I have never,
ever seen so much street level retail space vacant in Manhattan. It’s been growing by leaps and bounds. And,
these spaces are not in off the beaten- track locations – they’re in prime,
100% locations. Why?
First, there’s
the increasing stress on ‘bricks and mortar’ retail stores as Internet impact
increases. Second, historically many
office building owners don’t really understand retail leasing. They figure that if their rent for office
space is going ‘sky high’, so should the retail space. Not true.
Having been in the shopping center / mall industry for a number of
years, and learning from my mentor Dick Steinberg, different types of retailers
can afford to pay a certain percentage of their gross sales and still be profitable.
In some cases,
retailers, seeking branding high-visibility (vs. the Mel Brooks classic, High Anxiety) in a Manhattan location
have rented space. Some took space too
large for them – adding to an already heavy fixed overhead. Some rented stores in Manhattan believing
that they could generate astronomical sales – only to be sadly disappointed.
So, what
happens now? Many years ago, a
consulting partner and I began using the term ‘Opportunity Income Lost.” It relates to that rental income when a commercial
space sits vacant for a month. Actually, it’s the same with a hotel room that
doesn’t put a ‘head in a bed’ tonight – they’ve lost that revenue…forever.
When I worked
in commercial real estate leasing, our goal was to get a store open for
business as soon as possible after they signed the lease. If there was some period of ‘free rent’, then
it was all the more important to get them open so that the rent checks started
coming in to us sooner rather than later.
While I'm not
in retail leasing, I asked Victor Menkin, a long-time friend and one of the most successful
(and classy) retail leasing agents in NYC, what’s going on. Here are Victor’s
thoughts:
Well Steve,
after an intro like that I’m tempted to just say hello to your readers and
leave it at that before I say something to put a blemish on how you’ve profiled
me, however I’ll give it a shot and thank you for the kind words.
In brief,
there are a number of factors I can point to in order to understand what you’ve
just described:
The Internet: No need to elaborate.
It’s here to stay and the monster only keeps growing. Amazon’s piece of
consumer’s spending is only getting bigger and won’t recede in the near future.
Yes we can talk about retailers who are incorporating the Internet into their
sales strategy but that is only stemming the tide on the slow down in the
demand for bricks and mortar.
Synergy disintegration: When we
New York retail real estate practitioners read about J.C. Penney and Sears
closing many of their shopping center stores we get concerned but somehow seem
to manage to pull out the “Yeah but that’s not NYC” card. But guess what, the
same phenomena that infects a shopping center when an anchor leaves or shuts
down occurs here in the Big Apple when a major store or a quality national
tenant shuts down. It’s one thing for a Manhattan retailer to feed off the
traffic generated by a major transportation hub or densely tenanted office area
but when a “satellite” use takes a position near a major national retailer who
goes out, that area loses significant traffic and value. Bebe is about to close
all of their stores. Ralph Lauren just announced that they’re closing their
flagship Fifth Avenue store as well as 50 of their stores around the
country. Not good.
Escalating Manhattan housing costs: Apartment
rental costs have continually risen through many areas of Manhattan, Brooklyn,
Queens and now the Bronx. We are seeing redevelopment and new construction of
residential real estate. The Millennials are flocking to these new areas for
affordable housing. This in turn creates new opportunities for retailers and
restaurants to feed off that new and growing residential population and secure
spaces at lower costs than the historic tried and true Manhattan shopping
districts command.
Operating expenses: Let’s remember
that in addition to rent, NYC retailers have to absorb a portion of the real
estate taxes on the property. Keeping the Big Apple running requires a lot of revenue,
which is substantially generated by commercial property taxes so we continue to
see retailers absorbing an increasing real estate tax obligation. Add to that
the cost of labor to enable Manhattan retailer’s employees to live in one of
the most expensive cities on earth and the retailer’s margins are further
squeezed.
Over supply: There’s no denying
that this country is over built with retail space and NYC is probably leading
that statistic in per capita square footage. As the Internet pinches the demand
for bricks and mortar in the face of an overbuilt supply…….BANG! I just read this morning that retail
bankruptcies are occurring at a higher rate than in the depression!!!
Sovereign Wealth Funds: Manhattan
has reached a unique point in desirability for commercial property investments
and has seen a rash of foreign capital flock to Manhattan commercial properties,
which are seen as a safe haven for these funds. This money is apparently
primarily concerned with long term safety and are willing to live with a
compromised cash flow from the retail component of a mixed use building or a
prime retail specific property and wait for the market to come back.
