“Adapt or perish” has been the cry of retailers since the first entrepreneur nailed up a sign reading Buy This! ages ago. That said, we are in a particularly significant era of change where the very underpinnings of retail are shifting or dropping away.
SURVEYING THE BATTLEFIELD
Vacancies, Rents, and Neighborhood Shifts
Retail is struggling in Manhattan, as online competition continues to grow. Vacancy rates in Manhattan have doubled from 2.1% to 4.2% between 2012 and 2017. This is particularly apparent in areas known for luxury shopping, with the exception of Fifth Avenue between 49th and 60th streets, which is still thriving, with the highest average rents being $3,900 per square foot and the majority of storefronts leased up.1
The highest average rent on Madison Avenue between East 57th and East 72nd Streets was $1,709 per square foot in the fall of 2014, and has dropped to $1,348 per square foot as of November 2017.2 Rents in Q3 2017 declined in 12 of the 16 main retail corridors tracked by CBRE – with overall average asking rent falling 13.4% year over year.3 Along 5th Avenue, between 42nd and 49th streets, average asking rent decreased 17.4% to $1,023 per square foot. Add to this, many tenants leaving traditional retail centers such as Herald Square, in the hope that developing areas such as Hudson Yards might become more profitable.
The New Shopper - Click, Click, Click
The sound of a mouse clicking is the sound of a new generation of shopper. Millennials are driving a shift away from in-store purchases to the web. Online purchases by the 18-34 age group have been steadily increasing. In recent years, Millennials have made more than half of their purchases online.4 The Millennial consumer is driven by technology and uses smartphones, tablets, and social media to shop; prefers to interact with brands digitally; and enjoys the time-saving convenience of e-commerce. Surveys report that 67% of Millennials and 56% Generation Xers prefer to shop online. 51% of all Millennial shoppers are likely to make a purchase through social media networks.5 Perhaps most significantly, online shopping allows consumers to compare merchant offers, browse other consumer reviews, and find the best prices.
Bottom line: According to a recent study, online sales will grow at a compounded annual rate of 12% through 2020 and purchases made online have accounted for 50% of total sales growth in the past year, despite accounting for only 12% of total retail sales.6
WITH CHANGE COMES OPPORTUNITY
Leveraging Landlord Concessions
In this feverishly evolving market, some landlords are more willing to rent to pop-up stores or agree to short-term leases. This enables landlords to buy time as they search for long-term tenants. Pop-up locations and short-term leases can be attractive, particularly for less-established brands, as a means to test the market without a long-term commitment. Moreover, the space is more attractive and marketable when occupied.
Landlords are also looking at alternate solutions such as renting window space to advertising companies. The broker market is also changing to accommodate tenants and owners who are looking to lease short-term space.
Some landlords would prefer to negotiate free-rent concessions or comped amenity fees rather than lower asking rents, as real estate investors often expect rents to stay at a certain level.
Retail proponents have made attempts to help the industry. The proposed Small Business Jobs Survival Act would give retail tenants the right to a minimum of a 10-year lease renewal. 7 Additionally, a bill passed by the New York City Council in November 2017 will raise the threshold for Manhattan’s Commercial Rent Tax from $250,000 to $500,000 in annual rents effective July 1, 2018.8 The new threshold would relieve approximately 2,000 small businesses in Manhattan from paying the commercial rent tax.
Retail Lab 101
By necessity, this is an age of experimentation with Amazon leading the way. The online giant’s acquisition of Whole Foods is a recognition that people who shop for food online still spend a considerable amount of food money in brick and mortar stores. Amazon is also a pioneer in the so called “click and collect” store where customers order online but drive to a physical location to collect their groceries. Going further, the Amazon Go experiment uses sensors and cameras to automatically charge customers who simply pick up an item and carry it out of the store. Amazon’s aggressive presence in the grocery industry is a challenge to competitors to either innovate or exit.9
AND YET, RETAIL CONSTRUCTION CONTINUES
Mark Twain once quipped that reports of his death were greatly exaggerated. The same can be said for retail. In the face of many challenges, retail construction is on the rise. Across the nation, spending on shopping center construction topped $1.6 billion in June 2017 — the largest amount since the Great Recession of 2008.10 Existing properties are renovating and reimagining themselves to house more restaurants and other attractions — a move away from consumer goods to an entertainment-oriented environment. The goal is to provide shoppers with a more interactive experience, one they cannot enjoy online.
Without question, a wave of change is washing over retail. Success will come to those who are able to get up and ride that wave. It will be interesting.
If you have questions, contact Vincent Altieri at 212.331.8824 | email@example.com. Berdon LLP, New York Accountants