Manhattan Sees Major Growth Spurt of Service-Oriented Retailers, Says Lee & Associates’ JP Sutro
LAS VEGAS— Since joining Lee & Associates in the New York City office in 2012, JP Sutro has closed over $200 million in retail lease transactions. The executive managing director specializes in representing both retail landlords and tenants throughout Manhattan and Brooklyn.
REBusinessOnline caught up with Sutro during the RECon show in late May to get his take on the state of the retail market in New York City. The three-day deal making and networking event is the world’s largest global gathering of retail real estate professionals and typically attracts about 37,000 registrants.
REBO:Nordstrom’s first foray into New York City has begun. A three-story, 47,000-square-foot men’s store opened at 57th Street and Broadway in April. How significant is it that Nordstrom has entered the market?
Sutro:It’s fantastic. All the owners I know that have property on 57th Street have been waiting for this moment. They really think they are going to see an influx of more shoppers and more retailers playing off the Nordstrom’s idea — especially when you hear of other department stores not doing so well. It’s interesting to see Nordstrom having such confidence in the market, especially 57th Street, which has historically been a very strong shopping district. It’s going to be great for that area.
REBO:Recently, there has been an uptick in the service-based retail market in New York City, including boutique fitness centers and hair salons. What’s driving the growth?
Sutro:There are concepts such as Drybar, and other concepts that are offshoots of Drybar, where women can go in and get a personalized blow dry of their hair. It takes about 30 minutes. The clients get handed a glass of champagne and they become friends with the stylists. That concept is popping up all over New York. Group fitness has also become very popular in the city because of the social interaction it provides.
REBO:Can you give us some detail as to the total square footage these service-based retailers typically occupy?
Sutro:The SoulCycle and the CycleBar concepts range from 1,500 to 2,500 square feet. Barry’s Bootcamp goes all the way up to 5,000 square feet, depending on how many classes it can fit into a particular location.
REBO:What are the ideal locations for these service-based retailers such as specialty fitness?
Sutro:They first started popping up in the central business district to attract people before and after work. Now these service-based retailers are really expanding into more residential areas. They are seeing that residential areas that are not as close to the subways are doing just fine because people are OK with taking Uber or a taxi to their class.
REBO:We’re also hearing more about the popularity of thrift and vintage apparel retailers. Tell us about Buffalo Exchange.
Sutro:Buffalo Exchange is doing really well across the country because it offers a different type of product. (The chain buys, sells, trades trendy vintage and used clothing and accessories for men and women.) If I wanted to sell my clothes to Buffalo Exchange, it is only going to take clothes that are kind of funky or different.
Buffalo Exchange is expanding in New York right now. Its footprint is between 4,000 and 6,000 square feet, which is big for an apparel store these days. It’s more of an experience when you go there. The store features apparel you can’t find any longer.
REBO: Off-price retailers continue to crop up in Manhattan. Target is opening small-format locations in the city and T.J. Maxx is expanding its footprint in New York. How do you explain the success of these off-price retailers, particularly in upscale Manhattan?
Sutro: There is certainly some high street retail on Madison Avenue, Fifth Avenue and Broadway that is starting to see a slowdown. There are some downward trends in asking rents. I think that tenants are getting comfortable with the fact that rents have really bottomed out. Now they are really looking for deals.
We’re really going to start seeing an uptick in leasing activity, especially from retailers like Target and T.J. Maxx, which can take a larger square footage of space. That’s not really the norm anymore. A high-end fashion shoe store, for example, is only going to take half the square footage that it took five or six years ago. Someone like T.J. Maxx or Target looking for 20,000 square feet, that’s an anomaly, so landlords are looking to do what they can to accommodate that request.
REBO: So these high-end retailers aren’t taking up the same amount of space they once were? Did they just get smarter with regard to their occupancy costs?
Sutro: Exactly. They don’t need flagships anymore. If they do, then they consolidate. Target is doing well because it is such a large brand that has really understood the particular neighborhoods of New York City. Not many large retailers have the ability to dive that deep into the specifics of each neighborhood.
For example, Target opened a store in Tribeca, where it has a Chobani yogurt station right in front. It’s more high-end. That’s what the moms and the families in Tribeca like to see —something that is a little more high-end. You’re not going to have that in Kips Bay, where a 21,000-square-foot Target is set to open next year. It’s a different demographic in Kips Bay. Chobani will not bring in the customers. What will bring in the customers are the great deals for the neighborhood.
REBO: According to CBRE’s first-quarter Manhattan Retail Report, the restaurant category was the most active segment, with nearly 160,000 square feet of deals signed. Financial services and apparel retailers were also active during the first quarter, each leasing roughly 81,000 sq. ft. The most active neighborhood in terms of square footage leased was the Plaza District, followed by SoHo and Flatiron/Union Square. Did any leasing trends in the first quarter surprise you or reinforce your assessment of the state of the market?
Sutro: It’s not a surprise that restaurants are still expanding. I say that just because of the population density of New York City is still growing. People still need to go out and eat. You can’t buy a restaurant on Amazon. You can order food and have it delivered, but people still want to go out and have that experience. People are still spending money to go out, and restaurants are doing well.
In the Plaza District, the quick-service restaurants — where you get in and out — are expanding. You get a juice, you get a sandwich that is premade and you get out. Those are the ones that are doing really, really well.
I think we’re going to see a slowdown in full-service restaurants because in 2019 there is going to be a minimum wage increase, which is going to diminish the returns for a lot of these restaurants. The margins are already small, especially in Manhattan where I think they’re not going to be able to sustain themselves. It’s going to be a problem for these full-service restaurants that have 20 staff on hand at all times.
In 2019, the minimum wage in New York City will increase for the third time in three years — from $10.50 to $15 per employee. This change has a trickle-down effect as managers and chefs will also demand higher pay than a hostess or dishwasher. Restaurant owners can’t justify pawning off this downward pressure onto their customers by increasing the price of their menu items. Manhattan has so many options for restaurant-goers to choose from. There is just too much competition for such little profitability.
REBO: Much has been written about the impact of e-commerce on brick-and-mortar stores. Which segments of retail in Manhattan have been the hardest hit by the online competition?
Sutro: Apparel is going be hurting a little bit. If you have something unique like a Bonobos (an e-commerce retailer that designs and sells men’s clothing), where you don’t walk away with any bags and the retailer mails it to you a day later, that’s what’s really going to be strong. If you’re just the traditional apparel retailers of the world, that’s really where you’re going to see the downsizing.