Savvy Retailers ‘Recalibrate’ in New York City
Manhattan has long been one of the most competitive retail markets in the country due to two characteristics of its population: an incredible density and high incomes among residents and workers. The Bureau of Labor Statistics reported that the average weekly wage of Manhattan’s private sector workforce was $3,153 in the first quarter of 2019, much higher than the national average of $1,184 per week.
In addition to its residential base, tourism plays a strong role in Manhattan’s retail sales. Marketing agency NYC & Co. projects that New York City will host 67 million visitors this year, up from approximately 65 million in 2018.
While these demographic factors have kept Manhattan’s brick-and-mortar retail market somewhat insulated from e-commerce and other factors affecting the industry, the borough has not been completely shielded from the woes affecting the retail industry.
Pocket-sized technology offers immediate access to everything from groceries and apparel to cars and construction materials, forcing brick-and-mortar retailers to get creative with their shopping experiences in order to avoid closing stores.
Manhattan remains a top-tier market that commands rents above the national average. But the net result of e-commerce and asking rents that don’t match operating costs is a shift in the balance of power away from Manhattan landlords who for decades had the market for retail space cornered.
“While the Manhattan market continues to see downward price adjustments, tenants across an array of categories, including entertainment, food and beverage, apparel, health and beauty, and service-oriented businesses remain active, drawn to expansion or renewal opportunities afforded by the favorable leasing terms and the strong underlying local economy,” says Nicole LaRusso, director of Tri-State research and analysis at CBRE.
The average asking rent for retail in Manhattan stood at $756 per square foot in the third quarter of 2019, down 5.7 percent on a year-over-year basis, according to CBRE’s Manhattan Retail Market View report. This marks the eighth consecutive quarter of rental rate decline in the borough, which CBRE attributes primarily to the decline in rental rates in high-priced luxury corridors like Upper Madison Avenue and Broadway in SoHo.
“Manhattan today is definitely a tenant’s market but there is a higher degree of equilibrium in the boroughs,” says Gene Spiegelman, principal and vice chairman of brokerage firm Ripco Real Estate. “Traditional retailers are clearly being extremely disrupted in all categories by e-commerce, and Amazon has exponentially increased its footprint with the consumer. As a result, retailers are having to recalibrate their business model to respond with a truly omnichannel strategy.”
Shlomi Bagdadi, president of Tri-State Commercial Realty Inc. expects this trend to continue for the remainder of 2019 and into 2020. Demand is still strong, he says, but broader market forces are causing rents to moderate.
“Tenants in the New York City market, even in the most difficult economies, will always have the need for commercial space, affording landlords with the ongoing opportunity to rent in-demand spaces,” he says. “At this moment, we are in a tight market, especially in the hottest areas of Brooklyn, such as Downtown and Manhattan in Midtown. This bodes well for those who wish to lease spaces.”
Apparel Sees Changes
While retailers have made great strides to form omni-channel platforms over the past decade, Ripco’s Spiegelman says that apparel retailers are struggling relative to other retail categories to strike the proper balance between the online platform and physical stores in their day-to-day operations.
“Apparel retailers are having the most trouble reconciling what the consumers want and how they are purchasing it,” he says. “The struggle is between brick-and-mortar and online channels, which are increasingly becoming one and the same.”
In August, San Francisco-based clothing rental subscription service Le Tote purchased New York-based clothing department store chain Lord & Taylor from Hudson Bay Co. (HBC) for $100 million. Hudson Bay Co., which also owns the Hudson’s Bay and Saks Fifth Avenue department store chains, previously operated 46 Lord & Taylor stores in 2012. Between then and the third quarter of 2019, the brand closed eight stores, including its flagship store in Manhattan.
Le Tote’s subscribers can rent apparel and accessories online then either purchase the items at a discount or send them back. As part of terms of the sale, Le Tote assumed responsibility of Lord & Taylor’s stores and digital channels and dramatically increased its rentable inventory.
