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For Retailers In 2020, It's 'Bluebirds, Sunshine And Rainbows.' For Landlords, It's 'Storm Clouds'

ICSC New York expo in 2019

This year has not been kind to retail in New York City.

2019 kicked off with the closure of the iconic Lord & Taylor building on Fifth Avenue, and multiple big-name brands followed by closing their stores along the city’s most popular shopping strips. In August, Barney’s — long a symbol of Manhattan consumer culture — went bankrupt.

Meanwhile, asking rents have continued to slide in major shopping corridors as the city grapples with double the amount of vacant retail space it had last year.

Still, a sense of optimism, though cautious, realistic optimism, permeated the International Council of Shopping Centers’ annual New York expo last week. On the floor of the conference, real estate players pointed to increased transactions, landlords who are more accepting of market realities and a slew of new kinds of retailers who are willing to take physical space.

Aurora principal Jared Epstein

“The mood and the climate of the show had gotten worse and worse,” said Jared Epstein, a principal at Aurora Capital, of the past few years of retail tumult. “It went from, you couldn’t move in the Javits Center, to you, like, you could throw a bowling ball down a hallway and not hit anyone. That’s how dead it was.”

But with the tectonic shifts in retail now starting to fall into place, the gloom is lifting, Epstein said. His company is developing retail in the Meatpacking District of the city. He pointed to a lineup of digitally native brands that have built up over the last few years that now realize they need physical stores to hit their profit goals.

“It’s optimism met with deal flow,” he said from the floor of the expo. 

Certainly, in New York City the dominant trend of 2019 has been sliding rents, as prices have begun to come down from stratospheric levels.

Out of the 17 major corridors tracked by the Real Estate Board of New York, 11 saw year-over-year decreases in asking rent in 2019, according to REBNY's fall Manhattan retail report. Overall, average asking rents across the borough fell by almost 6% to hit $756 per SF this summer, according to CBRE, the eighth quarter in a row of declines.

Upper Madison Avenue’s average fell 16% to hit $954 per SF, marking the first time rents in that stretch have been below $1K per SF in eight years.

“If you look around this room, most of the people on the landlord side have storm clouds over their heads and it’s raining on their parade," said JLL Vice Chairman Michael Hirschfeld, whose clients include British toy store Hamleys and Aqua Restaurant Group. "For those dedicated to tenant rep, it’s bluebirds, sunshine and rainbows."

Hirschfeld said right now is the best real estate market for retailers he has seen in the last decade, and suggested that there are a significant number of new retailers brewing in China that will be pushing to the U.S. in the coming years.

“We are not negotiating a single deal in New York City that does not contain an enormous amount of tenant allowance, oftentimes equal to a year’s rent, and others that are more aggressive than that,” he said. “It’s what you need to do.”

Cushman & Wakefield's Brandon Singer

JLL Retail Brokerage Vice Chairman Patrick Smith, who represents owner clients like Durst Organization, Tishman Realty and Nuveen, said landlords are adjusting their offerings to compete. That includes incentives like helping with the tenant build-out.

“The idea of putting up a 'for-lease' sign and having the tenants figure it out is over,” Smith said, adding that retailers that have been delaying pulling the trigger on deals for the past two years are starting to transact, generating greater optimism around the show.

“There is a lot of growth in discount, food and grocery, and a lot of fitness,’ he said. "The sole outlier is apparel, which is still evolving into what it is going to be."

Edison Properties Senior Vice President of Leasing Lenny Lazzarino, whose company owns office, storage and retail properties in New York City, said the tenant incentives retailers ask for to start up are table stakes these days for landlords like him.

“[The market] ranges anywhere from a small tenant that doesn't have credit at, say $25 per SF, to a traditional, true credit tenant can be as much as $100 per SF,” he told Bisnow. “To get the kind of rent you want and the right tenant, you have to put that into the game.”

Cushman & Wakefield Executive Director Brandon Singer described talking to landlords and tenants, as a retail broker, to be a tale of two cities.

“On one phone call it’s like the end of the world depressing, on another phone call it’s, 'take new stores,’” he said.

His clients include Showfields, a physical space in Manhattan that leases small parts to specialty online retailers, and Fithouse, a boutique gym that started leasing in the city last year.

He said there is a whole host of new retailers who are taking space — and they all are able to do it because pricing is sliding.

“We’re always optimistic, that’s what we do,” he said. "But I actually am, no bullshit."

Newmark Knight Frank Vice Chairman Ariel Schuster

There were some 500 exhibitors at ICSC New York this year, an event spokesperson said. With the entire industry grappling with widespread changes, complexities and shifting consumer demands, the expo doubled down on content — adding more speakers and programming than last year.

In total, were some 62 informational sessions and more than 170 speakers and panelists.

“Our job as retail brokers is far more important than it was five or 10 years ago. Things are getting far more complex,” Newmark Knight Frank Vice Chairman Ariel Schuster said. “Deal structures are different, there is a lot more strategy and consulting.”

Avison Young Tri-State Head of Investment Sales James Nelson

Putting aside the optimism, multiple players suggested the political climate in New York City — specifically a proposed city council bill that would introduce commercial rent stabilization — may cause friction for retail moving into 2020.

On the other hand, some suggested this year's residential rent reform changes could be pushing traditional multifamily investors toward retail properties.

“A lot of investors, especially 1031 [exchange investors], are now looking at the [retail] asset class,” Avison Young Head of Tri-State investment sales James Nelson said. “[Retail] has been hit so hard, the rents have been, in some cases cut in half — and some cases by a third.”

Investors now have the benefit of buying with an ability to reset rents.

“It’s certainly the contrarian play right now," he said.

CORRECTION, DEC. 16, 10:00 A.M. ET: Patrick Smith is a vice chairman at JLL. An earlier version of this story misstated his position. This story has been updated.