New York’s Luxury Corridor Loses its Luster, but Less Expensive Areas Hold Their Own.
Nov 17, 2009 10:56 AM, By Elaine Misonzhnik
In a fog
That’s not to say that retailers are flooding New York City with demands for space. Retailers no longer feel pressure to expand, so unless a new location makes sense financially, they are not going to take it, Fox explains. Plus, in a lot of cases landlords are more concerned about getting a stable, good credit tenant to occupy their property than they are about making top buck on the deal, adds Goldfarb.
Instead, there is a select cadre of retailers that’s actively shopping around. The names include drugstores CVS and Duane Reade, Subway, video game seller GameStop and regional beauty supplies store Ricky’s NYC, according to Goldfarb. Jones Lang LaSalle’s Miller has also been working with some larger tenants, including TJ Maxx, Marshalls and Dollar Tree, on taking over empty big boxes left by Circuit City. The electronics seller operated at least 30 stores in New York City, including four in Manhattan.
Apparel retailers, however, considered the bread and butter of New York’s retail scene, are still holding off on new store openings. “I think that until the apparel chains start to expand there’s going to be a lull in the market,” says Fox. “Even if there is a rent reduction on a prime piece of space, the apparel tenants aren’t biting [because] they don’t know what kind of sales volume they will do and then it costs $1 million to build a store and the banks aren’t lending. So when you take the apparel industry, which is a major retailing segment in the city, and it’s sitting on the sidelines and the banks are sitting on the sidelines, those are two big generators of retail business that are licking their wounds right now.”
One positive sign on the apparel front, however, has been the opening of women’s clothing store White House | Black Market on 508 Broadway in SoHo. Ariel Schuster, of New York City-based real estate firm Robert K. Futterman & Associates, says the retailer has been looking for a second location in Manhattan for two years and finally decided to take the 4,440-square-foot SoHo space this fall. Robert K. Futterman represented White House | Black Market in the transaction. “That was a great sign” for the market, says Schuster.
Whatever leasing activity does take place involves significant concessions from landlords. So far, the latter have resisted lowering asking rents and that’s why official statistics have held up so well, according to Fox. But the effective rents at which deals are being signed have come down by anywhere from 25 percent to 40 percent. In many instances, the tenants are pushing hard for free rent and significant tenant improvement allowances, says Miller, who is a tenant representative. Today, a tenant looking for a Manhattan storefront might get up to $100,000 more from a landlord through various concessions than was the norm two years back.
The difficulty landlords are facing in filling vacancies has had the unintended consequence of making pop-up store leases—temporary leases that are generally signed for the term of several months, but can be as long as two years—much more common, he notes. In the past, Grubb & Ellis would get two or three calls a season from retailers looking for pop-up locations. Today, Goldfarb says his phone is ringing off the hook. Among the retailers who have signed pop-up leases in Manhattan recently are Gucci, Toys ‘R’ Us, Rachel Ray and Ricky’s.
As a rule of thumb, the pop-up leases in New York City feature rental rates that are 50 percent off those found in permanent leases and require little to no build-out investment from the retailer, according to Consolo. And in some cases, those leases serve as test runs for permanent locations. Earlier this year, apparel seller Lisa Perry opened a pop-up store in SoHo. The brand is now in the process of signing a permanent lease on the Upper East Side, says Consolo.
The city’s landlords have also become less finicky about letting “wet use” tenants, i.e. restaurants and fast-food joints, take spaces formerly occupied by hard goods retailers, notes Miller. In the past, “a lot of landlords had put a line in the sand and said ‘We only want a dry use.’ They are now allowing food uses into some of these spaces just so they can fill them up,” he says.
Looking forward
Their newfound flexibility should help New York landlords recoup some of the losses resulting from the increase in vacancies, but opinions about how long they will have to remain this accommodating vary.
Goldfarb and Lindenfeld say the Manhattan market has bottomed out, but Kurland notes that leasing activity will pick up only if the retail sector has a good holiday shopping season this year. (At the moment, most industry sources project that same-store sales growth from November through January will be flat.).
Kurland, who handles retail leasing on a national basis, notes that the last deal she closed in New York City happened seven months ago. At the peak of the real estate boom, she would close at least one Manhattan lease a month. Kurland’s working on four potential transactions in the city right now, but remains cautious about the short-term prognosis.
“Unfortunately, our business is very tied into consumer confidence,” she says. “And except the things that you absolutely need,” including food and drugs, people are not shopping.
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