Though the stretch of Madison Avenue starting at 57th Street and continuing through the upper 60s has not, historically, been associated with hard times, the current downturn has hammered the corridor, making it one of the worst-hit areas in New York City.
In the past year, the Gold Coast, as local retail brokers have come to call it, witnessed the exits of long-time neighborhood stalwart and linens seller E. Braun & Co. and fashion designer boutiques Alessandro Dell’Acqua and MiuMiu, among others. Some of the retailers have closed shop altogether. Others opted to downsize. In one case, Vornado Realty Trust alleges that a tenant, Krizia S.p.A., pulled a “midnight move” on its digs at 769 Madison, leaving without notice and without paying back rent for more than four months. (Vornado is now suing the retailer for approximately $350,000.)
The problem for Madison Avenue, according to local brokers, is two-fold. First, the submarket is defined by opulence and luxury retailers have suffered more than any other sector from the drop in consumer spending. Year-to-date same-store sales in the luxury category have declined 16.3 percent, according to ICSC, while total same-store sales are down only 0.5 percent.
Shoppers who in the past indulged in aspirational purchases no longer have the money to do so, says Susan Kurland, executive vice president of retail brokerage services in the New York office of CB Richard Ellis, a global real estate services firm. “I know lots of people who have money and are just not spending,” notes Kurland.
In fact, upscale retailers including Bergdorf Goodman and Saks Fifth Avenue now offer customers the option of taking their purchases home in plain shopping bags, to hide the appearance of conspicuous consumption.
In addition to the drop-off in demand, many retailers with Madison Avenue leases also agreed to expensive terms at the peak of the cycle—rents they can no longer afford. “The rental rates they were paying [at $1,400 per square foot] were priced into the perfect market and instead, they met the perfect storm,” says Henry Goldfarb, vice chairman of Grubb & Ellis Co., a commercial real estate services firm.
As a consequence, the vacancy rate in the Madison Avenue submarket has now reached 16.1 percent, according to a third quarter report from Cushman—a 70 basis point increase from mid-year 2008. That’s higher than both the national vacancy rate for neighborhood and community shopping centers, which is currently at 10.3 percent, and for regional malls, which is at 8.6 percent, according to Reis Inc., a New York City-based research firm. Meanwhile, effective rents in the area have dropped by as much as 40 percent, adds Goldfarb.
The rents on upper Madison Avenue officially average $1,005 per square foot. Unofficially, rents range between $800 per square foot and $900 per square foot, according to Goldfarb. However, that’s still too expensive for many retailers. That makes it difficult to turn over vacant space to tenants outside the luxury sector—they simply can’t afford it, says Bill Miller, vice president and director of real estate with the retail services outsourcing group of Jones Lang LaSalle, a Chicago-based commercial real estate services firm.
Considering Madison Avenue in isolation, observers might understandably conclude that New York City’s retail market is devastated. But the Big Apple is a city of neighborhoods and Madison Avenue represents only a small part of the overall scene. For example, Upper Fifth Avenue has also seen a 40 percent drop-off in rental rates in the past year, but because it has less available inventory than Madison Avenue, it has not experienced as much vacancy, according to Faith Hope Consolo, chairman of the retail leasing, marketing and sales division of Prudential Douglas Elliman, a New York City-based real estate services firm. Meanwhile, Manhattan’s less ritzy retail areas, including Times Square, Union Square, Herald Square, Lower Fifth Avenue and SoHo continue to welcome new tenants.
This summer, Nordstrom Inc. announced that Nordstrom Rack, an off-price version of the luxury department store, would take a 32,136-square-foot space at the former Virgin Megastore in Union Square and JCPenney moved into the repositioned Manhattan Mall. Meanwhile, arts and crafts retailer Michaels opened its first Manhattan store on the Upper West Side. In short, the recession has affected leasing fundamentals—both occupancy rates and effective rents have suffered—but New York City continues to attract interest from prospective tenants even during a difficult time.
