You can’t be too rich: As news reports point to declining sales in America’s retail sector, one area that has been experiencing strong growth is luxury retail in Manhattan.
Like Manhattan’s residential real estate market, which has remained robust in the face of sharp declines experienced elsewhere in the country, the borough’s high-end retail sector also remains buoyant.
“Things have quieted down in the U.S. overall, but Manhattan still seems to be
the hole in the doughnut,” said Jim Downey,
senior director of national retail services
for Cushman & Wakefield. “Retail sales
here do not seem to be impacted by the economic slowdown.”
At the moment, many of the city’s main luxury retailers are putting on outward
displays of confidence. For instance, in February, Gucci opened a huge new flagship store on Fifth Avenue.
Foreign retailers are one reason no slowdown has been apparent. Many of the luxury retail stores in Manhattan’s high-end retail enclave are owned by non-U.S. companies, which can hedge declines in one
region with stronger sales elsewhere.
For example, French firm Moët Hennessy Louis Vuitton (LVMH), the world’s largest luxury brand conglomerate, had only 26 percent of its global sales in the U.S. in 2006. France alone accounted for 15 percent, while the rest of Europe contributed 22 percent to sales that year.
LVMH, which has a Louis Vuitton showpiece store on Fifth Avenue, said it is unconcerned with the possibility of a struggling U.S. economy. Sales for full year 2007 were up 12 percent from 2006, and the company’s CEO, Bernard Arnault, confirmed a “tangible” rise in sales for 2008.
At a press conference in early February, Arnault predicted a recession in the U.S. would have a “limited” or “even non-existent” impact on his firm, as demand elsewhere would make up for it.
Another factor buffeting Manhattan’s luxury retail sector is increased tourism. A sagging U.S. dollar is luring record numbers of foreign shoppers to the city, many of whom consider an afternoon on Fifth Avenue as de rigueur as a trip to a museum.
Those domestic tourists gawking around places like Rockefeller Center can also be counted on to splurge in Manhattan. International and domestic tourists spent $24.7 billion in 2006 in New York City, according to NYC & Company, the city’s tourist bureau.
The city’s most expensive retail space is along Fifth Avenue in Midtown, where rents average between $1,250 and $1,400 per square foot.
Soho and Madison Avenue above 57th Street are among the other most expensive retail enclaves. Average rents on Madison Avenue are currently around $1,050 per square foot, while Soho rents hover around $270 per square foot, according to brokerage firm CB Richard Ellis.
In 2007, the firm reported retail rents in Soho alone jumped 27 percent from 2006 to 2007. Tellingly, the vacancy rate for all three areas is about zero, and brokers say that even rumors about a vacancy can light up switchboards at real estate offices.
In a further sign of the strength of the city’s luxury retail market, high-end stores are returning downtown, seeking to capitalize on proximity to Wall Street and a retail scene that’s finally recovered from Sept. 11. Last October, Tiffany & Co. opened an 11,000-square-foot store at 37 Wall Street, and in July, high-end menswear retailer Thomas Pink opened a 3,000-square-foot location nearby.
Tiffany, for its part, predicts 2008 overall sales will increase 10 percent and said U.S. retail sales will see a “high single-digit” percentage increase.
Downtown shopping is about to be reinvigorated in other ways, too. In January, the Port Authority inked a $1.4 billion deal with the Westfield Group to put in 488,000 square feet of retail space in the future transit hub and towers in the area. Westfield plans to lease the new space and manage it upon completion.
Still, there are worries that if the economy worsens, retail throughout the city could take a drubbing.
“Even a shopping mecca like New York City is directly tied to the fluctuations of the market,” said Stuart Ellman, executive director of New York City-based Judson Realty, which focuses on high-end retail. “New York is dependent on the financial industry, and the market has an effect on shopping. If you lose a million dollars on the stock market … you don’t feel like making that impulse purchase anymore.”
Landlords also will be more flexible when it comes to making deals, Ellman predicts. “Especially on Madison Avenue, landlords are dependent on the high rents and can’t let the buildings sit without being leased,” he said. “There’s a choice if the landlord wants to stick out for the highest rent or get it leased for a little less, and I think that’s what’s going to happen. The landlords are going to be a little more flexible with the rents and the terms of the transaction.”
One indication of how Manhattan’s luxury retail market could fare in a recession can be seen by examining the city’s
last significant downturn, which occurred after Sept. 11.
Then, the downturn in spending caused by fewer tourists and simultaneous stock market losses lasted about two business quarters. But by the second half of 2002, luxury retailers already believed in a bounce. “A lot of them are doing better than anticipated, but it is a holding pattern, and they are hoping for the rebound,” Andrew Goldberg, senior managing director in the retail group at New York-based Insignia/ESG, told the magazine Retail Traffic in 2002.
However, for the moment, brokers are expressing confidence about the top of the retail market.
“There have been five major deals in Soho in the past six months, and two more are pending,” Downey said. “People are still spending.”