Real Estate Weekly

NYC retail market making healthy start in 2002

NYC retail market making healthy start in 2002 – Brief Article

Andrew Goldberg

Where is New York’s retail real estate market heading these days? This is a question I am asked frequently by clients and colleagues alike, and I think to better anticipate the future, it is useful to review the recent past.

Several related events helped launch and shape the astounding changes in the city’s retail tapestry during the past 10 years. Starting with the aggressive incentives put in place by the City of New York to spur the redevelopment of Times Square, and aided by the phenomenal expansion of the U.S. economy in general, plus the New York area economy specifically, large-scale corporate” retail became a driving force in our market. Corporate entities such as Disney, Warner Brothers, the WWF, ESPN and others made it fashionable to open up overly large retail destination venues. These stores in highly visible locations, the foot traffic they created, and the press coverage they generated, motivated a host of other player to join the fray, and a retail “land grab” resulted.

Companies like H&M, Victoria’s Secret and the GAP, with its namesake, Old Navy and Banana Republic brands, all opened enormous stores in both traditional and non-traditional retail neighborhoods, and in the process reshaped the city’s retail streetscape. National “niche” players like Restoration Hardware and Lechter’s, and European retailers such as Prada, Gucci and Louis Vuitton were also part of this “high exposure” trend, and as a result converted decidedly non-retail markets like SoHo and other parts of the City into the retail places to be in New York. This “market-share-at-all-costs” mentality was contagious, creating the “drug store/coffee bar wars”, with companies like Duane Reade and CVS, Starbucks and Timothy’s battling it out on every corner and opening up locations at an incredible pace.

It should come as no surprise to anyone that the effect of all this activity was tantamount to a page out of Economics 101: Skyrocketing rents and a paucity of good space caused local and/or less well-financed retailers to be pushed to the sidelines, unable to compete with the national and European players for space.

The end result of this decade-long process was a market where New York’s traditional retail epicenters, areas like Madison Avenue and Fifth Avenue, became so tight for space that rents climbed into the stratosphere. Rents of $700 and $800 or more per SF were (and still are) commonplace along these avenues. SoHo, of all places, was commanding rents of $400 or more per SF!

My belief is that this market, like the economy, began to decline in early 2001. The companies that had leapt into retail with mega-stores and multiple locations to achieve corporate visibility and marketshare had begun to reject the concept that huge amounts of money can be lost in the name of brand-building. Just as they led the up-trend a decade ago, they led the down-trend over the last 18 months, with retailers large and small putting space back on the market.

And, while Sept. 11 was certainly the specific event that caused retailers to reevaluate their real estate needs, fundamental economic weakness had already undermined a seriously overheated market. Taken together, the fourth quarter of 2001 may have been one of the quietest on record for retail transactions in New York City.

Jumping forward to the present, the end result of this market adjustment seems to be a “wider”, more accessible, and in my opinion, healthier retail market. For example, we are now seeing activity across a broad range of retail segments. National food tenants such as Outback Steakhouse, Pret A Manger and Quizno’s are back in the market aggressively. Regional banks have become a serious presence, with Fleet Bank, Washington Mutual, Commerce Bank and others announcing aggressive branch openings over the course of the next year. Drug stores remain very strong players, and are taking advantage of vacancies by snapping up space in heretofore unheard-of locations (think Duane Reade at 230 Park). The cell phone sector has also become hot, with Verizon, Cingular and VoiceStream all seeking multiple sites in the city. These and other retailers are the “bread and butter” deals that are driving the market these days.

So, what does the future hold? Presumably, the strengthening local and national economies will keep national retailers focused on, and active in, New York. In addition, current space inventories will give local players opportunities to remain active, and European retailers — as they always have – will be here opportunistically. Luxury brands should show signs of life if the economy continues to improve and consumer spending rises. All of this, however, is likely to be over-shadowed by the redevelopment of downtown.

While a final master plan has yet to be unveiled, it is certain that the former World Trade Center site will be transformed into a magnificent mixed-use office, residential and retail environment that will encompass a major transportation hub and a memorial. This will very much alter the face of Lower Manhattan, and result in a positive, substantial and lasting impact on the New York retail scene for as far into the future as I can see.

COPYRIGHT 2002 Hagedorn Publication

COPYRIGHT 2002 Gale Group