As store vacancies rise and rents fall in Manhattan, some eager retailers appear ready to pounce on the spoils.
This story first appeared in the April 8, 2009 issue of WWD. Subscribe Today.
The bargains are attracting interest from a lineup of aggressive companies that includes Nordstrom Rack, The TJX Cos. Inc., H&M, Zara, Topshop and CVS Corp., according to sources.
Amid the ravages of the recession, which followed boom years in which Manhattan’s real estate was among the most expensive and coveted in the world, the latest developments could alter the face of retailing in the city. They follow a moribund period — with the exception of major openings recently such as Topshop in SoHo and Giorgio Armani on Fifth Avenue — that picked up momentum because of tight credit and reduced consumer spending.
“Apparel chains, big-box retailers and discounters are out looking,” said Joe Harbert, chief operating officer of Cushman & Wakefield’s New York metro region during a presentation Tuesday on commercial real estate trends for the first quarter of 2009 and the prognosis for the year.
Harbert characterized the retail real estate market as “a more promising picture from last quarter when demand was largely nonexistent.” However, only a limited number of deals have been completed, as landlords and tenants “struggle” to agree on rent prices.
“In November, December and January, we had no activity,” said Gene Spiegelman, C&W’s executive vice president. “Then, in February, the market all of a sudden started opening up, and it has continued into April.”
Spiegelman said there are “a number of deals in the proposal stage” and that retailers and landlords are “in this dance to determine what is value — what are retailers willing to pay and what are landlords willing to accept. Everyone is feeling each other out.”
Spiegelman declined to specify any deals in the works or which retailers are actively seeking Manhattan locations.
“Our position on growth and expansion really has not changed,” said Pete Nordstrom, president of merchandising for the Seattle-based Nordstrom. “We are thoughtfully and selectively pursuing opportunities to grow both in the full-line stores and Rack division.
“We are a national retailer, but there is really one place where our absence is conspicuous, and that is Manhattan,” Nordstrom said. “We continue to look at sites on Manhattan, as it is a fantastic market that, for the right opportunity, we would really like to be there. At this time, there may be more attractive opportunities to consider for a Rack location than a full-line store. We have nothing new to announce. We continue to look and consider.”
In general “specialty retailers and discounters are still growing but at a slower pace,” said Tiffany Co, a debt analyst at Fitch Ratings.
Lower rents and the availability of space “could encourage [retailers] to look at relocations, especially if there are locations available now that weren’t available before, and it could encourage them to get into some markets that in the past weren’t feasible,” Co said.
“My sense is that on a market-by-market and location-by-location basis, a retailer, if there is a potentially fabulous location open, may opportunistically take it,” said Roxanne Meyer, executive director, UBS Investment Research. “But I don’t have the sense that retailers are on the margin opening more stores than previously planned, and in fact I believe retailers are moreso opportunistically looking to close stores where they can get out of a poor location.”
Topshop, which opened its first U.S. store, is interested in high traffic areas. One possibility is 34th Street, where Vornado Realty Trust, which provided the SoHo site, has substantial property holdings.
Through the 2008 fourth quarter, double-digit sales declines industrywide and rising unemployment scared retailers from scouting Manhattan sites. However, declining rents and real estate availability, as well as some recovery in the stock market and optimism that the economy may have bottomed out have encouraged retailers to renew the search.
On Madison Avenue in the first quarter of 2009, ground-floor rents on average from 57th to 72nd Streets dropped to less than $1,000 a square foot for the first time in two years, to $947. That’s a 10 percent, or a $110 drop, from the end of 2008, according to C&W.
Madison Avenue’s availability rate increased slightly from the end of 2008, ending the first quarter at 12.97 percent, and has remained within the 12 percent range for the past three quarters. C&W defines availability as the combination of vacant space and occupied space that is available through direct lease by landlords or sublease by tenants.
In SoHo, the average ground-floor asking rents dropped to $241 a square foot, a 14 percent or $39 decrease from this time last year. Availability declined by 0.6 percentage points from this time last year, ending the first quarter of 2009 at 9.2 percent.
On the Upper West Side, along Broadway from 60th to 86th Streets, availability remained stable from this time last year, ending the first quarter of 2009 at 7.9 percent, a 0.4 percentage point decrease. Average ground-floor asking rents fluctuated over the past several months, ending the quarter at $344 per square foot, a 7 percent or $22 increase from this time last year.
Availability on the stretch of Fifth Avenue from 42nd Street to 49th Street reached 15.3 percent at the end of the quarter from about 9 percent in the fourth quarter, surpassing Madison Avenue as the submarket with the largest availability. Also in the first-quarter, ground-floor asking rents fell to $596 per square foot, down 20 percent or $147 from $743 per square foot at the end of 2008. Two notable departures from the neighborhood were Kira Plastinina and Circuit City, which both shut down after bankruptcies.
Spiegelman said that corridor has “always struggled to establish a strong identity,” though the additions of Zara and H&M in the past year on 42nd Street should help.