“New York City has always been a very, very strong urban market,” says Stanley Lindenfeld, senior managing director with Grubb & Ellis. “And the other thing you have to take into consideration is that [on a national basis] in order to save money, people have not been driving and they’ve stopped going to the mall. New York is a walking city, so there is more of an opportunity here than in the outer-lying areas.”
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In fact, most of the retail properties in the city’s central locations, including Times Square, Union Square and Fifth Avenue, have maintained near-full occupancy rates, according to Benjamin Fox, president of Winick Realty Group, a New York City-based retail brokerage firm.
In some areas, New York’s continued success is a function of branding. Many retailers take locations in Times Square to gain exposure in an iconic and hugely trafficked part of the city, not necessarily because merchants believe stores at the “Crossroads of the World” are going to be boffo contributers to their bottom lines. As a result, Times Square’s vacancy rate actually declined in the third quarter of 2009, to 9.3 percent from 10.0 percent at midyear.
Another part of the equation is rents. A retail space in Union Square currently leases for about $354 per square foot and in the area South of Houston Street for $239 per square foot, according to Cushman. That’s less than half what retailers would pay for a similarly-sized storefronts in the luxe environs of Madison Avenue.
And some of the best-performing areas of the city tend to cater to value-oriented tenants, a group that has withstood this recession better than luxury and mid-price retailers. The Union Square sub-market, for instance, houses national discounters such as Filene’s Basement and DSW and cheap chic retailer Forever 21, in addition to a Barnes & Noble and a Babies “R” Us. A number of smaller affordable apparel concepts, including Strawberry’s and American Eagle round out the tenant list along with a bevy of local discount chains.
The area’s emphasis on affordable fashion, along with its heavy foot traffic, made it the logical choice for Nordstrom Rack’s first Manhattan location, according to an official statement from Scott Meden, the brand’s president. Nordstrom Rack sells Nordstrom merchandise at discounts of up to 60 percent. The brand’s Union Square location is scheduled to open in the spring of 2010.
Union Square’s considerable foot traffic also means that any vacancies don’t last long, even in a downturn. Earlier this year, the area became the victim of Circuit City’s liquidation, leaving it with a 48,000-square-foot empty space in the same residential tower that housed the Virgin Megastore. This November, however, Best Buy opened in that spot. It is the first Best Buy in the world to operate 24 hours a day, seven days a week.
Further downtown, SoHo has benefited from a steady influx of tourists and its affordable rental rates, according to Fox. The area gets an added boost because of the variety of its retail offerings. Walking down Broadway between Houston and Canal Streets, one can see a broad spectrum of national and international chains, ranging from the all-American Levi’s store at 536 Broadway to the Japanese transplant Uniqlo a few doors down. “SoHo has remained extraordinarily healthy and there are hardly any availabilities along that stretch,” says Fox. “Every brand you can think of is represented there; it’s almost like going to the mall.”
Mirroring the same pattern seen in Union Square, new tenants have swiftly picked up most of the vacant slots that have opened up in SoHo since the beginning of the downturn. When Ann Taylor left a 7,000-square-foot space at 560 Broadway, in moved Escada. When Staples exited from 488 Broadway, fashion retailer Bebe picked up the 8,700-square-foot store.
The drop-off in demand for new space has hit some of Manhattan’s outlying retailing areas harder, including the Upper East and Upper West Sides. In those zones, however, mom and pop shops have provided a stabilizing force, according to Goldfarb. Since the local necessity retailers—delis, dry cleaners, liquor stores—have usually inhabited the same location for years, they tend to pay affordable rents and have largely avoided the recent carnage in the retail sector.
“They provide needed services for the community and are not as affected in a recession as the national chains that overpaid for the space and for whom the slightest quiver is death,” Goldfarb notes. “You have to look at the market in terms of who’s really being impacted and it’s the larger chains that tried to grow their bottom line through store growth and paying rentals that were just not [right].”
Next page: In a fog
In a fog
That’s not to say that retailers are flooding New York City with demands for space. Retailers no longer feel pressure to expand, so unless a new location makes sense financially, they are not going to take it, Fox explains. Plus, in a lot of cases landlords are more concerned about getting a stable, good credit tenant to occupy their property than they are about making top buck on the deal, adds Goldfarb.
