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.
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:
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