Fall 2011 Retail Report

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The market for New York City retail store space is still tight in the most prestigious corridors and some of the excess demand is spilling over into other prominent corridors within Manhattan according to our Retail Advisory Group. We’ve seen this encouraging activity despite a backdrop of continued economic weakness at all levels.

 

Global Economic Factors

The Euro has slid against the dollar by over 3 percent since the last REBNY retail report and is threatening to move lower as the credibility of the European bailout mechanism is being questioned. Mixed economic reports out of China have stunted global economic optimism as well. Still, these developments have not had much impact on the New York tourist industry as the Manhattan hotel occupancy rate increased to 89.3 percent in the third quarter compared to the third quarter of 2010 as measured by PKF Associates. As a result, the major retail corridors in New York had little change in the amount of foreigners with shopping bags at their side.

 

Mixed Signals on Consumer Spending

U.S. consumers are also sending mixed signals. The most cited official U.S. unemployment rate is stagnant at 9.1 percent, real disposable income declined .1 percent in September, and measures of consumer sentiment are at levels not seen since the recession. Despite these dismal figures, personal consumption expenditure still increased 2.4 percent from the second quarter and real retail sales increased 3.9 percent in September compared to last September. Regardless of their economic problems, American consumers are still spending.

 

Prime 5th Avenue Retail Corridor Spillover

The 5th Avenue retail corridors, according to our Retail Advisory Group, have continued to tighten and as a result of that activity, asking rents have increased. With very little availability, the average asking rents on prime Upper 5th Avenue spaces between 49th and 59th Street have increased 17 percent over the spring and 11 percent since last fall to $2,633 per square foot. This average asking rent is a function of owners responding to very high demand while there are very few spaces on the market.

There has been somewhat of a spillover effect from the high asking rents on Upper 5th Avenue to 5th Avenue between 42nd and 49th Streets. Owners sensing that even high end international retailers will be priced out of Upper 5th yet are still willing to pay a premium to be near this popular corridor have increased their asking rents. The average asking rent for retail space on 5th Avenue between 42nd and 49th Streets is up 31 percent from the spring and 35 percent from last fall to $675 per square foot. Some of the high profile companies to take space on 5th Ave since the spring have been Swatch, Michael Kors, and Dolce & Gabbana.

 

Limited Supply in Prime Corridors Impacts Asking Rents

As we have done in earlier reports, we need to remind our readers that these are asking rents, not taking rents. In retail corridors where there is a balance of supply and demand we have seen stability in asking price for available space. However, in other corridors where there is limited supply we have seen dramatic jumps in asking rent. Needless to say, the very high asking rent for these spaces can result in equally high percentage increases from report to report and year to year. Our Advisory Group had a robust discussion about these exorbitantly high, almost unrealistic asking rents and whether they should be included in the report. The group cited several reasons for excluding and including these unusually high rents. According to the group, the listings could be excluded on the basis that they are not reflective of the market, will not be leased for anywhere near that level, and that they hurt the market as they scare away tenants. The reasons for including the listings are that this is what the owner is asking, that the space may drive up the price for all space in the market and that the owner may get a higher taking rent than he would have otherwise.

The Advisory Group found all these reasons to be correct, and therefore included these questionable rents in the averages. However, this report addresses the issue by providing, not only the average, but the range and the median as well. With these additional market indicators, a careful reader will be very cautious about drawing attention to these corridors in which this situation occurs. Likewise, we do not call out these percentage increases because in our judgment and the judgment of the Advisory Group they are not an accurate representation of the market. If these owners are successful in leasing such highpriced space it has been their experience that they have provided an above-market amount of free rent and tenant improvement allowance. This typically brings the taking rent very close to other signed leases in the market.

Not all areas of the city witnessed the type of volatility in asking rents as the international shopping destinations of the 5th Ave corridors and Times Square where supply is short, demand is high, and one opening can drastically change the corridor’s average asking rents. Third Avenue between 60th and 72nd and 5th Avenue in the Flatiron District are two larger corridors where a steady supply of space leads to stable rents. Average asking rents this fall on Third Avenue between 60th and 72nd are up 4 percent from last fall to $255 dollars per square foot but down 5 percent from last fall. Average asking rents on 5th Avenue in the Flatiron District are up 1 percent from the spring to $279 and 9 percent from last fall.

 

Unique Aspects of the Retail Market

In preparing to release our report, our Advisory Group always reminds us to clearly acknowledge the unique aspects of the retail space market. The asking rent does not factor in a free rent period or a financial allowance for making interior improvements in the space. The dollar value of these lease provisions can vary depending on the relative strength or weakness of a particular market , and the availability of comparable space in the same corridor. Similarly, a tenant with strong financials, especially over an extended period of time, provides an owner with greater assurance that the rent will be paid on time. A tenant in this position can generally negotiate a lower rent than a tenant that cannot offer the owner the same level of financial security.

There are exceptions. Many retailers have unique space needs. For a retailer who wants a store on Fifth Avenue in the mid 50s an available space on Sixth Avenue is no substitute, not even at a lower price. Likewise, for a retailer that wants to be on Seventh Avenue in Times Square, a store a short block away on Eighth Avenue is not an option. A few years ago the competition in the retail banking industry led to very specific space requirements for branch locations. Banks wanted to be on a corner and could not be persuaded to lease a similar mid-block space at a discount or with generous concessions. With strong competition for a specific location on a block, it was not unusual for the taking rent in these cases to be higher than the asking rent as well as the normal range of rents for the corridor.

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