Retail Inventory Ticks Upward in New York City, But Low Rents Should Draw Tenants Back

by Taylor Williams

By Pierre Debbas, Esq., partner at Romer Debbas LLP

While headlines have primarily focused on impacts to small businesses, contrary to popular belief, large retailers and national chains have not been immune to the COVID-19 pandemic.

Restaurant and hotel chains, movie theaters, gyms and other experiential retailers have shuttered locations across the country. Just this past July, legacy retailer Neiman Marcus closed its Hudson Yards location due to heavy COVID-19 impacts. The big box retailer also faced store closures in other locations, such as Florida and Washington, due to a high loss of revenue.

Pierre Debbas, Romer Debbas LLP

Pierre Debbas, Romer Debbas LLP

These large, vacant retail spaces have created problems, especially in markets ike Manhattan. While there are some moves in play, such as Home Depot taking over the Bed Bath & Beyond’s midtown location, or Target setting sights on the former 86th Street outpost of Barnes & Noble, the reality of vacant spaces – large and small – is apparent throughout the city’s prime retail hubs.

When looking forward, landlords will have to consider subdivisions and repurposing of big box spaces to make leasing viable, potentially making way for smaller-concept retailers and the return of mom-and-pop shops.

Essentially, the question remains: What is the true absorption rate of all vacancies out there at the moment? Subdividing and reducing space is great for smaller retailers, but can also create more inventory for vacancies within the city.

The high vacancy rate is not all bad news, however. In some sense, it will restore the fabric of local New York City communities by bringing back smaller mom-and-pop shops.

Retail rents in prime parts of Manhattan have dropped roughly 15 percent in the last year. In SoHo specifically, the neighborhood has seen a 26.2 percent decline in asking rent price in the previous years. With affordability on the rise, this allows a window of opportunity for new and small retailers to come to New York City.

This new wave of smaller retailers coming to Manhattan will also bring about a new sense of excitement. In turn, this will spur residential leasing and sales activity. In a mere matter of months, the city’s rental vacancy rate has risen above10 percent. This will increase the cash flow in the city and help both the commercial and residential leasing market.

Retail landlords are undoubtedly feeling this pressure from declining rents due to the pandemic. As we have seen over the past year, the loss of a retail tenant has a trickle-up effect with landlords feeling the burden as well. With no one paying the rent, landlords are facing a huge revenue deficit, which in turn will affect the flow of money within New York City.

There is most certainly pressure on landlords, but it’s not pressure that is completely disrupting the market. We’re not seeing banks jump to foreclosure at the moment, rather; we’re seeing banks working closely with the vast majority of borrowers.

Of the institutional lenders Romer Debbas represents, most are working out forbearance agreements to help clients weather the financial storm. Stimulus money has also helped to keep the market afloat throughout this past year.

Of course, the hospitality and restaurant industries have been hit the hardest. We have seen creative leasing deals come through, reinforcing a sense of community within New York City.

Of the creative solutions our firm has seen throughout the city, one of the more prominent arrangements involves landlords and restaurant tenants agreeing to rent based on a percentage of gross revenue for a fixed period of time. Solutions like this benefit both the landlord and tenant, whereas instead of searching for a new tenant during a pandemic, landlords are able to stay afloat and continue the relationship with the current tenant.

The goal is to get through this crisis together. In New York City, we have really seen this mentality with landlords, tenants and banks, which adds to the sense of optimism for the future.

Small neighborhoods play a big part in generating income for the city, and with a marked reduction in sales tax due to high retail vacancies and a surge in online spending, the deficit will need to be made up elsewhere. In the long-term, cities and towns that learn how to live and operate with this new normal will suffer less of a detriment than those areas with drastic shutdowns weighing down the economy.

In our new world, shopping and restaurants won’t be sufficient enough to fill up space. People are looking for experiences; yoga studios, Pilates, hair and nail salons. After a year inside, we expect to see demand skyrocket for these activity hubs, especially focusing on self-care practices.

Romer Debbas is a boutique law firm in Midtown Manhattan that specializes in the acquisition and disposition of commercial and residential properties.


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