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Retail Real Estate Report
High-End Rents Grow in Strategic Locations: Lower End, Non-Discretionary Retail Holds Up As Well
Despite deteriorating economic conditions, the retail sector has to date continued to perform relatively well, according to brokers, developers and owners recently surveyed. CB Richard Ellis’ (CBRE) latest Global Retail Rents Survey, for example, finds that retailers are focusing on some of the major global fashion capitals, pushing rents in the world’s most expensive retail locations even higher.
Half of the markets in the CBRE survey experienced retail rental growth in the past year (ending Q3 2008), with 65 percent of those seeing increases over the last six months. New York’s Fifth Avenue ranked as the world’s most expensive retail destination, with rental values reaching $2,200 per sq ft, more than 75 percent higher than Hong Kong, the second most expensive location.
Following New York, North American cities garnering some of the most expensive retail rents are Los Angeles, San Francisco, Toronto and Vancouver. Miami, Montreal, Philadelphia and Washington also joined Los Angeles and New York as being among the fastest growing retail markets, although demand continues to be restricted to prime sectors.
Ray Torto, chief global economist, CB Richard Ellis, explains: “It is easy to assume that falling consumer confidence and financial market turmoil across the globe are striking all retail stores, but the CBRE survey, together with sale figures from retailers, is showing that we have a barbell market. Our analysis indicates that the upper end is holding up well and the same is true for lower-end, nondiscretionary retailers.”
MANHATTAN'S RETAIL MARKET MIXED
Looking specifically at the Manhattan retail scene, the picture is mixed, according to a recent report by The Real Estate Board of New York (REBNY). Retail asking rents for ground floor space along some of Manhattan’s prime shopping corridors have risen notably compared with last year, while others are seeing declines.
“The report demonstrates mixed results, with some prime shopping corridors showing strong increases in asking rents and others experiencing declines,” said Steven Spinola, REBNY president. “The advisory group, made up of some of the city’s leading retail brokers, notes that while the retail market has slowed in the last few months, tenants are still leasing space and deals continue to be made.”
DEALS GET MORE CREATIVE
Faith Hope Consolo, chairman, retail leasing and sales division, Prudential Douglas Elliman Real Estate, New York, concurs: “Despite some of the negative press, leases are still getting done and retailers are moving forward with deals. In the last few months we have signed 25 new leases from SoHo to Meatpacking to Madison Avenue.”
These are not steep discount deals, she emphasizes. Instead, landlords are being more reasonable and it is possible to put more creative deals together. “Rents are by no means dropping off of the radar screen but there are better concessions in the marketplace. There are better incentives on the table for the right retailer such as more rent-free time,” she explains. “In fact, I have a portfolio of premier properties in Midtown and uptown and that landlord is offering a year’s free rent. His view is that he wants to get the retailers past this difficult time in the economy. It is more of a team approach than I have seen in the past.”
Consolo says that she is doing deals with trophy-type tenants. The firm in fact is close to completing its 13th lease with a jeweler on Madison Avenue this year alone. She says that the big players are still out there. “This is not an economy for the weak or undercapitalized but then New York has never been for the weak or undercapitalized. The retailers now have an opportunity to make very sensible deals. A year ago, the retailers were closing their eyes and saying just let me sign on the dotted line. Now, they can get the best locations. Six months from now when they open the new store, they will look like heroes. Next spring, the leases that are being signed right now will look like bargains.”
PENT-UP DEMAND FOR HIGH-PROFILE CORRIDORS
The deal flow has definitely slowed significantly, suggest Virginia M. Pittarelli, principal,COO,and Stephen Stephanou, principal, Madison Retail Group, a national retail real estate consulting and brokerage firm. According to the Madison team, if one looks at the high-demand, strong retail corridors in Manhattan, however, it is difficult to determine if they have been affected. If there is an affect, it will take a longer period of time for the impact to be felt. Up until very recently, there was a huge amount of pent-up demand for high-profile locations on the prime blocks of Fifth Avenue in the Plaza District, Prince Street, Broadway — in particular in Soho — and Bleecker Street in the West Village, to mention the most obvious. And there still is demand for good retail spaces in these key areas by global, national, and regional brands. Many of these markets have a number of leases that were signed in the last few years at very aggressive rents. And few spaces are out there at the present time. So those markets appear to remain strong for now.
Madison Retail Group has seen a fraying around the edges in some markets over the past few months such as Third Avenue in the 60s and 70s on the Upper East Side, West Broadway in Soho,and Lower Manhattan. It sees some churning on Madison Avenue at present.
