of a traditional wholesale deal, brands can simply cut shop owners into a predetermined percentage. Or, if the brand has no margin built into their price but wants to get into a store—as is often true in the D2C sector—they can essentially pay the shop owner rent to be on the shelves. In turn, shop owners get a steady stream of guaranteed income that helps them combat the rent crush.

That model, now called Pop-Share, was the first incarnation of Guesst. Earlier this year, however, Varian and Norris began rolling out a new program within the Guesst framework, Net-Share, which has taken on special significance in the face of COVID-19. Under the Net-Share agreement, it’s not shop owners and brands who share data, but shop owners and landlords. The platform allows both parties to see precisely what’s being sold in the store and to come to more reasonable terms on rent from there.

There were reasons for shops and landlords to adopt Net-Share before the coronavirus, but it required a more adventurous kind of dealmaking than the average commercial lease. Now, the physical-retail-decimating pandemic has completely rescrambled the equation, and everyone’s looking for something that works. “We call it The Great Reset,” says Norris. “[Landlords are saying], ‘We used to get market rents off of historical data. Where’s historical data now? What’s relevant right now?’ What we’re seeing is a lot of lease modifications.”

Specifically, Norris says, there are new terms where landlords agree to a kind of percentage rent based on revenue, which means they make a cut based on how much product their tenants are able to move. Of course, such a system requires trust—and Varian and Norris hope that Guesst’s features, with its real-time data-sharing and regular payouts, will allow both sides of the equation to work together productively. It’s easy to see the mutual appeal of a scenario in which, when a shop owner rings up a purchase, a percentage of the sale is immediately sent directly to the landlord.

The present moment, says Varian, is an opportunity to brush aside the cobwebs of an adversarial landlord/tenant model. “Landlords are feeling the pain too,” she says. “We’re all in this together, and figuring out something that works for everybody is going to be key.”

This podcast was sponsored by The Urban Electric Company. Listen to the episode below, and if you like what you heard, subscribe to the podcast (free of charge!) to get a new episode every week.

Homepage photo: Michele Varian and Jay Norris | Courtesy of Guesst

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