Retail dead zones now home to monster malls

Bronx Terminal MarketWhile vacancy signs have been proliferating along the avenues of many of the city’s established shopping districts throughout the downturn, major chain stores are moving into massive new malls located in former retail dead zones in places like the South Bronx and East Harlem.

These new multilevel malls — many of which are on former industrial sites — are different from the big-box stores that made inroads into many parts of the city in recent years. They boast even larger floor plates, often allowing a store to consolidate all of its operations on one level. That, in turn, has the potential to attract the types of warehouse stores and wholesale outlets typically found in the suburbs and less dense parts of the outer boroughs.

Indeed, later this month, Manhattan’s first Costco is set to open at East River Plaza, a new half-million-square-foot mall located between East 116th and 119th streets along the FDR Drive. Next year, a slew of bargain stores will also be opening at the mall, which was developed by the Blumenfeld Development Group and is 90 percent leased out. Tenants will include Best Buy, Marshalls, and Bob’s Discount Furniture.

David Blumenfeld, principal at the firm, said one of the big attractions of building a mall in Upper Manhattan was that the area was so under-retailed. In addition, he said the site was one of the only swaths left in Manhattan that could accommodate some of the big-box stores preparing to move in.

“There aren’t many places where you could deliver a 130,000-square-foot floor plate in a retail location and have visibility on the FDR Drive,” he told The Real Deal.

Across the river in the South Bronx, the Gateway Center at the former Bronx Terminal Market, a 1 million-square-foot mall and the largest retail development built in the city in decades, had its official ribbon-cutting ceremony in September. The complex is said to be off to a strong start, despite the dismal performance of malls in other parts of the country and the overall slump in consumer spending.

Gateway, which was developed by the Related Companies, is 90 percent leased out and 80 percent open for business. The massive development is home to the Bronx’s first BJ’s Wholesale Club, its first Bed Bath & Beyond, and its first Toys”R”Us superstore.

Meanwhile, Related cleared another hurdle in the Bronx last month when the City Planning Commission voted to approve its controversial $310 million plan to redevelop the former Kingsbridge Armory, once the largest armory in the country, into a mall that will cater to national retailers.

The project will also include a movie theater and a 60,000-square-foot grocery store that opponents claim will drive local grocery stores out of business. It still needs approval from the City Council.

Retail experts say that taken together, these new mall projects have the potential to decrease the exodus of New York City shoppers leaving the city in search of better deals. They also could revitalize underutilized areas of the city.

But several of them, particularly the Kingsbridge Armory project, have run into opposition from local merchants and unions who want developers to require tenants to pay a living wage. Opponents no doubt recognize what a huge impact these mega malls can have on surrounding microeconomies.

Some of the stores in these developments are so-called category killers — superstores capable of driving out smaller competitors though their capacity to stock vast selections of a single category of goods, such as electronics or home repair goods.

Steve Malanga, a senior fellow at the Manhattan Institute, a conservative think tank, said consumer opinion polls and various studies have shown that a significant percentage of New Yorkers leave the city to shop in the suburbs in order to take advantage of the cheaper prices available at big-box stores. A 2008 study by the city found that New York loses approximately $1 billion in grocery sales annually to the suburbs.

With the economic downturn, the new power centers could not have picked a better time to open. The New York Times recently reported that nationally, warehouse store sales are up by more than 50 percent since 2003, while many other categories of retail have seen a marked decline in sales.

Although the new retail developments may pose a threat to established commercial strips, they are also opening up areas for redevelopment that were once retail backwaters.

In East Harlem, for example, the prospect of the new mall opening has had a tremendous impact on real estate along the section of East 116th Street between Lexington and the FDR Drive, which until recently was a retail dead zone, said John Clifford, principal in GreenbergFarrow, one of the architects for East River Plaza, which was built on a six-acre site formerly occupied by a wire factory.

“I would say that 70 percent of the buildings have been redone waiting for this to open,” he said. “When you put in a half-million-square-foot anchor at the end, and people are now marching up and down 116th Street in droves, you are going to see things change.”

Peter Ripka, a partner in Ripco Real Estate, which is the broker for both the Gateway Center and East River Plaza, said the large floor plates and relatively inexpensive rents are a big draw for national retailers. Rents at East River Plaza range from about $40 per square foot for the big-box store spaces up to $150 per square foot for smaller stores.

It is extremely difficult to find comparable retail space in Manhattan, said Ripka.

“Think about finding a 100,000-square-foot site in Manhattan. What would the rent be?” he said. “It is crazy to even think about it — you cannot put a number on it. If it was on a good street, it could be well over 100 bucks a square foot.” By comparison, the Whole Foods in Union Square is about 50,000 square feet.

However, some argue the subsidies, tax abatements and special zoning changes that these mall developers receive gives them an unfair advantage over smaller, less politically connected developers.

The Related Companies received approximately $133 million in tax abatements for the Gateway Center, while Blumenfeld received approximately $80 million in tax credits and low-interest rate bonds for East River Plaza.

One of the justifications for the incentives is that the developers help defray the extraordinary costs of remediating formerly industrial land and going through laborious rezoning. Blumenfeld said that unexpected delays and court challenges added about $100 million in unanticipated costs to his firm’s $500 million project.

He said it will take a while before his investment pays off. “It is a project for my kids and my grandkids,” he said.