Like teeth punched out in a fight, the empty storefronts dotting Manhattan streets are reminders of a recent walloping, this one delivered by the economy. With consumers tightening their belts to save money, retailers, reeling from dropping sales and unable to make rent, are being forced to close up shop. The pockets of vacant stores thus created are perhaps the plainest hallmarks of the recession.
The Real Deal examined the state of retail in five of the most heavily trafficked shopping areas in Manhattan —125th Street, the Upper East Side’s Madison Avenue, the Lower East Side, the Financial District and the Meatpacking District — to see how each is weathering the economic downturn, and found that each district has its own unique set of challenges, from worker layoffs in the Financial District to Madison Avenue shoppers burned by the Madoff Ponzi scheme.
Prudential Douglas Elliman estimates that the vacancy rate citywide has jumped from 8.7 percent in 2008 to 12.4 percent this year — at a time when tens of millions of square feet of retail space is scheduled to open in the next few years. Countless other projects, including nine along Harlem’s 125th Street alone, are stalled as developers struggle to find retailers and investors to fill their spaces, leaving shuttered storefronts to blight the strip, potentially for years to come.
Still, there seems to be a thin silver lining here in New York City: Mom-and-pop retailers and supermarkets are now seeing open doors on streets they had been shut out of during the expensive boom years.
Asking retail rents are down about 25 percent throughout Manhattan, said Jeff Winick, CEO of Winick Realty, making now an opportune time for businesses to sign leases.
“The supermarkets couldn’t afford the market, and now they can, so they’re expanding,” said Winick, who represents Gristedes supermarkets, which he said is looking for six new locations. Local chains like Ricky’s, a beauty supply store, and pharmacy giant Duane Reade are also pursuing aggressive expansion plans, he said.
“The local people are expanding. It’s the national and regional tenants that are being conservative right now,” said Winick. “Most of them are not doing expansions this year, they’re waiting until 2010.”
Harlem’s busiest retail strip, 125th Street, is lined with large blocks of vacant storefronts, often on prime corner locations.
Prudential Douglas Elliman shows an availability rate of only 3 percent here. But Barbara Askins, president of the 125th Street Business Improvement District (BID), which stretches from Morningside to Fifth avenues, said vacancy is 16 percent when considering the shuttered storefronts developers took off the market with plans for demolition.
Now that the economy has soured, those plans appear to be on hold, threatening to blight Harlem’s iconic retail strip for years to come.
Askins’ retail inventory report from last year lists eight development sites marked by vacant lots or storefronts, not including Vornado Realty Trust’s recently scuttled plans for an office tower planned to house a Major League Baseball television station.
Winick’s firm is marketing one of those projects, a planned three-story building at the corner of Fifth Avenue. According to the listing, asking retail rents are $50 to $150 per square foot. He said they haven’t gotten any offers, putting the project on hold until an anchor tenant steps forward.
Drew Greenwald, president of Grid Properties, owns a vacant lot that is also on the list, one located next to the historic Apollo Theater. His firm has approved plans for a 14-story building with three levels of retail, expansion space for the Apollo Theater and office space for non-profits.
“Sales are doing great on the streets, but I’m sure that you’ve heard retail tenants are pulling back,” said Greenwald, who also owns the Harlem USA mall across the street. “We started to market to people, but found that a number of players were dropping out of the market every few months,” he said. “We weren’t going to move forward with the project without leases in hand.” He noted that the Apollo doesn’t have funding for expansion either.
Meanwhile, Jonathan Bodrick, owner of vintage shop B.O.R.N., said foot traffic on 125th Street has been as high as ever. “November was very tough for a lot of retailers, but for me it was the best month I’ve ever had,” said Bodrick, who added that recent discounts and layaway offers have helped sales.
Retailers on the Upper East Side’s Madison Avenue, the city’s most exclusive shopping corridor, have a different set of problems. Several shop owners said business has dropped 20 to 40 percent since Lehman Brothers’ fall in September, adding that a portion of their customer base lost their fortunes in the economic crash and Bernard Madoff’s Ponzi scheme.
“We have a very loyal customer base, but they don’t spend as much as they used to,” said Pauline Rueda, manager of the Bra Smyth lingerie shop.
She shared a letter addressed to her landlord pleading for a rent reduction, which she said has gone unanswered. The landlord did not return calls requesting comment.
Both local and national retailers are pushing landlords for rent reductions, said Faith Hope Consolo, chairwoman of Elliman’s retail group.
Exorbitant rent increases (according to Elliman, rent shot up 27 percent between 2007 and 2008, to $1,150 per square foot) coupled with a drop in luxury spending have sent many retailers fleeing to less expensive space. As a result, the availability rate has more than doubled since 2008, to 10.5 percent.
For vacant space, Consolo said offers are being considered for $800 to $900 per square foot. “There are deals being made on Madison. Landlords have dramatically lowered asking rents, and by the summer, I think you’ll see a lot of this inventory absorbed,” she said.
Matthew Bauer, president of the Madison Avenue BID, noted that many seemingly vacant storefronts are actually stores in transition. He listed eight luxury retailers under construction along the avenue, from Hermès and Ralph Lauren to watchmaker Girard-Perregaux.
