Manhattan’s retail real estate sector is something of an enigma. While the city’s demographic and economic indicators continue to be positive with rising quarterly retail sales and upticks in tourism, leasing has slowed, mainly in the second half of 2019. According to CBRE, average asking rents maintained a downward trend in the fourth quarter of 2019, with the average of 16 shopping corridors declining 8.8 percent year-over-year to $723 a square foot.
The high number of direct and sublet vacancies along with the introduction of aggressively priced retail space kept downward pressure on asking rents and produced conditions that were largely favorable for tenants.
“This decline was more substantial than the prior quarter and marked the ninth consecutive quarter of declining rents in the city,” said Nicole LaRusso, director of research and analysis for CBRE Tri-State. “It’s not a demand crisis. The underlying fundamentals that drive retail demand are strong and improving.
“As retailers figure out how to be profitable in this brave new world of omnichannel, that’s what’s complicating the market,” LaRusso said. “The cost of failure is very high in New York. If you get it wrong, you’re paying a lot of rent. On the tenant side, the picture of the cost of operating in New York has been getting better. There was a rapid increase in pricing in 2010 that peaked in 2015. A lot of retailers signed leases when the market was ascendant. Landlords are adjusting rents.”
While some landlords are lowering asking rents, LaRusso said there’s reluctance on the part of many owners to reduce rents because they’re worried that they won’t able to meet lenders’ pro formas.
La Russo said retailers having success in moving toward an omnichannel business model recognize that physical stores are an integral part of a multichannel strategy. “We’re seeing a lot of online retailers recognizing that there’s a limit to how much business they can do online in the virtual world,” she said.
Just as food and beverage is on the rise in shopping centers, on a square footage and transaction count basis, food and beverage was the biggest category of 2019, with 208 leases and more than 670,000 square feet.
The corridor with the steepest decline in asking rents in the fourth quarter was Broadway in SoHo, where prices fell 19.1 percent year-over-year to $466 a square foot, from $577 a square foot in the 2018 period. Fifth Avenue in the Flatiron District also recorded a steep decline with asking rents falling 19 percent to $365, from $389.
Asking rents on upper Madison Avenue declined 16.3 percent year-over-year to $911, from $1,088, marking the first time average rents fell below $1,000 since 2011. CBRE noted that the picture isn’t entirely bleak, with Balmain, Bape, Santoni and JM Weston committing to the thoroughfare. “Madison Avenue has been affected by a lot of trends. The fact is that there are many shopping areas in New York that can attract a high-end shopper,” LaRusso said, referring to Hudson Yards and the Meatpacking District. “Madison Avenue isn’t the one and only place, and retailers don’t want to go there and pay those rents.”
Washington Street in the Meatpacking District was one of a handful of corridors that experienced an increase in average asking rents, surging 23.2 percent to $575 a square foot. The jump was attributed to spaces leased at higher rates at nearly finished Gansevoort Row, and on 14th Street, which created demand. Downtown Broadway was also positive story. While average rent was flat annually, the corridor saw a 4.7 percent increase quarter-over-quarter to $413 a square foot, from $394 a square foot.