N.Y.’s Outer Boroughs Provide Retail Frontier

They’d take sites on Fifth Avenue and 34th Street, then hop to the suburbs. Now, retailers are waking up to the inner-city neighborhoods in between.

BROOKLYN, N.Y. — They’d take sites on Fifth Avenue and 34th Street, then leapfrog to the suburban malls. Now, big-name retailers are waking up to the inner-city neighborhoods in between.

This story first appeared in the June 9, 2003 issue of WWD.  Subscribe Today.

Hybrid retail centers are sprouting along inner-city stretches, and since the late Nineties, retailing has been pouring into middle- and lower-income communities in the city’s boroughs. Wal-Mart; Kohl’s; Old Navy; Burlington Coat; Target; Penney’s; Sears; Foot Locker; Bed, Bath & Beyond; Ikea; Nine West; Home Depot; Athlete’s Foot; Ashley Stewart; Finish Line; Champs, and The Children’s Place are among the chains said to be aggressively scouting locations. The activity has picked up since Sept. 11, 2001, which opened up businesses to the potential of under-retailed areas outside Manhattan, where there are huge populations.

“It’s evidenced by all the new big-box construction,” said Barry Fishbach, executive vice president of Robert K. Futterman & Associates, citing Target’s upcoming store in downtown Brooklyn, Lowe’s plan to enter Brooklyn near Red Hook, not far from a Home Depot, and Linens-N-Things, which recently signed a lease on Cropsey Avenue in Coney Island.

“We feel inner-city neighborhoods are largely underserved, and there are still very few national retailers that embrace these markets,” said Mario Ciampi, senior vice president of store development and logistics for The Children’s Place. “For some reason, they can’t get their hands around the operational aspects. We feel very comfortable in inner cities because of the density and because they’re not overstored like a lot of suburbs. Our priorities are New York’s five boroughs, Chicago, Philadelphia, Miami, Los Angeles and San Francisco.”

“You walk on any street anywhere, and there is no shortage of apparel,” said Hal Kahn, chairman and chief executive of Macy’s East. “The

is: Are there enough quality retailers penetrating the markets? As far as we are concerned, we are very well covered in the boroughs. Our stores do well. I don’t think there is a shortage of retail, or really an opportunity for many more malls in the city, though we are expanding our Queens store [in the Queens Center].”

Among the most ambitious projects under way is right in downtown Brooklyn, close to where Macy’s has a store. “We’re sitting on gold — right here on Fulton Street,” exclaimed Joseph Sitt, the energetic chairman of Thor Equities LLC, a New York-based inner-city real estate developer, which bought the former Albee Square mall out of bankruptcy from Forest City in 2001 and is spending $400 million to transform it into The Gallery at Fulton Street. It’s no Bellagio, though with the mosaic tiling, Portobella porcelain floors, skylights and fancy logos etched into glass railings, the project will bring some of that Las Vegas glitz and a higher grade of retail to downtown Brooklyn. With three levels and 1.4 million square feet of retail, hotel and office space, and with over one third just for retail, it will be the borough’s most upscale-looking mixed-use complex.

But will the enhanced environment put off Brooklyn’s blue-collar population? “We don’t think it is going to scare off anyone,” Zitt asserted. “The platform will be upscale, but the retailers will be moderate.”

Sitt expects high productivity — $900 in sales per square foot, or close to $200 million in annual sales, compared with $38 million in the old Albee Square. He bases his projection on population statistics, office development and the performance of stores nearby. He said 235,000 people shop the neighborhood each day, 300,000 live within a mile and the average household income is $54,000. There’s 10 million square feet of office space in the neighborhood, including 8.4 million built in the last decade.

The Children’s Place, at 471-485 Fulton Street, posts in excess of $800 in sales per square foot, establishing it as among the 672-unit chain’s top stores. Ashley Stewart, specializing in large sizes for African-American women, also has a top store on Fulton Street, posting around $5 million. Sitt founded Ashley Stewart in 1991 to help tenant his other urban properties, and eventually sold it off to institutional investors.

Other urban retailers contend they also do well where least expected. Harvey Gutman, senior vice president of retail development for Pathmark, said at last month’s International Council of Shopping Centers convention that shrinkage at the Pathmark in Harlem, opened about two years ago, is no worse than any other high-volume Pathmark. Its $29 million in annual volume exceeds projections and offsets the higher real estate, delivery and security costs of that location. “Inner-city development can be very profitable for the company and the community it serves,” he said.

According to Diedre M. Coyle, senior vice president and director of communications for the Initiative for a Competitive Inner City, which does research to support urban business, there is an $85 billion sales opportunity in inner cities, largely being missed by retailers. She described the urban customer as “a savvy and unique group of shoppers, extremely brand loyal, seeking high-end, quality products that satisfy ethnic and trendy needs.”

