Gus Delaporte Dec. 10, 2013, 8 a.m.
More than a decade ago, with just 30,000 people living south of Chambers Street and the neighborhood largely silent at night and on the weekends, high-end, luxury retail in lower Manhattan was at best a pipedream and at worst a failed enterprise.
Today, with some $20 billion being spent on new construction between the upper stretches of Battery Park City and Broadway, the residential community has doubled to 60,000 and continues to grow. That affluent community of residents, not to mention increased tourist traffic, has upped the demand for luxury retail.
Burberry, Hermès, Ferragamo, Michael Kors and Zegna are some of the luxury names to have signed on at Brookfield Place, while J. Lindeberg and Tory Burch head the list of names rumored to be in talks for space at Westfield’s World Trade Center retail corridor.
“If you had asked me a year ago about Brookfield, I would have told you I wasn’t sure—and my retailers weren’t sure either,” said Faith Hope Consolo, chairman of the Douglas Elliman retail team. “But they’ve worked very hard, and they’ve been able to attract a really good core selection.”
But the bullish behavior isn’t limited to lower Manhattan. From the emergence of the outer boroughs as genuine players in the market to redevelopment across 34th Street, it’s all happening, and fast, in the world of Big Apple retail. Asking rents in the major retail markets of Manhattan averaged $130 per square foot in fall 2013, up 18 percent year over year, according to data from the Real Estate Board of New York.
“In general, the New York market remains very healthy,” noted Robert Gibson, vice chairman in Cushman & Wakefield’s retail services group, whose own third quarter retail stats showed an increase in rents in nine out of 10 Manhattan submarkets.
Uptown, along the traditional luxury retail corridors, retailers have reemphasized the importance of flagship New York locations: Asking rents on Fifth Avenue hit $3,000 per square foot in the second quarter, according to data from CBRE, the first time that threshold had been broken in New York.
Driving the Fifth Avenue market were 38,000-square-foot and 20,000-square-foot deals for Ralph Lauren and Valentino at 711 Fifth Avenue and 693 Fifth Avenue, respectively.
“The Valentino deal on Fifth Avenue is very exciting,” Mr. Gibson said. “They paid market, but that’s a space that they’re betting everyone who comes to New York will walk by.”
On Madison Avenue, long considered the epicenter of high-end retail, Hermès extended its lease for 10 years and paid some of the highest rents on the street to stay on the corner of 62nd Street. The French luxury retailer paid more than $1,700 per square foot.
Despite raving about the growth of the Madison Avenue market from 59th to 72nd Streets, Jones Lang LaSalle’s Michael Hirschfield questioned the pricing of the Hermès deal.
“That’s a remarkable number, an eye opening number. It’s higher than any rents on the street,” he said.
Others argue the rent numbers are meaningless.
“That’s their flagship; that store does more business on Madison than they ever did when they were on 57th,” Ms. Consolo said. “The money doesn’t mean a thing.”
South in Times Square, it’s status quo, where tenants are reaping huge sales volumes for their marquee space, but with Toys ”R” Us rumored to be on the way out of its 100,000-square-foot location on Broadway, a huge swatch of space could hit the market in the bow tie.
Early suggestions indicate that the space, set to be vacated in 2016, could be divided into smaller spaces for several separate retailers, and with ground floor space in Times Square asking upwards of $2,000 per square foot, significant deals could be on the horizon.
Big transactions have already been inked in Herald Square, where Macy’s and JEMB Realty have both announced plans to reinvigorate one of Manhattan’s most storied retail corridors.
JEMB will welcome the world’s largest H&M location—in excess of 60,000 square feet—at its redeveloped Herald Center complex next fall. The 250,000 office and retail property, formerly occupied in large part by defunct discount retailer Daffy’s, will undergo a complete repositioning, including the installation of a glass facade and LED lighting, beginning early next year.
Not to be outdone, Macy’s in the midst of a $400 million renovation of its landmark 34th Street location nearby.
