The Real Deal New York

Brokers hustle, landlords bend and small locals seize opportunities


March 31, 2009
By Melissa Dehncke-McGill

Do retailers need a rescue plan? As more storefronts turn out the lights and pack up racks of clothes, boxes of electronics, bottles of wine and other merchandise, that question is on the minds of a lot of New York City real estate brokers. In this month’s Q & A, retail brokers told The Real Deal that they’ve seen asking rents decline by 30 to 40 percent in secondary and tertiary areas of the city, and by roughly 20 percent in more prime locations.

One broker said the new mantra is: “You have to work twice as hard to make half the money.” He said he didn’t know if that estimate was exactly right, but that it’s probably “pretty close.”

Meanwhile, as landlords negotiate more on rent and throw in incentives like covering build-out costs, the dance they are engaged in with tenants is intensifying. That’s because some tenants are wondering whether it’s worth it to hold out for further rent declines, and some landlords are wondering if they should wait for the market to rebound so they don’t get stuck with a lower than desired revenue stream in the future.

Brokers say landlords who have owned their buildings for a long time and don’t have to worry about mortgage payments are in a better position to discount rent than those who have high carrying costs.

And, nearly everyone said that while national chains have largely disappeared from the mix of tenants hunting for space, some local tenants are still on the prowl for space. They said if those tenants are willing to take a risk in a down market, they might be able to lock in a good, long-term deal. For more on retail vacancy, rent breaks and struggling shopping strips like Madison Avenue, we turn to our panel of experts:

Joanne Podell executive vice president, retail services, Cushman & Wakefield

It’s starting to feel like you can’t walk down the street in Manhattan without spotting another store that has shut down. What’s going on with retail vacancy these days?

Vacancy has undoubtedly increased, but the multiple vacancies are really concentrated on a few streets. While we are seeing increased vacancy on upper Madison Avenue and, to some degree, small pockets in Soho, there are still markets where there is continued activity and limited availability — namely Fifth Avenue and Madison Avenue below 57th Street.

What are you seeing in terms of rents? How much have they declined in the last few months?

In secondary and tertiary markets, asking rents have declined between 30 and 40 percent. In primary markets, declines are more along the lines of 20 percent.

What kinds of new incentives, if any, are you seeing building owners throw in to entice new retailers to lease space?

We are seeing landlords offering longer build-out time and, for the first time in many years, we’re seeing some landlords offer tenant improvement money. Landlords are willing to entertain creative deal-making. This may include making shorter-term deals, agreeing to kick-outs with penalties and signing leases with percentage rents. If a landlord is willing to reduce rent, they will look for some payback if business improves. These are all case-by-case scenarios.

Who are your most promising retail clients right now?

The service tenants — health and beauty aids, banks, particular electronic retailers — have all been actively tracking the market and looking for space. These types of tenants provide services that are needed, regardless of the health of the economy.

Do you see any silver linings for retail in this economic shakeout?

Retailers who have adequate cash and a willingness to commit will be able to make long-term deals at rents that they will not be able to make five years from now.

Scott Auster partner, Ripco Real Estate

It’s starting to feel like you can’t walk down the street in Manhattan without spotting another store that has shut down. What’s going on with retail vacancy these days?

Vacancy rates are as high as they’ve been in quite some time, but having large storefronts sitting vacant throughout the city is likely creating the impression that things are slightly worse than they actually are right now.

What are you seeing in terms of rents?

Larger spaces are seeing the largest percentage decrease, but since there are almost no larger deals — at 10,000 square feet and above — being done for the most part, it’s not easy to determine exactly what that percentage is today. I would estimate large retail spaces are worth approximately 30 to 40 percent less per square foot than they were at the height of the market. Smaller storefronts have fared better, mainly because local tenants, long priced out of some markets by national chains and financial institutions, have been actively pursuing locations in select markets where they know this is an opportunity. Also, food tenants — including takeout, fast casual and sit-down dining — have been active. Given this larger pool of prospective tenants, small store rents are still down 20 to 25 percent from their peak and will likely continue to trend down until the economy improves.

What kinds of new incentives, if any, are you seeing building owners throw in to entice new retailers to lease space?

For the first time in my career, cash contributions by landlords toward a tenant’s construction are a regular part of negotiations for new retail leases in New York City. We are [also] seeing quality tenants negotiating for and receiving [tenant improvement] allowances as part of an overall concession package.

What do you expect to happen in prime areas in terms of vacancy in the coming months?