Trendy retailers is what The Gallery at Fulton Street is seeking. Among those signed on are Forever 21, which will have 20,000 square feet and will be the chain’s biggest unit in the U.S., Sitt said. William Barthman fine jewelers, which has a store in lower Manhattan, is opening in about a week. Also, Avenue, a plus-size division of United Retail that’s already operating in the mall, is doubling its space to 6,000 square feet, while Toys ‘R’ Us is remodeling.

Still, Sitt has lots of leasing left to do. In a new 300,000-square-foot addition to The Gallery, he’s seeking a department or discount store, such as Sears, Roebuck or Wal-Mart. He tried Target, but Target has decided to open in nearby Atlantic Center, a competitor at Atlantic and Flatbush Avenues. Sitt said he has handshakes covering another 200,000 square feet of space in The Gallery, though no signed leases. Phase I of the retail project is opening in October, with other components including a hotel and office opening in the next three years. “You’ve got to build it and show them. Like a field of dreams, they will come,” Zitt said. “The urban market has incredible sales potential, yet it is heavily underserved.”

Other new developments and venues in the boroughs attracting retailers include:

  • Jamaica Center, Queens. Old Navy, Walgreens and Foot Locker are among the tenants in this year-old 200,000-square-foot project on Jamaica Avenue and Parsons Boulevard, built by the Matton Group.
  • Atlantic Terminal, at Flatbush and Atlantic Avenues in Brooklyn. It’s an extension of Atlantic Center across the street, owned by Forest City; has 373,000 square feet, and will be anchored by Target. Also coming are Children’s Place, Daffy’s, Red Lobster, Payless and Bath & Body Works. Total space on the entire Atlantic project is 760,000 square feet. Tenants in the existing phase include Circuit City, Pathmark, Marshalls, Old Navy and Party City.

  • Main Street and Roosevelt Avenue in Flushing, Queens. The former Caldor space remains vacant, but deals are pending, according to Fishbach. Macy’s, Gap, Footlocker, Payless and Modell’s are on the block or nearby, and there is a proposed project on Main Street and 39th Avenue, between Roosevelt Avenue and Northern Boulevard, for a 100,000-square-foot indoor mall to house small tenants, with roughly 500 square feet each.
  • The Queens Center, a powerhouse mall on Queens Boulevard and Woodhaven Boulevard posting $964 in sales per square foot, is expanding to 921,500 square feet, from 606,800, with Penney’s relocating and growing to 202,000 square feet from 137,000. Tenants are being sought.
  • Fordham Road, the strongest retail strip in The Bronx. A former Caldor’s with 265,000 square feet was recently converted to retail and office space, with Bally’s, Children’s Place and a yet-to-open P.C. Richards all moving in. Dr. Jay’s and Jimmy Jazz also operate on Fordham Road.
  • Steinway Street, Astoria, Queens. Express opened in 2001, and a movie theater at 2860 Steinway Street converted to retail with Duane Reade, which opened already, and other tenants are expected.

    Historically, national retailers have avoided such urban locations because of high real estate and construction costs, crime rates, complicated and lengthy permitting processes and misconceptions about consumers. “The key is to be really on top of it,” Ciampi said. “We consider New York City its own region and we give it real attention. We’ve created our own trucking operation to serve these stores, control the distribution of product, from a security and timing standpoint. We ship as often as we need to keep the costs down, and we have ample room in each store for back stock and storage. In inner cities, you get creative, you use basements and second levels. In the suburbs, you don’t have these opportunities.”

    For Thor Equities, which has about a dozen inner-city projects and is planning six more, the key is to buy the real estate cheap, and Sitt has purchased several bankrupt or foreclosed properties. It’s also important to partner with municipalities for incentives and tax breaks, and to charge high rents based on a percentage of sales. Rents will be higher, though, as a percentage of sales can end up being lower at high-volume locations, compared with suburban sites.

    The process of obtaining electrical, fire and structural permits can be long and complicated, as can financing. For his Fulton Street project, Sitt said he went to Wall Street, including J.P. Morgan, Smith Barney Citigroup and Credit Suisse First Boston, and obtained 4 percent, securitized loans.

    Sitt, the son of the founder of Baby Togs children’s apparel, saw the potential of the inner city as far back as 1985. He bought a foreclosed vacant lot on East Tremont Avenue in The Bronx and on it built a small strip center with a 12,000-square-foot building with a steel roof to prevent break-ins. He leased space to Rite Aid and Payless, and most importantly, found his calling: converting blighted urban areas to viable retailing. He’s got a 100,000-square-foot project in the works on a downtrodden stretch of State Street in Chicago, recently bought a property in Detroit that will be redeveloped and wants to enter such markets as Puerto Rico and Los Angeles, all with his Gallery concept. But for this native of Bensonhurst, Brooklyn, it’s The Gallery at Fulton Street that’s dearest.

    “I love this project,” he said. “This is home for me.”