I recall participating in a panel discussion grappling with the question of the changing retail landscape in various neighborhoods in New York City, particularly Manhattan. And I believed then, and still do, that what makes New York so exciting is that one never knows what the next trend will be, nor where.
As 2009 comes to a close, overall activity has increased. Tenants who were priced out of the overly aggressive New York City market over the past few years are celebrating that they are now able to compete for space. Those tenants include big-box/discount-oriented retailers, food tenants and institutional users like schools and museums. In the past, it was difficult, if not impossible, for these users to secure sites. They could neither afford space nor compete with tenants thought to be more desirable by landlords.
Just in time to meet market demand, Costco has opened its first Manhattan store, in East Harlem. The store is projected to be the chain’s No. 1 store nationally, and other retailers that will occupy the project include Target, Best Buy, Marshalls, Petsmart and Old Navy. Also noteworthy, Nordstrom Rack inked a deal for part of the old Virgin space in Union Square. These retailers and others, like Kohl’s, TJ Maxx, Loehmans and Filene’s, can be opportunistic and take advantage of softened market conditions in Manhattan, as well as in the strong retail pockets in the outer boroughs, which have been greatly under-stored.
Competing with the discount retailers for large blocks of space are the gourmet supermarkets Whole Foods, Trader Joe’s, Fairway and several other local players. New restaurant and fast-food concepts are also springing up, many featuring healthy, natural food. Multiple deals have been done by Duane Reade, CVS, Pricewise and Staples—all of which are being aggressive while competition for space is reduced and terms are attractive.
A few banks are still selectively looking to lease additional space, but the banking frenzy is over. Schools, museums and other institutional users (CUNY, Baryshnikov Arts Center, Museum of Vampyric Artifacts/MoVA) are also taking advantage of affordable space.
Another trend we saw this past year was the pop-up store. Many of the local boutiques, as well as national and international chains, secured short-term leases in order to test the market. This also provided landlords with immediate income, even if only temporarily, while market conditions improved. Many of those tenants will commit to securing space long term. Based on the appeal to the consumer of branded product, a number of the fashion apparel and luxury retailers will again explore options to lease space. There is business for them in New York, but they must keep it fresh and provide perceived value. Consumers are demanding that, even in the high-end, luxury tier of the market. Activity has increased, and leases are slowly being signed on Madison Avenue, on Fifth Avenue (still reported as the priciest corridor worldwide), in Soho, in the Meatpacking District, on 34th Street and along many of our high-profile/high-traffic corridors.
As consumer confidence increases and people return to shopping and cautious spending, both the traditionally rent-challenged users (discount, food, schools) and some of the high-end tenants who stayed on the sidelines during the height of the market are locking in space at more appropriate terms, with less risk. Manhattan shopping will be more inclusive and interesting for us all—many who shopped at the big-box stores in Long Island or New Jersey will now have the same places in which to shop locally. Even Madison Avenue will be more inclusive, as reduced rents have encouraged a wider range of interesting merchants, rather than just the usual proliferation of jewelers. New York City is still the capital of the world and has a unique appeal for retailers.
The principles of my job as a broker are the same today; however, we brokers must put on our thinking caps and be creative. Our challenge has been to identify tenants who are active and bring about that always-elusive “meeting of the minds,” which has been difficult, as it required landlords to drop rents to realistic expectations based on new tenancies and projected sales volumes—and tenants to understand that the bottom may have arrived.
We read things like “finding value in a changing market” and taking advantage of or seizing “windows of opportunity”—in fact, the market did need a correction as retail rents for high-profile space, in particular, had become overpriced with competition from multiple retailers for the same spaces. Many retailers were paying what was required to secure their dream “showcase” or “flagship” site, without stopping to think that sales projected for a roaring economy might not be sustained in a changing or troubled one.
There have been some fatalities and will be more—only a couple of years ago many tenants readily paid inflated rents and their landlords made out like bandits; now tenants may lock in bargains long term and landlords may suffer if their carrying costs are not met. Rents have dropped from 20 to 40 percent over the past 18 months, and are now leveling off as activity is increasing. Remember that song from The Lion King—“The Circle of Life”?
Robin Abrams is executive vice president of the Lansco Corporation and chaired the Retail Committee of the Commercial Board of Directors for the Real Estate Board of New York.