I think we’re going to see the vacancy rate continue to increase throughout the rest of the year. At the beginning of the year we saw a large uptick in vacancy from tenants shutting down after the holiday season. That mass exodus hasn’t compounded since then, but as the months of slower sales begin to pile up, more of the marginal tenants that had been trying to hang [in] … will probably shut down. Madison Avenue has obviously been impacted more than other retail markets in Manhattan. Prime retail areas that are occupied largely by national chain store tenants will likely not see that same uptick in vacancy because those leases are guaranteed by the corporation operating the store — unless the corporation goes out of business like Circuit City did.

We’ve reported that more retailers are seeking rent breaks and rent deferments. Are you seeing a lot of that?

For deals that were made when rents were at their height — they are all asking. I think landlords are more inclined to give reductions to tenants who have been with them for a period of time and to tenants in good standing. If landlords know that their tenant’s business has suffered, they are more inclined to give those tenants rent reductions because they know if business comes back up they’re probably going to be able to recoup those discounts. For tenants who just signed and haven’t opened yet or just opened, there is no history so landlords are slightly more reluctant.

Who are your most promising retail clients right now?

Any tenant that has a somewhat healthy balance sheet and has a discount [or] off-price model is looking for good deals in this market. This includes apparel, health and beauty aids and food merchants. However, none of these tenants needs to make any deal right now, so if the space and terms are not to their liking, they are not going to stretch to secure the location.

How much more do you have to hustle to get a deal done today than you had to last year at this time?

Most people say you now need to work twice as hard to make half the money. I don’t know if that correlation is exact, but I’d say it’s pretty close.

How is the retail brokering business different today than it was three or six months ago?

I think it’s better than it was during the fall. We were in a free fall then, and while we are certainly not out of the woods and things could get much worse before they get better, I think the market has adjusted to these new realities and it’s become easier to negotiate … to have the makings of a deal right now.

Faith Hope Consolo chairman, retail leasing, marketing and sales division, Prudential Douglas Elliman

It’s starting to feel like you can’t walk down the street in Manhattan without spotting another store that has shut down. What’s going on with retail vacancy these days?

Yes, there are more vacant storefronts, as some major chains such as Circuit City, Linens ‘n Things, Fortunoff and some struggling mom-and-pops have shut down. At the end of the third quarter last year, overall Manhattan vacancy was 7.4 percent. But that’s not the whole story — some areas, such as Lower Manhattan, have a vacancy rate of less than 1 percent. Even the overall number is quite low compared to many other metropolitan areas.

What’s the biggest challenge to being a retail broker in an environment where most stores are struggling?

Persuading them to take the plunge. Understandably, some tenants, particularly smaller ones, are hesitant about expansion, about location, about whether they’ve achieved the optimal deal. All of us today do more handholding, to ease [our clients'] fears. Brokerage has always been a people business, and never more so than today.

We’ve seen that retail vacancies are up on prime strips like Madison Avenue. How are building owners dealing with that?

Landlords are reassessing their rent structures, particularly if the building in question is older and already paid for. Without the constraints of an exorbitant mortgage, a building owner can work with the retailer to get the right tenant. I expect spaces to be taken. We’re already seeing that. Virgin Megastore leaves, Forever 21 comes in. Armani, Diesel, Tommy Hilfiger — all have taken or are taking space in the city.

Who is shopping for retail space right now?

Wal-Mart reportedly is looking to enter the city. Food remains important, whether it’s a coffee shop, a tea lounge, cupcake bakery, Chipotle, or another eatery. We have done a fair amount of restaurants lately, including two recent deals, Associazione Pizzaiuoli Napoletani on Bleecker Street in the Village and Estan on Frederick Douglass Boulevard in Harlem.

Can you give us an example of a recent deal that illustrates what’s happening in the New York City retail world today?

The ultimate New York deal — and I’m sorry to say it wasn’t ours — may be the Virgin Megastore being replaced by Forever 21. Clever reuse that’s perfect for its location.

What surprises you most about retail in the city today?

Just how resilient it is. People are still eating out — look at some of the top restaurants in the city and you see that they remain crowded.

Do you see any silver linings for retail in this economic shakeout?

Those shuttered stores almost uniformly were the weak players in their sector — whether they were undercapitalized, overleveraged or just plain out of touch with their customer. This frees up space for the newcomers … at more reasonable rents.

Gary Trock senior vice president, CB Richard Ellis

What types of retailers are faring best and worst in today’s market?

The local tenant is your strongest tenant in this market. They are seeing the opportunities because national tenants are not in the market. For the Walgreen’s and Starbucks, that market has disappeared. [Still], there are [few] tenants in the market aggressively out there looking for space. The lack of retail sales [is] obviously an issue.

