Although it would appear that retail landlords in New York City are reaping the benefit of high rents — and many are, if they bought at the right time — demand has declined and leasing velocity has slowed, mostly due to inflated landlord expectations, tenant hesitancy and increased supply from tenant defaults.
Yes, the Manhattan retail leasing market has softened, but not enough to significantly reduce historically high asking rents. For example, the fourth quarter of 2015 saw ground-floor average asking rent decreasing in the majority of the major corridors over the second quarter 2015. Fifth Avenue, from 49th to 59th, saw an 8 percent decrease; Madison, from 57th to 72nd, saw a 5 percent decrease; West 34th Street, from Fifth to Seventh avenues, saw a 16 percent decrease; and Broadway, from Houston to Broome, saw a 15 percent decrease.
The corridors which saw rent increases were modest compared to the rises we saw in early 2015 and 2014. While this is in part due to increasing supply, an adjustment in landlord expectations is having the greatest impact.
High rates of default and eviction have plagued New York City for years, mostly due to inexperienced tenants relying on unrealistic revenue projections and margins, leaving little room for error.
And yet many tenants claim that their NYC locations generate the highest sales, both in terms of overall volume and sales/square foot, while others view a NYC flagship store as a necessity for marketing and brand awareness. In an era of high rents, it is incumbent on landlords to truly understand a tenant’s business model and leasing perspective, to strike a deal that maximizes their long-term revenue.
To best understand the tenant, it is important to look at consumer behavior. Today people want a multichannel approach to shopping — seamlessly, in-store or online, with consistency in pricing and the ability to return in-store or at home via shipping. Those retailers savvy enough to deliver flexibility efficiently are best positioned to sustain success.
Invasion of the Web Players
e-Retailers, like Amazon, Warby Parker, Birch Box and Bonobos, have incorporated brick and mortar into their online strategy by opening stores to leverage their web capabilities. Utilizing their massive amounts of consumer data, they can provide a unique in-store experience by knowing local buying power/buying habits and merchandising stores accordingly. Having the right inventory on hand before the doors even open can lead to strong sales and an excellent first impression.
e-Retailers are also exhibiting smarts when it comes to site location. Warby Parker and Bonobos had tremendous brand recognition and identity from the Internet before opening retail locations in Soho. Experience and understanding of their consumer helped them best locate their store where brand recognition drives traffic. At the time, streets such as Greene and Crosby presented a relatively affordable alternative to Broadway, Spring or Prince.
Brick-and-Mortar Fights Back
Many of the traditional retail players, the brands established on Main Street and in malls, are facing increasing online competition and are being forced to downsize their footprints. But at the same time, many are strengthening their internet capability, and making adjustments to their inventory.
Traditional brick and mortar retailers have evolved their location strategies in those areas of the city where rents remain at historic highs. Secondary locations, side streets, mid-block, once shunned for corner locations and major corridors, today present tremendous value, especially for those retailers that recognize the importance of offering that seamless customer experience from the virtual to the real and back.
Retailers like Staples are shrinking their footprints, but at the same time, repositioning those locations as both stand-alone stores, and as a distribution outlet for same-day-delivery, or in-store pickup and returns. Despite their physical store consolidation (169 closures in 2014 and another 225 closures announced in 2015), Staples maintains its place as one of the top online retailers. They are investing heavily into their online capabilities to seamlessly integrate the customer experience; and 80 percent of these customer experiences are with businesses. A transaction can start virtually with home or office delivery, but always with an option to return in-store. This multi-platform retail approach is not a fad, but a necessity for the success and future of certain retailers.
Landlords Balance Needs Today and Tomorrow
It would be naïve to expect rents to grow without the anticipation of a bubble, but the uniqueness of New York City real estate, particularly the finite and less commoditized retail market, mitigates concerns. We can expect the market to continue to soften as the delta between expectations and reality lessens. In Manhattan, projecting rent increases and market conditions is mostly speculative, but understanding the evolution of e-commerce and the needs of the consumer is an important way to balance the rent potential with a tenant’s ability to pay over the length of the lease.
— By Jeff Pandolfo, Director of Leasing for SCG Retail and the Northeast Division of The Shopping Center Group. This article originally appeared in the March/April 2016 issue of Northeast Real Estate Business magazine.