The expected softening in Manhattan retail rents has hit one neighborhood harder than the others: Harlem.
While the latest biannual Real Estate Board of New York retail report found that both Midtown and the West Side experienced drops in retail asking rents, Harlem saw the steepest declines. The area saw asking rents fall 26 percent over the same time last year.
Which raises the question: why?
“What skews these things is what’s available,” said Ben Fox, president of Winick Realty Group. “What I mean by that is size; the larger the retail space, the less dollars per foot it would command. So a 1,000-foot store, you could ask $500 a foot, and right next to it would be a 3,000-foot store that would command half of that.”
Lansco Corp.’s Robin Abrams, who chaired the subcommittee that put together the REBNY report, which came out early last month, agreed: “I think the data reflects a drop in retail rents because some very large spaces that may be priced lower than a boutique came on the market … more space that wasn’t on a high-profile corridor.”
By high-profile corridor, Abrams means 125th Street. The 125th Street strip’s proximity to transportation has allowed the corridor to consistently command the highest numbers in the area.
In fact, the REBNY report shows that the average rents of ground-floor retail on 125th Street, river to river, were actually up nearly 10 percent over the last year, from $113 a foot to $125.
So if prices are climbing there, well, then the problem most likely lies with everything else.
Specifically, many new luxury condo projects in Harlem, fruits of Manhattan’s recent building boom, include ground-floor retail space that is coming to market now.
“There have been new developments with large multilevel retail and that is impacting the report,” said Abrams. “These are great spaces and they are at appropriate rents for Harlem. They’re not depressed, but they’re not 125th Street.”
Many of these spaces are languishing, largely because the ideal retail tenant, as far as the developer is concerned, isn’t the same as the tenant who is eager to rent off the beaten path in Harlem.
“It is challenging to have to lease space at the base of a high-end residential building [in Harlem],” said Abrams, explaining that Lansco is currently trying to lease a retail space in a residential building at 110th Street and Central Park North. “The developers of most of this new product have been looking for the ideal tenant that will be in keeping with the image of the building and service the people who they’re trying to sell and lease the units to.”
Also contributing to the problem is the expectation that most retail tenants who sign 15-year leases aren’t looking for an area that’s up and coming, but instead a neighborhood that’s already arrived.
“[Harlem rents] are still discount in nature for most of the retailers,” said Scott Auster, a partner at Ripco New York. “But you’ve just begun to get a full price point tenant like MAC Cosmetics, Aerosoles, Old Navy, American Apparel.”
“The full-price-point tenants didn’t open in anticipation of further residential development, they did it because the customer is already there,” added Auster.
The challenge is getting those retailers into less-trafficked streets. “I think a lot of the developers thought that because of the architecture or the building, they would get sexy tenants like restaurants or apparel stores. [But instead, they’re seeing interest from] health and beauty, drugstore chains, fast food or coffee chains, dry cleaners, some of the smaller banks, some of the more local restaurant operators, looking to service the community in Harlem rather than draw people from outside,” said Abrams.
“So there’s a little bit of a switch going on, and there are local tenants who might have been looking for space and are priced out — and then there are other tenants that the developers are trying to attract from other areas who need an education on the neighborhood.”
Thus a portion of the neighborhood finds itself at something of an impasse, as most developers aren’t willing (or able) to lower their expectations.
“The concern for that [investor] landlord is, where did he project his rents to be? He might have bought high, financed and developed depending on where he thought rents were going,” said Cory Zelnik, of Zelnik and Co. “The question for that landlord is, ‘Will he have the flexibility at what the market is?'”
In the end, the person who will gain from this market is the small-business owner. As the landlords of smaller spaces off the major retail corridors are forced to lower rents in order to fetch tenants, moms and pops can step in.
“The little wine shop, the local entrepreneur, will have more opportunity than in the past,” said Zelnik. “They’re not going to be on 125th Street, but if they want something cozy or quaint, it’s that landlord that’s off the beaten path that’s having the trouble, and he may be more willing to negotiate down.”