By James Nelson, principal, head of Tri-State investment sales, Avison Young
It probably won’t be a shock to learn that in the aftermath of COVID-19, we are going to need to reimagine retail.
Even before the pandemic hit, retail vacancy was becoming more prevalent throughout New York City. Now more than ever, landlords and retailers are going to need to think outside the box to fill vacancies and allow retailers to survive.
A recent survey among members of the International Council of Shopping Centers (ICSC), which consists of landlords, tenants and service providers, found that 57 percent of retail professionals believe that the economy will improve over the course of the next year. That being said, 73 percent wanted to see businesses open again in their state.
James Nelson, Avison Young
A key question involves when we could expect to return to the in-person conventions and events that our industry is known for. ICSC is famous for its annual conference in Las Vegas that draws over 30,000 people. It’s a chance to catch up with friends and business contacts in a fun setting while also being able to accomplish dozens of meetings over a few days, as everyone is in the same place. Industry professionals were undoubtedly glad to hear the organization announce it would host a three-day event in Las Vegas in December.
The bright spot for retailers in terms of taking steps to reimagine their products and services is that almost all adapted to embrace online shopping during the pandemic, accelerating the trend of “bricks to clicks” seemingly almost overnight.
Of the retailers surveyed, 99 percent reported that their stores fulfilled online orders to some degree. Meanwhile, pure play e-commerce sales grew by $86.6 billion, or 24.2 percent, on a year-over-year basis in 2020. In addition, e-commerce sales accounted for 11.2 percent of total retail expenditures, excluding auto, gas and food and beverage.
The negative impact on physical stores was definitely felt, however. In 2020, there were 13,400 store closings — more than 10 times the number of openings, according to ICSC and PNC RE Market Research. This might seem like an astronomical number, but keep in mind that in 2019 there were only 11,100 closings compared to 3,900 openings. The last time there were more brick-and-mortar store openings than closings was in 2016.
Thus, landlords and tenants will have to embrace the new reality, which may include backfilling dark spaces with everything from medical to logistics uses. In New York City, essential retail has been popping up all over the city, a trend illustrated by the lines for COVID-19 tests that formed outside CityMDs during the last year.
There has also been a lot of talk about micro distribution centers. Ghost kitchens have been actively opening to allow restaurants to utilize kitchen space for deliveries and avoid paying main street rents.
Meanwhile, Amazon has announced that it will be opening over 1,000 fulfillment centers or other e-commerce facilities in the United States in the coming years. Walmart and other retailers are following suit.
New Yorkers are also closely watching how the legalization of recreational marijuana will play out for retail. According to a recent CNN article, New York state leaders believe that legalization of the drug would create anywhere from 30,000 to 60,000 jobs and bring in some $350 million in tax dollars.
The New York state budget deficit, which will reach $6 billion in the 2024 fiscal year, will need the help even with the hopeful federal bailout of upwards of $14 billion. The next big debate to watch will be with the legalization of gambling statewide — another potential boon to state coffers.
As for landlords, they will have to continue to get creative if they want to fill their spaces. Jay Norris, co-founder of Guesst, a third-party sales verification platform, has a win-win solution for landlords and tenants to get through this difficult time — his transparent platform that shows daily sales numbers, and landlords can structure lease concessions based on those figures.
For example, a tenant could receive a break in rent until certain sales milestones are achieved. This could also lead to the adoption of percentage leases which were previously only found in malls. The big question then becomes whether e-commerce sales will count toward these metrics.
But perhaps the most important variable in the entire equation lies within the fact that the New York City retail market simply cannot and will not have a shot at making a strong and complete recovery until people return to the office.
At Avison Young’s New York City office at 530 Fifth Ave., owner RXR has an app that shows the occupancy rate within the building each day. At a low point on a winter Friday, the occupancy rate hit 6 percent, whereas in recent weeks it has reached nearly 20 percent. However, that figure is still a far cry of where office occupancy rates need to be for the city’s retail and restaurant scenes to once again have real life and fighting chances.
Manhattan’s office vacancy rate rose from 10 to 16 percent during the first quarter, but we’re seeing a renewed energy and foot traffic in the city. Although there is an abundance of vacant retail space in office hubs like Midtown, Fifth Avenue is bustling again, which is encouraging.
Over half of all New Yorkers over 18 and nearly half of all adult Americans have been fully vaccinated, which, based on the recent CDC announcement, means they will no longer be required to wear masks indoors.
On May 7, the Metropolitan Transportation Authority reported pandemic ridership records of approximately 2.2 million trips on the subway, over 100,000 trips on the Long Island Railroad and 83,100 trips on Metro-North.Prior to the pandemic, average weekday subway ridership totals routinely exceeded 5.5 million in the subway system. That figure fell by more than 90 percent to a low of roughly 300,000 daily trips last April as the number of COVID-19 cases peaked in the New York City area.
With all this in mind, there is no doubt that when it comes to solving the retail vacancy issue, creativity either through unique in-store uses or incentivized leases will both have to play major parts.
— This article originally appeared in the May 2021 issue of Northeast Real Estate Business magazine.