I could
probably go on further describing the problems but don’t want to get your
readers any more depressed and even though John Lennon wasn’t a retail real
estate broker, I think his words are appropriate: -“There are no problems only
solutions”.
There is
some good news. There’s too much money at stake in the Manhattan commercial
real estate market to allow the retail component’s revenue stream to be log
jammed as it is and property owners are already making meaningful changes to
adapt to the current conditions. Quality, creditworthy retailers who have
adapted to omni-channel retailing and have successfully addressed the
Millennial consumer lifestyles are now in stronger positions to leverage asking
rents and landlord concessions and contributions beyond what we have seen in a
while. Landlords are also looking for operators who offer an experience in
their stores as much if not more than their merchandise. These types of
retailers can repair what I’ve referred to as the “synergy disintegration”
(copyright pending) by generating their own traffic as destinations.
We have seen
downturns in the retail real estate cycle here many times over and we continue
to not only survive but to come through it stronger. NYC is still THE place to
be to make your bricks and mortar mark in retailing.
However, the
really good news is that my first grandchild Joshua Reiss Menkin just turned 7
months! Thanks for the opportunity Steve.
EXTRA!
Am very glad I
didn’t publish this column yesterday as this morning I found an interesting
post on LinkedIn by Eli Braha about the state of retailing:
2017 – The year
that retail died: In memorium…
- J.C. Penney: closing 138 stores
- Sears Holding: closing 108 Kmart and 42 Sears stores
- Macy’s: closing 68 stores
- Radio Shack: closing 187 stores
- Abercrombie & Fitch: closing 60 stores
- Guess: closing 60 stores
- The Gap: closing 175 stores
- Wet Seal: closing 171 stores
- Crocs: closing 160 stores
- The Limited: closing 250 stores
- American Apparel: closing 110 stores
And here are
some of the comments posted on LinkedIn about Eli’s article:
It is the natural evolution of retail. Many of
those names are either out of date, expanded far too much
Thanks for the summary. The reality is Amazon
has changed the way people shop, however retail malls need to become more of a
destination and become more focused service and entertainment. Store design
like office, housing, and other sectors, need to utilize space more
efficiently.
I think the one thing about every store on the
list is that they didn't create a unique buying experience--no compelling
reason to walk in the store and rub shoulders with people you'll be fighting
with for bargains. Brick and mortar is viable to the extent the 'buying
experience' exists. Just an opinion from a guy who might walk in a store once
per year.
The sector is going through a
massive shift, but to say that retail is dead is slanted media and misleading.
Let’s not ignore food concepts, athleisure and other service-oriented retail. 1
example. just in the last few yrs, Soulcycle has expanded to 70+ locations.
It says a lot about what retail
can be sustainable in certain markets. Soulcycle at 35 bucks a ride can't work
everywhere as an example.
Another retailer bites the dust! hhgregg said
on Friday afternoon that the company was closing all 220 of its stores and
going out of business entirely, the liquidation ends a 62-year run for the
Indiana-based chain. There is really nothing unusual about this. Brands come
and brands go.
A couple
of more thoughts from me on this:
Observing
retailing, from when the early chains went public, Wall Street has put pressure
on retailers to open a certain number of stores a year (witness the
proliferation – is there a stronger word? – of Starbucks). Succumbing to that pressure, to keep their
stock price (and stock options) viable, many chains simply over-expanded – big
time. This is not to suggest that we are
not in the midst of a sea change in retailing only to suggest that what’s
happening now has not totally been caused by Amazon, etc. and other online
shopping ‘stores.’
As
with many things that have been changing since Al Gore invented the Internet,
it’ll be interesting to see if today’s trends and behavioral changes (dare I
use the word Millennials?) will stick or possibly revert back to another more ‘human
touch’ type of shopping.
On The Road…
April 10:
Asheville, NC to conduct a networking / personal brand / career coaching
workshop for students in A-B Tech’s STEM (Science, Technology, Engineering,
Math) Program.
April 24-27:
London, UK to coach one of our clients preparing for their annual investor
conference, attend the conference and provide feedback – What went well? What didn’t go well? What to consider doing
differently next time?
May 17 – 18: Charlotte, NC to coach a client about to
begin their first road show with institutional clients to raise capital
May 22: London,
UK to conduct a Behavioral Presentation Coaching Workshop to a real estate
private equity firm
June
22-23: Asheville, NC to conduct a
session at a client’s global real estate event.
June 25 - 27: Newport, Rhode Island to attend IMN's U.S. Real Estate Opportunity and Private Funds Investing Forum
 |
| Last Sunday at the North Carolina Arboretum - 5 minutes drive from my apartment! |
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