In October, Los Angeles-based fast-fashion retailer Forever 21 filed for Chapter 11 bankruptcy protection and planned to close 200 of its brick-and-mortar stores in the United States, including its stores in SoHo and World Trade Center, in addition to two locations in Brooklyn and several others in the New York metro area. Spiegelman attributes the closings to overexpansion, a high-inventory business model and failure to adapt to slower shopping mall traffic.
Boutique apparel retailers, however, are finding more success by leasing space in developments like William E. Gottlieb Real Estate’s Gansevoort Row, a newly developed dining and retail destination in Manhattan.
High-profile tenants, including Italian apparel retailer Brunello Cucinelli, British apparel brand Belstaff and
British-American denim clothing retailer Frame, have all leased space at Gansevoort Row. Presumably, these retailers see value in operating in a location that offers an exceptional customer base via the workers and tourists that frequent the project’s 5 million square feet of office space and 1,000-plus hotel rooms.
“It’s not that people value clothing less than they used to — it’s just not where people want to spend their time and money anymore, especially young people,” says Spiegelman. “They would rather go to a wellness class or enjoy a high-quality coffee or meal, which in most cases cannot be ordered online.”
Developments that mix tenant types are worth more than the sum of their parts when anchor tenants attract customers for in-line retailers. Dining and entertainment concepts can turn a shopping trip into a true — wait for it — experience that can generate cross-shopping and higher sales for their co-tenants.
“A quality tenant brings a lot to a development or building,” says Jacqueline Klinger, senior broker at SCG Retail. “It isn’t just about the rent. When a landlord is focused strictly on who will give it the highest rent, that can be shortsighted in the sort of market we are in these days.”
The Related Cos. and Oxford Properties Group are co-developing Hudson Yards, a 28-acre development in Manhattan’s West Side. Phase I of the project opened in March. With 100,000 square feet of retail space, 4 million square feet of residential space and a 212-room Equinox Hotel, Hudson Yards is fielding strong demand from a multitude of retailers that want to be in a hip location with a built-in customer base.
Even retailers with a largely online presence are growing their businesses by opening storefront space at developments like Hudson Yards. Several foreign retailers — men’s apparel stores Mack Weldon and Rhone, Italian footwear provider M. Gemi and British swimwear brand Heidi Klein — have even opened their flagship American stores at The Shops & Restaurants at Hudson Yards, joining a roster that is over 100 tenants strong.
“We curated The Shops & Restaurants with New Yorkers and the customer in mind,” says Kenneth Himmel, president and CEO of Related Urban, the mixed-use division of Related Companies. “We wanted to offer a diverse array of leading brands across categories and price points, bringing new experiences, creating a suite of hospitality amenities never seen before in a shopping center, and embracing demand for differentiated dining and cultural experiences.
Hudson Yards also houses 3DEN, a pay-as-you-go day spa designed as a one-stop-shop for rest and recuperation. Patrons can pay $6 per 30 minutes to access amenities including shared and private workspace, phone booths, nap pods, meditation rooms, private showers and a wellness center, or pay $69 per month for unlimited use.
The spa follows the “third place” retail model, which entices customers to spend a large percentage of their time at the establishment, surpassed only by their home and workplace. Examples of “third place” retailers also include gyms and coffee shops, which encourage customers to make the business part of their daily routine while making small, daily purchases of snacks, beverages and additional comfort items.
“Co-tenancy can make or break a project,” says Klinger of SCG Retail. “Getting that mix right may involve working with a top-tiered tenant that drives traffic, as well as having the staying power to be there for the length of the lease.”
“There is definitely a smaller pool of good tenants to choose from. Over the past five years we have seen marginal tenants overexpanding and blindly chasing one another. And now, not surprisingly, they are having financial difficulties,” she adds. “It’s incumbent on landlords to understand who their tenants are, and what they need to be successful. Assuming they’ll be there through the end of the term just because they’ve agreed to a high rent in this environment is unwise.”
