The Real Deal New York

Amid the retail meltdown, bigger isn’t always better

Landlords are tempering their expectations, and seeking out small retail tenants
By Rich Bockmann | June 01, 2017 10:00AM

When the retail market was rising over the past few years, “big box” was the term on many landlords’ lips. They were eager to create larger-footprint stores and demand bigger rent checks.

But as retailers retreat because of unmanageable rents and competition from online outlets, landlords are finding they can still ink new deals — just for smaller spaces.

“Bigger is no longer better,” said Faith Hope Consolo, chair of the retail group at Douglas Elliman. “There’s been such a change in the retail landscape that this is just now the norm.”

Indeed, new store footprints are shrinking. As of May, the average lease size for the year was about 2,700 square feet, compared to 3,100 square feet in 2016, according to a CBRE analysis of CoStar Group data.

And more retailers are taking small-to-midsized spaces than in the past. There was a 32 percent increase in new deals in the 2,500- to 10,000-square-foot range in 2016 from the previous year, according to Cushman & Wakefield. By contrast, leasing activity for spaces greater than 10,000 square feet only grew 10 percent.

Consolo said that while in Las Vegas last month for the International Council of Shopping Centers’ annual RECon expo, landlords were eager to show off subdivisions of large store footprints as a way to hedge their properties against a leasing slowdown.

“They want to protect their downside by providing these smaller spaces, if the [building’s] frontage allows it,” Consolo said.

Last month, watchmaker Tag Heuer signed a lease for an 896-square-foot store at General Growth Properties and Thor Equities’ 685 Fifth Avenue — just a sliver of the total 5,523 square feet of ground- floor retail space at the property (see profile of Thor founder Joe Sitt).

Down in Soho, landlord Corigin Real Estate sliced up a 2,500-square-foot space that had formerly been occupied by a deli at the corner of Crosby and Grand streets into four, roughly 500-square-foot spaces.

Corigin leased the space to the kinds of shops that can operate out of those small footprints, such as the perfume boutique Fueguia 1833 and the Australian accessories company Dinosaur Designs.

Eastern Consolidated’s TRData LogoTINY James Famularo, who is handling leasing at Corigin’s 21 Crosby, said retailers “need to be more frugal” about their square footage, and many have found they can cut their monthly rent by 40 or 50 percent by downsizing into smaller shops.

“They’re using smaller counters and more efficient displays and finding ways to make it work for cheaper rent,” he said, adding that it’s particularly true with restaurants and fast-dining eateries.

In addition to larger retailers looking to scale back, smaller lease deals are getting a boost from neighborhood retailers that require less space and are often seen as more recession-proof: dry cleaners and nail salons, as well as the various quick-service restaurant concepts that seem to pop up daily.

“There’s a lot of interest in growth and expansion from local tenants,” said commercial broker Lisa Rosenthal of Lansco. “They’ve been priced out for years, and now they’re saying, ‘I’ve been wanting to be here forever and now a landlord might be interested in me.’”

She added that she is seeing businesses expand away from the city’s high-street corridors in areas such as Ninth, 10th and 11th avenues on the West Side.

In the first three months of the year, food retailers — especially the fast-casual kind — were the most active tenants in Manhattan, accounting for 34 percent of the borough’s transactions, according to CBRE.

Famularo said many landlords are confident that as long as they can provide the necessary infrastructure and mechanicals, they can easily lease their space to restaurants.

“If you can vent it, you can rent it,” he said.