5 Things You Need To Know About The Q2 New York Retail Landscape
At the International Council of Shopping Centers' annual RECon event in Las Vegas last month, the unofficial theme was adapt to survive. It is a phrase that has defined the retail landscape over the past year, as business owners look for ways to keep shoppers coming back to brick-and-mortar locations.
E-commerce’s growing market share and customers' preference for experience-based shopping have put pressure on businesses, as longtime chains continue to either file for bankruptcy or consolidate locations.
In New York City and Long Island, the increased number of empty storefronts and falling rents prove that the retail landscape has changed. But retail professionals remain optimistic. As malls and traditional retailers like department stores fall out of favor, landlords have an opportunity to reposition assets to capture the demands of an internet-driven demographic.
"With major retailers like Toys R Us and Sears closing their doors recently, it is clear that the needs of consumers have shifted," Berdon LLP principal Vincent Altieri said. "As these buying patterns continue to shift, it’s imperative that retailers stay attuned to the public's changing tastes."
From declining rents to indoor amusement parks, here are five retail trends impacting the market in Q2.
1. Rents are declining and landlords are offering more concessions
Retail real estate in Manhattan saw declining rents in the first three months of the year. On average, rents declined 19.5% year over year to $653/SF. The decrease in rents contrasts rising consumer confidence, which grew by 3.8% in Q1. Total quarterly retail sales for the five boroughs also increased by 4.8% year over year in Q4, indicating a disconnect between what consumers want and what brick-and-mortar retailers are offering.
The fall in rent also comes as Manhattan vacancy rates rose from 2.1% to 4.2% between 2012 and 2017, according to a report from the City Council. Areas like SoHo and the Upper East Side have seen a significant increase in empty storefronts, prompting Mayor Bill de Blasio to propose a tax on landlords who keep stores vacant for long periods of time.
For landlords looking to retain tenants, concessions have become the norm. Concessions for Class-A buildings in Lower Manhattan increased 24% in 2017, and Midtown concessions packages jumped 8.5%. While a typical retail lease term is between 10 and 15 years, some tenants have also pushed landlords for shorter terms, given the uncertainty in the market.
At Gucci’s SoHo location, the luxury retailer entered into an agreement with landlord Pearlmark Real Estate Partners that allows it to terminate its lease if the store fails to meet its sales goals within two years.
In suburban Long Island, where shopping centers and malls make up a large proportion of retail inventory, department anchors and traditional stores have felt the sting of changing retail tastes. In West Babylon, Kmart is scheduled to close in September. The closure of the store, which is a subsidiary of Sears, follows the closing of a Sears appliance store in the same shopping center in December.
Beyond negotiable lease terms, concession packages have included landlords footing the bill for architects and even furniture.
2. The rise of walkable, experiential retail
Millennials, and now a growing number of baby boomers, are opting for dense urban centers that support the live-work-play lifestyle. Combined with nearby transit options, these denser communities give residents the convenience of shopping close to home without having to get in a car.
In Long Island, these communities have begun to crop up along renovated transit lines. Many of the railroad hubs are near shopping centers and malls.
"Providing consumers with walkable environments that encompass a variety of options — including stores, restaurants, bars, gyms, movie theaters and other experiential activities — is a shift that property owners and retailers are working with local governments to achieve,” Altieri said.
To meet these needs, Long Island retailers and shopping malls are adjusting their formats to provide social, shopping and entertainment options in convenient locations. Simon Property Group, which owns and manages several mall properties on Long Island, has worked to both create more experiential shopping experiences as well as bring other real estate sectors into the mix.
Appear Here, one of the largest online marketplaces for short-term retail space, has partnered with the owner to create The Edit at Roosevelt Field. The Edit features a revolving selection of 12 brands.
More malls have embraced pop-ups as a way to excite shoppers with a constantly changing selection of products and activities. Simon Property Group is also partnering with Marriott International to build a Residence Inn at Roosevelt Field, bringing hospitality to the retail center and creating a walkable shopping experience.
3. Grocery-anchored shopping centers and discount retailers grow in popularity
While online shopping has allowed consumers to purchase goods like clothing and electronics without leaving their homes, grocery shopping has yet to fully transition into the e-commerce sector. Shopping centers anchored by supermarkets have since become stable and reliable assets for retail landlords.
The rise of meal kit programs like HelloFresh and Blue Apron and home grocery delivery has also prompted grocery chains to reinvent themselves as experience-based retail destinations. From promotional products to cooking demonstrations, generating a social atmosphere can encourage shoppers to do more than pick up items and leave.
"Like other retailers, grocery stores have to think of ways to differentiate themselves from the online shopping experience," Berdon LLP supervisor William Craine said. "It's about striking that balance between convenience and personal touch."
Conversations at ICSC also centered around the shrinking middle class and the impact it will have on consumer spending. Discount retailers have gained prominence in the post-recession economy and continue to grow their market share. T.J. Maxx’s expansion at 250 West 57th St., which added 19K SF on the fourth floor, was the largest retail lease of Q1. Burlington, another discount apparel chain, took 55K SF in Kings Plaza Shopping Center in Mill Basin, Brooklyn.
4. Indoor amusement parks are the next trend
Fueled by the demand for retail experiences that create a social atmosphere and bring people together, retailers have turned toward entertainment concepts. At 11 Times Square, visitors will enter a 48K SF, three-level virtual reality-themed indoor amusement park from the film studio Lionsgate.
Dubbed the Lionsgate Entertainment City, the location will feature attractions based on hit shows and movies like “Mad Men” and “The Hunger Games” franchise. Rides draw visitors in while themed cafés and restaurants keep consumers in the space longer, leading to increased revenue.
Amusement park-like attractions have long been a defining characteristic of Times Square. Prior to its closure in 2015, the Toys R Us Times Square flagship boasted a 60-foot-tall indoor Ferris wheel.
Retail center activities don't have to be extreme. In family-oriented communities on Long Island, events as simple as kid's crafting activities could draw consumers to a shopping center and keep them there, Craine said.
5. Brookfield comes to Bleecker
Magnolia Bakery’s cameo in “Sex and the City” launched what would become a luxury retail land grab along Bleecker Street in Manhattan, driving up rents and leading to the departure of longtime tenants. A few years later, many retail chains, including Marc Jacobs, which opened several boutiques within the five-block radius around Magnolia’s, pulled up their stakes and left.
In a move that could breathe new life into Bleecker Street’s vacant retail landscape, Brookfield Property Partners acquired seven storefronts across four properties totaling 24K SF. Brookfield plans to use the properties as a testing ground for new retail concepts.
Effective July 1, the City Council also approved raising the commercial rent tax threshold for tenants below 96th Street from $250K to $500K. While this costs NYC revenue, the ruling allows certain small businesses the opportunity to reduce overhead, increase profits and maintain a presence in the neighborhoods they helped to define, Altieri said.
This feature was produced in collaboration between Bisnow Branded Content and Berdon LLP. Bisnow news staff was not involved in the production of this content.