Fifth Avenue between 56th Street and 58th Street is the world’s most expensive retail location at $4,000 per square foot, a 14.3 percent year-over-year increase in the second quarter of 2016, according to a global prime retail rent report by CBRE Group.
But rents that rose precipitously for years, defying the laws of physics, are due for a comedown. “The message for New York is, your rents have topped out for sure,” said Anthony Buono, chairman of CBRE Group’s global retail executive committee. “Landlords are maintaining existing rents by focusing on concessions to encourage retailers to look at a space. They’re financing build-outs, offering free rent, more cap-ex and more flexibility in the lease terms.”
“Right now, we’re seeing a bit of a slowdown in demand, which is impacting pricing,” said Andrew S. Goldberg, a vice chairman of retail services in CBRE’s New York City office. “There’s a lot more supply than there is demand.”
The oversupply has been exacerbated by landlords recapturing space — sometimes by buying out tenants — to take advantage of the enormous rent increases over the last five to 10 years and not anticipating the slowdown in consumer spending and retail sales, which has forced store closures.
Fifth Avenue blocks carry an enhanced premium, Goldberg said, adding, “If you want to be on the corner of Fifth Avenue and 57th Street, there are only four of them. You don’t have options.”
That could be why Bulgari’s rent at 730 Fifth Avenue could reach a reported $5,500 per square foot once incentives are exhausted. Goldberg said there’s scant availability on Fifth Avenue, citing the Crown building mid-block between 56th Street and 57th Street. Bergdorf Goodman Men’s at 745 Fifth Avenue has been reportedly considering its options, including closing or downsizing the location.
Luxury brands have been the most reticent to open new stores. “Some of them are coming off of years of exorbitant growth such as 50 percent to 70 percent increases and now it’s just nine percent or 10 percent,” Goldberg said. “There’s been a dramatic slowdown in spending from international tourists, which was driving a lot of sales in New York and in many parts of the world.”
For example, Hong Kong’s Russell Street, the second-most expensive address at $1,856 per square foot, declined 33 percent. The sharp drop was attributed to a slowdown in tourist arrivals from the Chinese mainland and more prudent spending by locals.
Traditional fashion capitals fared well with the largest year-over-year gains, however, there were corrections in other parts of the world such as Istanbul, where prices fell 16.7 percent.
“This report is just one narrow data point in the broad scheme of the total retail environment,” Buono cautioned. “It’s an import data point because everyone wants to know about the best of the best, but it doesn’t reveal the broad swath of trends going on in the entire marketplace.”
The global economy had a weaker-than-expected first half of 2016, mainly due to volatility in China and Asia and substantially slower growth in the U.S. There’s a degree of uncertainty looming over the European economy as the effects of the U.K.’s exit from the European Union start being felt.
Latin America’s economic woes have spread as far as Miami, which was the only U.S. city to log a decline in year-over-year rents, 7.1 percent.
“Miami is seeing bigger corrections,” Buono said. “On Miami’s secondary streets, which are still import streets, you’ll see fairly significant price reductions from the all time highs. We’ll see slower [growth in rents] or a pullback in the months and years ahead. I think it’s going in the other direction.”
Goldberg said that closing deals in Manhattan require “a little more creativity.”