Retail Rent Picture Varies Greatly Across New York City Submarkets
Retail leasing activity across New York City accelerated during the second quarter of 2019, but the market continues to see vast discrepancies in supply-demand balances across various submarkets.
In certain parts of Manhattan, year-over-year asking rents declined by double-digit percentages, according to the Real Estate Board of New York (REBNY) Spring 2019 Report.
Midtown East, for example, saw its average asking rent drop by 22 percent from $3,900 per square foot to $3,050 per square foot during this time period. The corridor between 42nd and 49th streets experienced similar activity, sliding 20 percent from an average asking rent of $1,000 per square foot to $800 per square foot.
Historically high vacancy and low absorption rates are behind the negative rent growth. Due to the high cost of doing business in New York, landlords have also struggled to backfill spaces vacated by tenants that were victims of the e-commerce world.
As a result, property owners are being forced to bring down their tenant improvement allowances and integrate more flexibility into their leases, primarily in the form of shorter lease terms to stimulate cash flows. Midtown East had approximately 100 vacant retail spaces totaling more than 500,000 square feet at the end of the second quarter.
The vacancy struggles aren’t unique to New York City. According to the latest data from Coresight Research, which tracks brick-and-mortar closures, the number of national store shutterings executed or announced in 2019 (about 8,000) already exceeds the total figure for all of 2018 (about 5,900).
Coresight predicts that the total number of closures could reach as many as 12,000 by year’s end. Notable 2019 closures in New York included the flagship locations of Lord & Taylor and Henri Bendel, as well as Saks Fifth Avenue’s women’s store in the downtown area.
We see retailers of all varieties responding by investing in their build-outs, storefronts and ambiances more so than ever before, in part to add to the “experiential” component of shopping and create lasting relationships with customers.
For example, Bergdorf Goodman has unveiled a plan to revamp its historic building over the next five years, including adding a new first floor and jewelry salon. Bloomingdale’s is redesigning its fashion floors, cosmetics department and shoe store via multi-year renovation projects, and Saks Fifth Avenue is nearing completion of a $250 million redevelopment project at its flagship location.
As retailers adjust to the pressures imposed by e-commerce with bolstered online sales platforms and a more engaging personal shopping experience, we expect the lines between brick-and-mortar and online shopping to blur even further.
This works in both directions, as the New York City market is already seeing more retailers who started as online operations commit to brick-and-mortar locations. Ironically, this allows them to better showcase the technology that helped launch their digital platforms in the first place.
Food, fitness and discount merchandisers have proven to be most resistant to the pressures of e-commerce, and they accounted for some of the more notable recent leases. For instance, Food Bazaar leased approximately 46,000 square feet at 201 E. 125th St. in Harlem, occupying the ground-floor of a residential building.
In addition, Complete Body Fitness, a boutique exercise concept, has leased 24,000 square feet at 25 W. 14th St. in Chelsea — one of the stronger-performing submarkets in the city along with SoHo and the Upper East Side — for its fourth location in Manhattan.
Lastly, Target has leased 23,700 square feet at 600 W. 181st in Washington Heights, replacing a former Rainbow Shop at that location.
Niche retailers in the apparel and electronics sectors are hanging in there in select submarkets as well, but some uncertainty remains on when a citywide return to positive rent growth will occur.
Brand loyalty will continue to help the biggest names and the strongest retailers, but others will need to follow their lead in establishing retail locations that aim to create experiences and long-term relationships with customers as opposed to need-based shopping.
As we see these changes continue to play out across the New York City retail landscape, we remain optimistic that the market will get out of this temporary rut and soon turn the corner.
—By Marisha Clinton, senior director of research, Tri-State area, Avison Young. This article first appeared in the August-September issue of Northeast Real Estate Business magazine.
retail rent picture varies greatly across new york city submarkets