From left: Alexander Brodsky, Jared Epstein and George Doerre
Less than three years ago, it seemed Manhattan’s retail market had no ceiling when it came to pricing. Asking rents in parts of Midtown and Soho grew by double-digit percentages, and investors spent billions of dollars for stakes in retail spaces with the expectation of big returns. Now, by most accounts, the market has surpassed its peak. Tenants are increasingly reluctant to ink leases at the record prices that some landlords want, and online competition continues to undercut in-store sales. Availability rates across Manhattan saw a 25 percent increase during the first quarter of 2017, according to data from CBRE. The average asking rent in the borough declined 2.7 percent, to $850 per square foot from $874 per square foot during the same time last year. And asking rents fell in 12 of the 16 corridors the real estate services firm tracks, with Fifth Avenue between 42nd and 49th streets showing the largest drop at just over 17 percent. From cutting their rents to offering generous concessions, retail landlords are doing what they can to fill vacancies in their buildings — some of which are encumbered by hundreds of millions of dollars in debt. “Landlords are trying to keep their existing tenants rather than create opportunities to jack up the rent by 20 percent,” said real estate attorney Joshua Stein. Whether you call it a bubble, a correction or a plateau, the market has undoubtedly softened. This month, The Real Deal asked six experts in the industry how those changes are affecting their deal activity and how things will shake out in the future.
Alexander Brodsky Principal, Brodsky Organization
How would you describe the state of Manhattan’s retail market? The retail market has definitely softened in the last 12 to 18 months. There are more vacancies, and the market is kind of in a correction in terms of rents. I’m hoping that within the next six to 12 months, retail vacancies and rents [will stabilize]. The market is also getting back into the types of businesses that Manhattan residents really interact with, which is positive. That’s different than what you had in the ‘60s and ‘70s — all very nice, very expensive retail. But who is really going into Graff Diamonds to buy a 40-karat diamond ring on a whim after lunch?
Do you think the slowdown is affecting the value of retail properties in Manhattan? Retail in Manhattan will always have a strong value, but the sector overall has been hit because of online competition. I think retailers are always going to want to be here, so I don’t think there will be a huge shot to retail values.
Is competition from online retailers the largest contributor to the softening retail market? For sure. That’s what I hear from a lot of tenants of ours, and it’s on their minds — if they can sell it online, why have a store? It’s very specific as to who will want that brick-and-mortar space.
Has there been a shift in tenants looking for space or have you shifted the way you evaluate tenants? I think it’s more how we’re looking at tenants. Recently, a pet store moved out of one of our properties on Ninth Avenue and West 43rd Street, and we re-rented to a nail salon. People use nail salons. People will always go there, because you [can’t get a manicure] online.
Do you think rents will climb back up to where they were one or two years ago? In terms of the grande-dame locations, I don’t think that they’re going to go as high as where they were, let’s say two years ago. I think those will certainly soften.
Have you had to offer concessions, such as free rent or tenant improvements, to ink leases? We haven’t really done any tenant improvements — not only because of the monetary issue. It’s so tenant-specific that if we do the build-out and they don’t like it, that’s another issue. In our minds, it’s more of an office tenant situation. We’ve definitely provided a little more free rent so tenants don’t have to pay rent when they are doing their build-out.
Jared Epstein Vice president and partner, Aurora Capital Associates
Generally speaking, is retail leasing slowing down, remaining steady or speeding up? Things are starting to pick up, especially Downtown. My email inbox and phone voicemail are filled each day by brokers and tenants who are interested in pop-ups in Soho or long-term deals in the Meatpacking District. The majority of the pop-up inquiries for Soho are from e-tailers that are ready to test brick-and-mortar retail with the expectation of turning the pop-up into a long-term location.
How do you attract tenants in a market that is continually changing? Relationships play a key role in the good times and the bad. Strong retailers are looking to capitalize with new stores that are built with the help of landlord incentive packages and which feature rents that will likely look cheap down the road. These retailers are represented by the best and brightest brokers. Landlords that have good real estate, relationships with these brokers and are willing to sign leases in the current environment will have the greatest likelihood of success.
Does the softening market concern you as a developer with a significant number of retail projects coming online, like Gansevoort Row? Fortunately, the majority of Aurora’s current developments are in the Meatpacking District with anticipated delivery dates in 2018. I don’t believe there is a neighborhood that is in more demand than the Meatpacking District. We are confident that the majority of the 100,000 square feet of retail and 300,000 square feet of office space we are developing will be leased prior to construction being completed.
What advantages do you see for landlords in the current market? Long-term owners will fill their vacancies by offering tenant-friendly deals and will seize on the opportunity of acquiring properties at better values.
Do you see the softening having an effect on the value of retail properties in the city? The value of stabilized retail properties has declined by approximately 50 basis points simply due to the fear that is associated with the word “retail” today. Once the fear subsides, these values will come back. Vacant retail and development sites with large retail components have softened more significantly, and this was needed because pricing was based on rental projections that were unrealistic and/or comps that were an anomaly.
Would you call it a retail bubble? Yes, this was a bubble, but thankfully it is deflating safely due to the strength of Manhattan. The bubble was created by the vast amount of capital that backed many unsophisticated purchasers who were projecting unrealistic retail rents to justify their record-priced purchases. These new landlords will either lose these properties or accept the reality of lower rents and lesser profits, if there are any at all.
Joshua Stein Principal, Joshua Stein PLLC
How is the retail slowdown affecting lease negotiations between tenants and landlords? Tenants have a lot more strength today than they did two or three years ago, and landlords are trying to keep their existing tenants rather than create opportunities to jack up rent by 20 percent. Landlords really want to keep those tenants: A real live tenant who is happy and paying rent is a great thing these days.
How can landlords retain tenants? Unless [a store goes] out of business, they’re going to stay until the end of their lease. If you are a landlord looking ahead, you may want an early renewal because you don’t want a tenant looking for alternative space. You may even lower the rent in exchange for an early renewal — that might make sense if [a landlord has a quality tenant] and the rent is really difficult to pay. If you lower their rent now, you have an assurance. [If you go vacant], your vacancy could be there for months.
Are you finding landlords offering shorter-term leases? It’s not something I’ve seen, but I think it’s a good idea. It lets retailers try a space without becoming totally committed to it, and it brings in some income and excitement. The question is whether the space is capable of fulfilling the needs of the tenant in its current condition. What ends up happening sometimes is the old tenants go in and demolish everything when they move out, so there’s a lot of concrete, steel, visible cabling — is that space suitable as a pop-up? Those tenants don’t want to invest capital dollars for such a short-term lease.
Are you seeing the most problems in the high-end retail sector? I don’t think it’s limited to high-end retail at all. As far as I can see, it’s all levels of retail. Fifth Avenue is supposed to have all high-end retail a上海夜网