In terms of square footage leased, Entertainment was Manhattan’s most active retail category in the third quarter. Completed lease transactions totaled more than 126,000 square feet in the third quarter, according to CBRE. Landmarks like Hudson Yards’ 150-foot-tall climbable Vessel centerpiece can attract potential retail customers to a mixed-use development.
Outer Boroughs Blossoming
According to data from the Office of the New York State Comptroller, private sector job growth in New York City has shifted significantly away from Manhattan to the outer boroughs since the Great Recession. The outer boroughs accounted for approximately 48 percent of total job growth between 2009 and 2018, with Brooklyn and Queens contributing 26 and 16 percent, respectively.
In 2011, in an effort to capitalize on this strong job growth, the Brooklyn Navy Yard Development Corp. and WXY began repositioning the Brooklyn Navy Yard. Once a naval shipyard, the historic industrial district is now undergoing a massive redevelopment project that includes the demolition and repurposing of old manufacturing and warehouse facilities to add retail, multifamily and office space.
The developers of the new shopping and dining destination plan to add more than 2 million square feet of retail space and to facilitate the creation of 10,000 new jobs by the end of 2020.
The Admiral’s Row & 399 Sands site at Brooklyn Navy Yard is currently under development and will feature 157,000 square feet of retail space, along with 365,000 square feet of industrial and office space and an 11,000-square-foot community facility when construction is complete in 2021. A new 74,000-square-foot Wegmans Food Market flagship store anchors the site and promises to bring heavy traffic from its cult fan base, known as “Wegmaniacs.”
“Manhattan is a tenant’s market right now, but the market is more balanced in the boroughs,” says Spiegelman. “Tenants still have the upper hand in some of the higher-priced real estate but in general, Brooklyn, the Bronx, Queens and Staten Island are still balanced.”
Demand remains strong for well-located and quality retail spaces in areas of high residential and commercial densities, according to Steve Kaufman, associate broker of RM Friedland.
These tenants understand their local markets and they are willing to take more risk than larger tenants. Landlords who provide the appropriate size space at the total monthly rent that these tenants can afford are most likely to be successful in the long run.
“Landlords are faced with difficult decisions these days. They prefer national and very well-financed tenants, but these tenants are highly selective in the Bronx market,” says Kaufman. “So, a landlord has to decide whether to wait for a tenant that may never come or to lease space to the best-qualified tenant that has come along.”
According to recent data from Marcus & Millichap, the average asking rent for retail space in Brooklyn was $51.55 in the second quarter, the most recent data available. By comparison, the asking retail rent was $35.22 in the Bronx, $52.96 in Queens and $37.24 on Staten Island. Average vacancy across all four outer boroughs was 3.8 percent.
“In many Bronx submarkets, there are opportunities for retailers who understand the specific neighborhoods in which retail spaces become available,” says Mia Abdou, assistant vice president of RM Friedland. “Thus, we believe vacancy rates will remain low as long as landlord and tenant pricing expectations remain somewhat aligned.”
One national tenant that has recently found success in the boroughs is JC Penney, which opened a three-story, 86,000-square-foot store at Brooklyn’s King Plaza Shopping Center.
Queens Place Mall, a local retail center which has undergone significant development this year, features several national anchors in Target, Macy’s and Best Buy, and is expected to undergo a redevelopment of its common areas and food court. Tenants including Dunkin’, Mrs. Fields, TeaCups, Chipotle and Teriyaki One have signed long-term leases at the mall’s new street-level food court, which is slated for delivery by summer 2020.
Earlier this year, BFC Partners opened The Empire Outlets, a $300 million outlet mall project located on Staten Island. Tenants including Nordstrom Rack, H&M, Brooks Brothers and Shake Shack have all committed to the 350,000-square-foot mall, and a large food hall is also in development.
— By Alex Patton. This article first appeared in the November-December issue of Northeast Real Estate Business magazine.