New York’s Luxury Corridor Loses its Luster, but Less Expensive Areas Hold Their Own.
Nov 17, 2009 10:56 AM, By Elaine Misonzhnik
Though the stretch of Madison Avenue starting at 57th Street and continuing through the upper 60s has not, historically, been associated with hard times, the current downturn has hammered the corridor, making it one of the worst-hit areas in New York City.
In the past year, the Gold Coast, as local retail brokers have come to call it, witnessed the exits of long-time neighborhood stalwart and linens seller E. Braun & Co. and fashion designer boutiques Alessandro Dell’Acqua and MiuMiu, among others. Some of the retailers have closed shop altogether. Others opted to downsize. In one case, Vornado Realty Trust alleges that a tenant, Krizia S.p.A., pulled a “midnight move” on its digs at 769 Madison, leaving without notice and without paying back rent for more than four months. (Vornado is now suing the retailer for approximately $350,000.)
The problem for Madison Avenue, according to local brokers, is two-fold. First, the submarket is defined by opulence and luxury retailers have suffered more than any other sector from the drop in consumer spending. Year-to-date same-store sales in the luxury category have declined 16.3 percent, according to ICSC, while total same-store sales are down only 0.5 percent.
Shoppers who in the past indulged in aspirational purchases no longer have the money to do so, says Susan Kurland, executive vice president of retail brokerage services in the New York office of CB Richard Ellis, a global real estate services firm. “I know lots of people who have money and are just not spending,” notes Kurland.
In fact, upscale retailers including Bergdorf Goodman and Saks Fifth Avenue now offer customers the option of taking their purchases home in plain shopping bags, to hide the appearance of conspicuous consumption.
In addition to the drop-off in demand, many retailers with Madison Avenue leases also agreed to expensive terms at the peak of the cycle—rents they can no longer afford. “The rental rates they were paying [at $1,400 per square foot] were priced into the perfect market and instead, they met the perfect storm,” says Henry Goldfarb, vice chairman of Grubb & Ellis Co., a commercial real estate services firm.
As a consequence, the vacancy rate in the Madison Avenue submarket has now reached 16.1 percent, according to a third quarter report from Cushman—a 70 basis point increase from mid-year 2008. That’s higher than both the national vacancy rate for neighborhood and community shopping centers, which is currently at 10.3 percent, and for regional malls, which is at 8.6 percent, according to Reis Inc., a New York City-based research firm. Meanwhile, effective rents in the area have dropped by as much as 40 percent, adds Goldfarb.
The rents on upper Madison Avenue officially average $1,005 per square foot. Unofficially, rents range between $800 per square foot and $900 per square foot, according to Goldfarb. However, that’s still too expensive for many retailers. That makes it difficult to turn over vacant space to tenants outside the luxury sector—they simply can’t afford it, says Bill Miller, vice president and director of real estate with the retail services outsourcing group of Jones Lang LaSalle, a Chicago-based commercial real estate services firm.
Stronger neighborhoods
Considering Madison Avenue in isolation, observers might understandably conclude that New York City’s retail market is devastated. But the Big Apple is a city of neighborhoods and Madison Avenue represents only a small part of the overall scene. For example, Upper Fifth Avenue has also seen a 40 percent drop-off in rental rates in the past year, but because it has less available inventory than Madison Avenue, it has not experienced as much vacancy, according to Faith Hope Consolo, chairman of the retail leasing, marketing and sales division of Prudential Douglas Elliman, a New York City-based real estate services firm. Meanwhile, Manhattan’s less ritzy retail areas, including Times Square, Union Square, Herald Square, Lower Fifth Avenue and SoHo continue to welcome new tenants.
This summer, Nordstrom Inc. announced that Nordstrom Rack, an off-price version of the luxury department store, would take a 32,136-square-foot space at the former Virgin Megastore in Union Square and JCPenney moved into the repositioned Manhattan Mall. Meanwhile, arts and crafts retailer Michaels opened its first Manhattan store on the Upper West Side. In short, the recession has affected leasing fundamentals—both occupancy rates and effective rents have suffered—but New York City continues to attract interest from prospective tenants even during a difficult time.
“New York City has always been a very, very strong urban market,” says Stanley Lindenfeld, senior managing director with Grubb & Ellis. “And the other thing you have to take into consideration is that [on a national basis] in order to save money, people have not been driving and they’ve stopped going to the mall. New York is a walking city, so there is more of an opportunity here than in the outer-lying areas.”
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