“The Madison Avenue market (between 57th Street and even going north of 72nd Street) had become over-heated,”says Stephanou. “Rents were being achieved by aggressive landlords particularly due to high-end jewelry stores that have higher margins and found the exclusive atmosphere of Madison and the smaller boutique sized stores appealing. There seems to be a settling here, particularly as the amount of sublease space available is increasing and quoted rents are reflecting a motivation to get a deal done.
The key luxury brands seem secure but a number of the smaller and more esoteric brands are being challenged in a down economy where affluent customers have been hit with severe financial setbacks.”
FORWARD MOMENTUM IN NEW YORK CITY RETAIL MARKET
James Preston of Kew Management, which has buildings located in the Flatiron-Madison Square Park area of New York, says that its retail has not been affected too much by the national economy to this point. “There has been just an enormous amount of forward momentum in the market place. We do expect a slow down in the first part of 2009 but we are looking for a recovery in the second half of the year. Our retail and small-space niche have remained active. We have six buildings in this area and have less than a three-percent over-all vacancy.”
The Flatiron-Madison Square Park area has seen considerable residential and hotel conversions taking place, and has attracted some high-end restaurants as well as national tenants. “We have a retail location available on Broadway, right in the heart of that improvement district, which is an ideal location for a restaurant or other retail uses,” says Preston. “We have recently signed a lease with Ben & Jack’s Steak House on Fifth Avenue between 28th and 29th Streets, and we are hoping to attract a similar high-quality tenant to our Broadway location.”
RETAIL PROBLEMS LESS IN NORTHEAST
Breslin Realty’s Robert Delavale, director of leasing, notes that even though some retail tenants are having difficulties, their problems are less so in the Northeast than in other areas of the country. “A retailer may be down nationally by 20 or 25 percent; however,in this market that same retailer may only see a drop in sales of 5 percent, maybe none at all. Not withstanding, we are cognizant of the global downturn, we realize that there are issues and we continue to work closely with tenants, to the extent that we can.We need to recognize that retailers will have issues with their overall bottom lines through this holiday season, and that will inevitably lead to some restructuring and store closures in the first and second quarters of 2009.”
Yet even in situations where Delavale is getting space back, it has not stayed on the market for long. “I recently found out Washington Mutual plans to close three of the locations we have together. To make matters worse,these transactions are controlled by the FDIC who has the power and authority to reject any of the leases that Chase does not want to assume,with no further tenant obligations to the landlord. Ordinarily, a loss like that could be devastating; however the three I am getting back are on Long Island, and two have already been spoken for. I fear any where else in the country this may have not been the case.”
RETAIL INVESTMENTS FOR THE LONG TERM
Joseph Coradino, executive vice president, Pennsylvania Real Estate Investment Trust (PREIT), feels that consumers are caught up in the emotion of the moment but in retail investment a longer-term focus is needed: “From our perspective, the investments we are making in our properties require a longer-term view than what happened today in the stock market. Further, our properties are in the Northeast part of the US and we are not really in the same kind of mortgage crisis environment that we might be in if we were in California, Las Vegas or Arizona.“
At our Cherry Hill, New Jersey, mall we just opened a new parking structure. There are numerous new restaurants and stores coming in. We will open the first Nordstrom in South Jersey on March 27, 2009, at Cherry Hill. It is a market-transforming event because if you look at shopping patterns in the Delaware Valley, the luxury shopper, the fashion shopper, were typically going north to New York City or west to King of Prussia, Pennsylvania. After we purchased Cherry Hill Mall, we studied the demographics and discovered from an income perspective that there were more $100,000-plus homes in the Cherry Hill five-mile ring than there were in and around King of Prussia.”
‘NECESSITIES’ CENTERS LESS AFFECTED BY DOWNTURN
Leo S. Ullman, CEO, Cedar Shopping Centers, Inc., a real estate investment trust, says his firm’s centers have been less affected by the downturn than most shopping center owners in this market because its portfolio is focused primarily on supermarket and drugstore-anchored properties. “
Our properties are necessities-based ‘bread and butter’ shopping centers. More than 75percent of our properties are supermarket and drug store-anchored. Supermarkets and drug stores typically do better in difficult times. We have had no closings in those two areas. We do expect some bad debt experience and store problems here and there,but other than a few privately owned stores, we just do not see anything in the way of major challenges.”
Ullman says that even in this market, some of his tenants want to expand. “Many of our chains, even in this environment, are pushing us for additional sites. Accordingly, our ground-up development deals are moving along nicely but those are primarily supermarket-anchored where we have assigned lease before we begin to build and we build to a fixed price.”
