Retail faces a bleak future in NYC

Online competition cuts into earnings - and rents
January 23, 2017 03:55PM

Macy’s on 34th Street

Manhattan’s retail rents fell in 2016, but some market observers predict the slide is only the beginning. The culprit: online retailers.

“There’s nowhere to go but down,” Cushman & Wakefield’s Steven Soutendijk told Crain’s. “Rents got too high too fast.”

One indicator of potential future rent decreases are availability rates, which remain precariously high in some sub-markets. On Fifth Avenue in the 40s, 31 percent of storefronts are available for rent in the fourth quarter, according to Cushman & Wakefield, but rents fell by a mere 1.1 percent compared to the fourth quarter of 2015. On Madison Avenue, where the availability stood at 23 percent, rents fell by 12 percent.

Several retailers blame the rise of online retail, which has cut into their earnings — and into their ability to pay high rents. Particularly hard-hit are clothing retailers and shops that compete directly with online giants like Amazon. Meanwhile, restaurants, bars and coffee shops still show strong demand for space, making up 41 percent of all leases signed last year, compared to 15 percent for apparel. Theme-park-like megastores like the Adidas shop on Fifth Avenue are also somewhat insulated from online competition, as they offer an experience online retailers can’t match.

“The model has to change,” said Alan Laytner, who owns Laytner’s Linen & Home on the Upper West Side. “Do you really need to sell a $20 pillow on Broadway?”

He said one reason his shop stayed afloat is that the landlord agreed to charge below-market rent.

Last month, ratings agency Fitch said it expects 9 percent of the retail sector’s debt to be in default by the end of 2017.

“A small number of players will do well,” said NYU marketing professor Scott Galloway. “Luxury brands will hold their own — you still can’t buy Hermès on Amazon. There will be some artisanal guys that will manage to hang on because they’re so exceptional. You’ll see Starbucks, Chipotle, more Warby Parker stores. And everyone else will get crushed.”

In July, The Real Deal reported that New York’s retail market could be entering a downturn.  [Crain’s]Konrad Putzier