Instead, there is a select cadre of retailers that’s actively shopping around. The names include drugstores CVS and Duane Reade, Subway, video game seller GameStop and regional beauty supplies store Ricky’s NYC, according to Goldfarb. Jones Lang LaSalle’s Miller has also been working with some larger tenants, including TJ Maxx, Marshalls and Dollar Tree, on taking over empty big boxes left by Circuit City. The electronics seller operated at least 30 stores in New York City, including four in Manhattan.
Apparel retailers, however, considered the bread and butter of New York’s retail scene, are still holding off on new store openings. “I think that until the apparel chains start to expand there’s going to be a lull in the market,” says Fox. “Even if there is a rent reduction on a prime piece of space, the apparel tenants aren’t biting [because] they don’t know what kind of sales volume they will do and then it costs $1 million to build a store and the banks aren’t lending. So when you take the apparel industry, which is a major retailing segment in the city, and it’s sitting on the sidelines and the banks are sitting on the sidelines, those are two big generators of retail business that are licking their wounds right now.”
One positive sign on the apparel front, however, has been the opening of women’s clothing store White House | Black Market on 508 Broadway in SoHo. Ariel Schuster, of New York City-based real estate firm Robert K. Futterman & Associates, says the retailer has been looking for a second location in Manhattan for two years and finally decided to take the 4,440-square-foot SoHo space this fall. Robert K. Futterman represented White House | Black Market in the transaction. “That was a great sign” for the market, says Schuster.
Whatever leasing activity does take place involves significant concessions from landlords. So far, the latter have resisted lowering asking rents and that’s why official statistics have held up so well, according to Fox. But the effective rents at which deals are being signed have come down by anywhere from 25 percent to 40 percent. In many instances, the tenants are pushing hard for free rent and significant tenant improvement allowances, says Miller, who is a tenant representative. Today, a tenant looking for a Manhattan storefront might get up to $100,000 more from a landlord through various concessions than was the norm two years back.
The difficulty landlords are facing in filling vacancies has had the unintended consequence of making pop-up store leases—temporary leases that are generally signed for the term of several months, but can be as long as two years—much more common, he notes. In the past, Grubb & Ellis would get two or three calls a season from retailers looking for pop-up locations. Today, Goldfarb says his phone is ringing off the hook. Among the retailers who have signed pop-up leases in Manhattan recently are Gucci, Toys ‘R’ Us, Rachel Ray and Ricky’s.
As a rule of thumb, the pop-up leases in New York City feature rental rates that are 50 percent off those found in permanent leases and require little to no build-out investment from the retailer, according to Consolo. And in some cases, those leases serve as test runs for permanent locations. Earlier this year, apparel seller Lisa Perry opened a pop-up store in SoHo. The brand is now in the process of signing a permanent lease on the Upper East Side, says Consolo.
The city’s landlords have also become less finicky about letting “wet use” tenants, i.e. restaurants and fast-food joints, take spaces formerly occupied by hard goods retailers, notes Miller. In the past, “a lot of landlords had put a line in the sand and said ‘We only want a dry use.’ They are now allowing food uses into some of these spaces just so they can fill them up,” he says.
Their newfound flexibility should help New York landlords recoup some of the losses resulting from the increase in vacancies, but opinions about how long they will have to remain this accommodating vary.
Goldfarb and Lindenfeld say the Manhattan market has bottomed out, but Kurland notes that leasing activity will pick up only if the retail sector has a good holiday shopping season this year. (At the moment, most industry sources project that same-store sales growth from November through January will be flat.).
Kurland, who handles retail leasing on a national basis, notes that the last deal she closed in New York City happened seven months ago. At the peak of the real estate boom, she would close at least one Manhattan lease a month. Kurland’s working on four potential transactions in the city right now, but remains cautious about the short-term prognosis.
“Unfortunately, our business is very tied into consumer confidence,” she says. “And except the things that you absolutely need,” including food and drugs, people are not shopping.