“The H&M world flagship is going to transform an already great retail corridor,” Mr. Gibson said. “Herald Center was a tired retail building that needed to be transformed, and with the renovations that Macy’s is doing, it will further activate 34th Street.”
In the Meatpacking District, the picture is not nearly as rosy, at least according to some real estate analysts. Taking rents there have dropped as retailers push back against property owners who are intent on squeezing every last dollar out of their space.
Those escalating asking rents in the area have not matched up with sales volumes. The problem, some argue, is in the demographics.
“When you come to Manhattan, demographics can be misleading,” Mr. Hirschfield said. “The reality is, if you go to Meatpacking on a cold Wednesday in February, no one is on the street.”
The proof is in the pudding: Many of the retailers who signed up at the height of the market aren’t seeing the benefits, and some are even moving out.
“Meatpacking pricing has dropped in the past 24 months, because retailers that signed up at the peak of the market aren’t making money,” Mr. Gibson noted.
Other industry participants, however, insist the tide is changing and that the stigma associated with Meatpacking sales volumes has largely been overblown. Specifically, the market has placed too much significance on the asking-rent-versus-sales-volume gap in the period immediately following the downturn, according to Michael Phillips, chief operating officer at Jamestown Properties.
“The P.R. for the Meatpacking District overshadowed the reality, and all the while the number of people on the street just continued to grow,” he said. “It will be a great surprise for Manhattan over the next three years. It’s a real area to watch.”
Across the East River, retail is finally taking notice of the increasingly attractive demographics in Brooklyn and Queens. Tenants as varied as H&M and Swarovski have been eyeing space in Downtown Brooklyn and elsewhere, with menswear an increasingly popular retail segment in the outer boroughs.
“Every retailer that visits us leaves to go visit Brooklyn,” said Ed Hogan, national director of retail leasing at Brookfield. “It’s working its way into business plans.”
And it’s not just the “high streets” of Fulton and Atlantic that are seeing interest. The area around the Barclays Center continues to transform itself, while Bay Ridge is also catching the eye of retailers.
In Long Island City and Sunset Park, Jamestown Properties is transforming the concept of manufacturing at its Falchi Building and Industry City complexes, two buildings set to bring a new brand of retail to the boroughs.
“The strategy at Falchi and Industry City is to connect manufacturers with retail space,” said Mr. Phillips. “That connection between the production and retail is a key piece.”
The developer, famous for its mixed-use Chelsea Market facility in Manhattan, last month opened the Food Box, a ground-floor food market at the Falchi Building. The emphasis of the project is on incubation of new concepts, which due to economic factors is a difficult enterprise in Manhattan.
“Adaptive reuse urban industrial areas and transition markets can see rents from the teens to $75 per square foot for a variety of spaces with landlord work letters and first gen support,” Mr. Phillips said. “You’d never see that in [Manhattan.]”
But the most enthusiasm in New York retail is saved for lower Manhattan, where Brookfield Place and World Trade Center, two developments with significant retail components, are set to change the conversation when it comes to shopping downtown. Together, the two complexes will bring more than 600,000 square feet of selling space to the neighborhood.
“I think Downtown is exciting,” said Mr. Gibson. “The entire Downtown retail landscape is being redeveloped.”
And it isn’t only Brookfield Place and the World Trade Center that are making waves. Farther east, Howard Hughes is reinventing retail at the South Street Seaport, a location once better known as a tourist trap than a viable luxury retail destination.
“The redeveloped Seaport will create an unrivaled destination that will become the most vibrant in lower Manhattan,” said David Weinreb, chief executive officer of the developer, at a groundbreaking this fall.
Mr. Weinreb further called the development “a place where exceptional retail, world-class dining and engaging cultural events blend seamlessly against the city’s most captivating waterfront backdrop, the Brooklyn Bridge.”
Stakeholders caution, however, that those expecting immediate fireworks should instead prepare for a more deliberate process of retail development in lower Manhattan, despite the seemingly insatiable demand.
“Fulton Street and Downtown stretching from Brookfield to the Seaport is a logical place for retail to grow, but I think that will take time,” Mr. Hogan warned. “It’s an evolution.”