We’ve reported that more retailers are seeking rent breaks and rent deferments. Are you seeing a lot of that?

This is really something that blindsided us in the past four to five months. Now everyone is waking up and saying, ‘Hey, we have reduced sales, we need reduced rents.’ There was an announcement that Sleepy’s asked for reduction of rents from all their landlords.

How is the retail brokering business different today than it was three or six months ago?

It’s a lot different. There are a minimal amount of phone calls and e-mails. There is less transactional activity in the marketplace. It is predominantly planting seeds, nurturing your existing clients, nurturing your landlords and maintaining your relationships. [Activity] pretty much came to a halt in January and February. We are busy, but we are busy with working the environment, with being in the game. From an optimistic standpoint, that is the most important thing that any broker can do now — stay in the game, keep a pulse on the market and keep a pulse with your clients, retailers as well as landlords.

Barry Fishbach executive vice president, Robert K. Futterman & Associates

What kinds of new incentives, if any, are you seeing building owners throw in?

Additional free rent, some consideration to tenant improvement, depending on the scale. For some owners it’s difficult: Where in the past they may have obtained some financing to do tenant improvement, now it’s more difficult for them. They may now have to use their own capital, but that applies more to a bigger box tenant, where you may be talking about a couple million dollars in improvement allowances as opposed to a few hundred thousand.

How much more do you have to hustle to get a deal done today than you had to last year at this time?

In some ways it’s less hustle if you have a good tenant with a strong buffer. The landlord is more motivated and in many cases deals are moving quicker.

Lisa Rosenthal director, Lansco Corporation

What are you seeing in terms of rents?

We are in a period of price discovery. Yes, rents are lower than they were, but it varies by the property and neighborhood.

We’ve all seen that retail vacancies are up on prime strips like Madison Avenue. How are building owners dealing with that?

Some landlords are willing only to do short-term deals now in hopes that the market will rebound in a few years. Other owners, especially those who have owned the property for a long time, are looking for strong tenants and will compromise on rent.

We’ve reported that more retailers are seeking rent breaks and rent deferments. Are you seeing a lot of that?

We know of many retailers who are seeking rent relief as their sales are substantially below last year. Many landlords are sympathetic and are receptive to rent breaks and deferments. Landlords know it is better to grant relief than have a dark store, and some rent is better than none. Further, when the economy comes back, the tenants will remember the landlords who worked with them.

How is the retail brokering business different today than it was three or six months ago?

The hardest thing for me is to assess value now. Six months ago you could determine value by recent comparables. Now, deals that were signed nine months ago are no longer relevant.

Can you give us an example of a recent deal that illustrates what’s happening in the New York City retail world today?

My colleague Diane Mandel recently relocated E. Braun & Co., the fine linen store, from Madison Avenue to 484 Park Avenue. The new location works for them and it is significantly less expensive than staying on Madison.

What surprises you most about retail in the city today?

I’m surprised at how quickly we’re seeing the slowing down of retail expansion.

Amira Yunis principal, national retail group, Newmark Knight Frank

What’s going on with retail vacancy these days?

Some tenants rented spaces at the top of the market and then spent significantly on build-outs — expecting the market to continue its upward momentum. Unless a tenant had prepared for the potential reversal in the market, it will be difficult to keep all its stores open. There are always ups and downs in the market, and as a retailer you cannot expect store sales to continuously climb without a down period.

We’ve all seen that retail vacancies are up on prime strips like Madison Avenue. How are building owners dealing with that?

Many of the transactions on prime strips were done at high rent numbers, which will be challenging to sustain under current market conditions. It will be difficult for highly leveraged landlords on these strips to cover their expenses when the pro forma calculations were based on future rent growth from an elevated market.

We’ve reported that more retailers are seeking rent breaks and rent deferments. Are you seeing a lot of that?

We have negotiated some rent breaks and deferments. Unfortunately, with all of the press on this, other tenants that may not need the rent reductions are jumping on the bandwagon. On the landlords’ side, I think it is difficult to determine which tenants are in need of assistance and which are not.

How is retail brokering different today than it was three or six months ago?

I think everyone is afraid of making the wrong decisions right now. Tenants are not sure if they should commit to the current rents that are obviously below where they were before, or if they should wait it out to see if rents go down further. Landlords do not want to lock in lower rents for years if the market is going to rebound soon. In the past, landlords preferred strong international or national public tenants. Now, however, they will consider strong local tenants since public companies are more at the whim of the stock market and overall national performance.

What surprises you most about retail in the city today?

The store closures on Madison between 60th and 68th streets and the store closures in Nolita.

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