Morgan Allard, owner of home furnishing store Adrien Linford, said his landlord reduced his rent. “I’ve talked to a lot of retailers and I think we’re all doing the same thing, we’re all going to our landlords and saying that rental rates are not sustainable given the decrease in foot traffic,” he said.
Lower East Side
On the Lower East Side, the Business Improvement District isn’t as concerned with the rising number of vacancies (Elliman said it’s doubled to 6 percent since last year) as it is with the future. Roberto Ragone, executive director, said they’re lobbying the city hard to amend the area’s recent rezoning to incentivize office space.
He said adding a daytime workforce to the primarily bedroom-and-bar community would do more than anything else to help ailing businesses, especially restaurants, which for the most part don’t even bother to open early on weekdays.
Daniela Grow, owner of organic restaurant the Wall, said she hopes she can hang on long enough to see the outcome if the BID is successful. “The first three weeks of March, for us, really dropped to like half of what we saw in January and February,” said Grow. She only serves freshly made foods at her restaurant, which means it’s not possible to reduce staff.
She said her landlord decreased her rent by $500 for March, April and May.
BID president Mark Miller, who also owns a gallery in the neighborhood and two properties, said he’s made deals with all of his tenants. While Elliman pegs current asking rents at $200 per square foot, a 10 percent decrease from last year, Miller said new tenants are signing leases at half that rate.
He also seemed optimistic that the Lower East Side’s discount rents will help keep the neighborhood afloat during the downturn. He pointed out that the BID’s new gallery map is already outdated: It lists 54 galleries, and there are now 58.
Despite an increase in the residential population, Financial District retailers said they have been left reeling from the tens of thousands of Wall Street layoffs since the financial crisis hit.
“We have less business, it’s down day-by-day. One day 75 percent, [one day] 50 percent, the next day 25 percent, then back to 75 percent,” said Muhammad Shami, manager of Alfanoose, a regular recipient of “best falafel” awards.
“The residents were not the issue in this area. We depended on the financial institutions and they’ve been hurt big time,” he said, adding that Merrill Lynch’s potential move to Midtown would further worsen business.
Financial firms including Citigroup, Lehman Brothers and JPMorgan Chase have already emptied workers from 4.6 million square feet of office space in the district, according to CB Richard Ellis.
According to the Downtown Alliance’s most recent report, six out of every 10 Lower Manhattan employees eat out at least three times a week. So, for every 10,000 layoffs, that’s 18,000 meals lost for restaurants like Alfanoose.
In light of recent events, Shami said his landlord agreed to discount the rent.
On the bright side, Elizabeth Berger, president of the Alliance, pointed out that only a third of Lower Manhattan’s employees work in the financial sector. She said the number of people living in the area, which also includes Battery Park City and South Street Seaport, has increased 145 percent since Sept. 11, 2001 to 56,354 residents.
“Taking the long view, retailers and restaurants in Lower Manhattan are serving a larger, more diverse population than ever before,” she said.
So far this year, the Alliance counted nearly two dozen new business openings, including True Religion Jeans and a host of eateries.
“We just put Starbucks in, which is probably the last Starbucks deal to happen in New York,” said Ariel Schuster, executive vice president with Robert K. Futterman & Associates. “It’s still the third largest CBD (Central Business District) in the country, so it’s still a great market to be in.”
One of the most notable openings of this decade was in 2007, with Tiffany & Co.’s new store on Wall Street.
The company’s flagship store on Fifth Avenue saw a 34 percent drop in sales during the fourth quarter of 2008 compared to the fourth quarter of 2007, said Mark Aaron, vice president of investor relations. “It’s certainly safe to assume that the Wall Street store’s sales are also quite soft,” he said, adding that the company is still excited about the long-term prospects of the location.
The Meatpacking District has one of the highest vacancy rates in Manhattan at 13 percent, up from 10 percent last year, according to Prudential Douglas Elliman. Consolo attributed the high vacancy rate in part to the significant amount of new space that’s come online, either through new construction or conversions.
One such vacant building is 414 West 14th Street, at Ninth Avenue, a recently finished six-story retail and office building owned by Sitt Asset Management.
If it had been finished two years ago, “We probably could have rented it a bit quicker,” said David Sitt, head of the commercial division. He added: “The only thing is, two years ago, the Meatpacking District wasn’t as vibrant as it is today.”
He noted new hotels and condominiums, traffic-generating retailers like Apple, and the High Line are all making the Meatpacking District more valuable despite the declining economy.
Last year, concerns about the credit of Barneys owner Istithmar World nixed its plan for expansion in the Meatpacking District.
Sitt said today he’s asking for $500 per square foot for the ground-floor space, whereas last year he was asking $800 per square foot. However, Consolo says today’s average is $325 per square foot.
The Chelsea Market, an office building with ground floor retail space, has been consistently 95 percent occupied, said general manager Alane Berkowitz. In general, she said tenants have said their retail business is up while wholesale business is down.
Ian MacGregor is the owner of the Lobster Place, a seafood store inside the Chelsea Market. While his wholesale business is down roughly 15 percent, his retail business is up the same amount, indicating people are choosing to cook at home more often.
“Our restaurant customers are paying us 10 to 15 days later than they usually would,” which amounts to thousands of dollars in outstanding bills a month for a single restaurant, MacGregor noted. “What they’re essentially doing is borrowing money from us.”