As the Barclays Center’s arrival approaches, the retail leasing landscape in Brooklyn is primed for a transformation. The borough will see an influx of high-end restaurants, a panel of real estate executives today told a crowd at TerraCRG’s Brooklyn Real Estate Summit, and that will mean higher rents. It is also likely to lead to more “rent participation” deals, wherein the landlord shares in the revenue stream of the tenant.
Panelists included executives from Forest City Ratner, RedSky Capital, Pintchik Development and Crown Acquisitions; David Kramer of the Hudson Companies moderated.
Although the steep increase in rent – Michael Pintchik of Pintchik Development Said Rents On Flatbush Avenue have risen from $50 or $55 to more than $175 per square foot as the Barlcays complex has risen – is clustered around the mega-project slated to open in September, the changes underway are not limited to the area. Retail overhauls are in progress in the Fulton Mall area as well as in Williamsburg, panelists noted.
Landlords said retail tenants in Brooklyn are now looking for lease terms of at least 15 years, up from seven to 10 years, because they are often spending more on build-out, and want to secure their investment in the building. Restaurants in particular spend a lot customizing their space and hope to stay once they are finished fixing it up.
But restaurant tenants also expect less in the way of rent increases, closer to “10 percent over five years,” said Pintchik, rather than the 3.25 percent annual increases he is used to seeing. And he said he is now accustomed to providing up to six months free rent for restaurants in a typical deal, whereas for anther retailer he would comp between one and three months rent, generally.
The major issues for landlords in Brooklyn, Pintchik said, are negotiating lease terms. Landlords want to avoid lengthy terms because it inhibits their ability to raise rents later, but want to avoid very short lease terms, since finding the right tenant requires time and money.
Forest City is looking to high-end restaurateurs as it looks to cultivate an experience like that of the successful LALive development in Downtown Los Angeles, near the Staples Center.
“Restaurants do extremely well there,” said Kathryn Welch, senior vice president with the developer. Welch noted that there was significant restaurant interest in the Atlantic Center and Atlantic Terminal. She said that in the next five years, 40,000 to 50,000 square feet of retail space will be becoming available in the company’s properties.
Meanwhile, Isaac Chera, founder of landlord Crown Acquisitions, was bullish on leasing the Fulton Street Mall, quoting the highest rents of the day – as much as $275 per square foot – as the area transitions to what Chera called a “cross between 14th Street,34th Street and Times Square.” He said there has been interest in Fulton Street space from the women’s clothing retailers Forever 21 and Banana Republic.
Interest from “Danny Meyer-type” restaurateurs has also spread to Williamsburg, according to Ben Bernstein, a principal at RedSky Capital, a developer and financing outfit. Rents along prime strips there can go as high as $200 per square foot, along Bedford Avenue, but are often closer to $65 per square foot, along, for instance, Manhattan Avenue, in Greenpoint, he said.
Bernstein underscored that the way RedSky makes deals work is by negotiating what he called a “natural five,” or a five percent upside from the restaurant’s total sales revenue. Welch agreed and said Forest City negotiates a percentage of sales, ranging from four to eight percent, with nearly every tenant. While many retail deals have included a cut of the revenue for landlords — famously, Harry Macklowe negotiated this provision for the 59th Street Apple store, to great effect — for restaurants, especially in the outer boroughs, the stipulation is fairly new.
And why, amid rising rents and drastically changing neighborhoods, do certain retailers, such as Apple, stay out of the borough? An audience member asked the panel.
“They just don’t understand it,” Welch said. “They look for the one place in Brooklyn,” to open a store, she said, when really, a retailer should look at different parts of brownstone Brooklyn as well as Williamsburg. “The numbers don’t tell the whole story.”