Retail tenants on side streets get incentives

Landlords offer up free rent, improvements to attract high-end stores, brokers and landlords say
By Guelda Voien | March 06, 2013 01:00PM

Landlords in Manhattan’s busier retail districts are asking sky-high rents – and getting them – but their counterparts in the less touristy corridors are finding that they have to pony up something extra to lease their spaces, brokers and building owners told The Real Deal.

Tenant incentives, or T.I.’s for short, often are part of the package for commercial tenants at major office buildings, especially in tougher economic times. Incentives can take the form of free rent or improvements to store to fit the renter’s needs.

These days, landlords in second- and third-tier retail strips — in the Garment District and Lower Manhattan, especially — are offering special deals to high-end retailers who ordinarily would not be in the position to bargain.

“A marquee retailer or restaurant on a side street might get quite a bit of consideration,” said Faith Hope Consolo, chairman at Douglas Elliman. “These requests increase during downturns, and the last one was no exception.”

But the shift is not a symptom of a down – or even stagnant — retail leasing market, brokers and landlords said. Rather, landlords of Manhattan properties in areas considered less appealing, such as Lower Manhattan and the Far West Side, want more upscale tenants — and they are ready to do what it takes to attract them.

The goal is to charge rents in the not-so-distant future that are comparable to the going rates for space in Times Square and the city’s other prime retail strips. To initiate the change, landlords are pushing to sign the restaurants and services they believe will buoy all rents.

“We’ve gotta get out the old tenants,” said Alex Bernstein, director at Bernstein Real Estate, which owns several retail properties in the Garment District and North Chelsea area. “Landlords are taking risks as well; everyone has known these streets are dead for decades.”

Bernstein told TRD that he does not offer tenant incentives for space “on the avenue” but has negotiated leases on side street properties that include free rent and even financial help with improvements.

The dollar amount of the incentive depends on the landlord. Bernstein told TRD that he has given a side street tenant as much as three extra months of free rent – not a huge sum if the lease is for several years.

“But I’ve heard of [a landlord] willing to give up to a million dollars,” in rent abatement, he said.

Downtown has been a hot spot for retail T.I.s, brokers said.

“In all the new projects coming online downtown, the first few significant tenants that fit the image of the property and help attract other retailers are likely given incentives to commit early,” said Robin Abrams, executive vice president at Lansco.

There are landlords, though, who offer incentives for less straight-forward reasons, Abrams stressed. Some inflate the rent and then give incentives to make the lease look better on paper. The ploy serves two purposes: It encourages – or forces – other tenants to also pay higher rent and it can help a landlord secure better financing for his property, Abrams said.

Many tenants, brokers cautioned, won’t qualify for incentives – regardless of the landlord’s reasons. Nonetheless, in negotiations, something to sweeten the pot can break an impasse between the parties, Consolo said.

“A tenant can always ask, and it’s the broker’s job to negotiate.”