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Not Dead Yet: Retail Shows Resiliency in NYC

Marc Fogel, CPA

6.25.19 | Berdon Industry Insights

What is the current state of retail and how it is affecting the commercial real estate landscape in the New York City (NYC) Metro area?

At first glance, the numbers are not encouraging. Recent surveys by both Morgan Stanley and Douglas Elliman show roughly 20 percent of Manhattan’s retail storefront space as vacant. Other reports, such as Cushman and Wakefield’s MarketBeat report, show the vacancy rate on the 5th Avenue corridor between 42nd and 49th Streets at nearly 33 percent, and at nearly 24 percent in Soho.

Due to the high number of vacancies, which many neighborhood residents rightly complain are eyesores, Mayor de Blasio is considering a vacancy tax that, in his words, “would penalize landlords who leave their storefronts vacant for long periods of time.”

The seemingly dire retail environment in the NYC Metro market has a number of causes, the biggest villains being the rise of e-commerce and the spike in rents in the years following the Great Recession (2007-09).

According to the commercial real estate giant CBRE, it was during those years that rents in 16 main Manhattan retail corridors soared by 89.1 percent, thereby creating what it called “an unsustainable situation for some tenants as rents surpassed what their sales growth could support.”

Yet, the last decade tells a more nuanced story.

In 2017, Manhattan accounted for 46 percent of the NYC Metro retail employment market; so naturally, changes in the Manhattan market will have an outsized effect on how the rest of the metro market is perceived. However, over the past decade, Manhattan saw 10.8 percent growth in retail jobs.

While Manhattan’s retail employment numbers have shown modest gains over the past decade, the number of retail establishments shrank by nearly 2 percent, giving rise to the current sense of doom and gloom regarding the strength, or lack thereof, of retail in the borough.

Wither Brick and Mortar?

Needless to say, it is too soon to count Manhattan out. One reason why is that rents are finally falling after nearly doubling between 2010-2014. CBRE has found that average rent prices in the aforementioned 16 main retail corridors has fallen by mid-2018.  CBRE finds that by the first quarter of 2019 average asking rents have continued to decline, “falling in ten of the 16 tracked retail corridors over the year, by 8.6% overall.”One study found that by the Spring of 2018, average asking rents for available ground floor retail spaces decreased from the year prior in 12 Manhattan corridors. Indeed, the self-correction in rent prices is leading to a spike in deal-making.

What sorts of businesses are filling the empty storefronts left in the wake of the Great Recession? Cellular phone companies such as T-Mobile, Sprint, and Verizon have become nearly ubiquitous storefront presences. Changes in the health care industry have seen a rise in the number of walk-in or urgent care clinics such as City MD which has dozens of locations throughout the NYC metro area. But according to CBRE, it is the Food and Beverage industry that is leading the way in bringing back NYC’s 16 main retail corridors. Notably, the Los Angeles-based coffee chain, The Coffee Bean & Tea Leaf, recently unveiled plans to open 100 franchises in the NYC Metro area over the next decade.

Meanwhile, some experts believe that the “Bricks vs. Clicks” dichotomy is becoming a thing of the past, thanks in part to traditional brick and mortar’s adaption of artificial intelligence apps to enhance the customer experience.

According to studies conducted by The International Council of Shopping Centers (ICSC) during the 2018 holiday season, they found that 70% of adults went to a mall or shopping center for their holiday shopping, while fully 93% of all holiday shoppers made purchases at a brick-and-mortar retailer. According to ICSC, shoppers prefer brick-and-mortar because going to a physical retailer provides shoppers the opportunity to see and touch items as well as avoid shipping costs.

One example of the synergy forming between brick and mortar and the online experience is Macy’s new “virtual assistant” app, which they developed with Microsoft. According to the retail giant, “The Microsoft Dynamics 365 AI solution for customer service amplifies human ingenuity in customer service and engagement across all channels, and empowers the brand to deliver exceptional customer experiences.”

Macy’s clearly sees the writing on the wall as large department stores have been those among the hardest hit by rising rents and the challenge posed by online retailers such as Amazon. Lord and Taylor, and The Gap have announced they are shuttering their NYC flagships, and some industry analysts wonder if Barney’s and Saks Fifth Avenue could be the next to go. Sears and Toys R’ US have also filed for bankruptcy.

However, while the giants are teetering, new trends are driving changes to the NYC Metro real estate market

If the recent drop in storefront rents are enticing a wave of traditional retail concerns (coffee shops, boutiques) into the city, new, more experiential outfits are also taking advantage of the lower rents.

Consider the popularity of ‘pop-ups,’ which are resulting in landlords offering more flexible, short-term leases or in some cases, licensing deals which permit tenants to use a space rather than rent it for a fixed period as is the case under traditional leases. “Unlike five years ago,” says Kelly Gedinsky of the Winick Realty Group, “landlords are more open to pop-ups” due to the financial pressure created by long-term vacancies.

Meanwhile, new construction is bringing in new retail, notably at Hudson Yards where the tower at 30 Hudson now hosts a seven-story shopping mall which includes a Neiman Marcus department store, as well as Dior, Chanel, H&M, and Zara.

Falling rents and exciting new technologies are having their effect on the commercial real estate market and signs are pointing to a retail revival in the NYC metro market.

If you have questions, contact Marc Fogel at 212.331.7568 | mfogel@berdonllp.com

Berdon LLP New York Accountants