Paydirt: Is it blasphemy to say flagship retail is next in the firing line?
The industry news you need to start your week, and what’s ahead
We know retail is in the soup. This year, some of the biggest brands have announced mass store closures across the U.S. (J.C. Penney, 138 stores; Macy’s, 68 stores; Guess, 60 stores, etc.) and a top hedge funder described the retail slump nationwide as a “forever trend.” Closer to home, Ralph Lauren just announced it was shuttering its Fifth Avenue Polo store. On Fifth Avenue, availability rates have jumped to 16 percent, Cushman & Wakefield data show.
Steve Roth, in his always-entertaining annual letter to Vornado’s shareholders, predicts a “rightsizing” of up to 30 percent of the weakest retail space, and you could picture him rubbing his palms together when he wrote that the situation would “create enormous opportunity for those with the capital and management platforms to feed on the carnage.”
Roth and others, however, remain bullish on premium flagship retail. Nearly a third of Vornado’s EBITDA comes from its retail holdings in prime areas such as Fifth Avenue, Times Square, and Soho. Roth, in his letter, said “Upper Fifth Avenue is enduring (read forever).” He predicted fast-fashion retailers will likely cut back on the number of stores, and double down on flagships.
“For flagship retail (and for A+ malls), this is a pause, a cyclical bump,” Roth wrote. “For everybody else, it is secular disruption.”
But it might be time to poke at the sacred cow that every brand needs to go big and glitzy in Manhattan to stay relevant. It’s something retail brokers and landlords have forever maintained as gospel, but retailers may not be able to afford to continue spending tens of millions on rent while in-store sales continue to drop. Even the best brick-and-mortar may be vulnerable to the lures of e-commerce, and I could foresee a situation in the next five years where a brand like Cartier or Ferragamo may question the wisdom of spending millions on building out a high-street flagship, accessible only to those able to visit New York. Shoppers of brands like these increasingly hail from parts of the world such as the Middle East and China. Those shoppers need to apply for a visa to come to the U.S. and may not want to deal with the hassle. Instead, these brands – assuming technology catches up – may pour the money into creating an immersive virtual store that does the job and can cast a far wider net than a single physical location. If that trend catches on, landlords of even the most sought-after retail would be on shaky ground.
Even the shot callers behind traditional department stores are beginning to rethink their footprints in prime Manhattan. Hudson’s Bay Companies, which owns Sak’s Fifth Avenue and limped through 2016, said earlier this month that it plans to unlock its real estate value and might stack apartments and offices above the $655 million Lord & Taylor flagship at 424 Fifth Avenue.
Amazon has already proved to be the Grim Reaper of mom-and-pops and vanilla retailers. Luxury flagships have survived because they offer cachet and an experience that is hard to replicate — the magic of walking down Fifth still endures. But if top brands and their tech partners figure out how to create that same wow factor online, they’re in a position to capture the new breed of luxury shoppers, people who didn’t grow up dreaming of Fifth.
421a here to stay?: After a few hiccups and a little grandstanding by Gov. Cuomo about “ideological differences,” the Senate voted late Sunday to revive the 421a developer tax abatement. The bill now heads to Cuomo’s desk, and he is expected to sign it. If 421a becomes law, it is hoped that it will kickstart new rental projects in the city, which developers said could not exist without it. TRD’s Katie Brenzel got her hands on a number of financial projections from developers that showed how it factors into their decisions to say yay or nay to a new project.
Leonard Litwin @102: Leonard Litwin, who as a figurehead occupied the same status in New York real estate as Queen Elizabeth II does in the U.K. and the Commonwealth, died at 102. Litwin, the founder of Glenwood Management, built an impressive Manhattan empire of nearly 9,000 apartments, but his power lay in far more than his holdings: He was, by a distance, the state’s biggest political donor, and his money and connections were instrumental in getting many pro-industry regulations passed, such as the continued renewal of the 421a program and the Urstadt Law. Though the real estate industry, through years of canny donations and arm-twisting, has set itself up to continue to exert outsized influence in Albany, it’s doubtful that any one figure will rise to the stature that Litwin had. (Side note: The British monarchy is facing a similar problem – read this superb Guardian piece on how the palace is preparing for her death.)
Townhouse record: New York City has a new high-water mark for a townhouse sale: $79.5 million, the sum paid for David Wildenstein’s property at 19 East 64th Street. The buyer? HNA Group, which also lit up the commercial market with a $2.2 billion deal to buy 245 Park. While some sellers might see the sale as a reason to jack their own prices up, luxury brokers said that’s absolutely the wrong takeaway.
“Every seller will come out the door and say, ‘Well they got $79.5 million, therefore I’m worth several hunks more of gold than I was yesterday,’” Paula Del Nunzio of Brown Harris Stevens told TRD’s Kathy Clarke and E.B. Solomont. The message to sellers: Records are not comps. Price sensibly, profit modestly, and move on.
(Paydirt is a weekly column that riffs on the biggest NYC real estate news of the moment, providing analysis and historical context on the deals and players that make this town tick. Read more from Paydirt here.)