How SoHo And Hudson Yards Tell The Story Of Manhattan Retail's Present And Future
Retail asking rents in corridors across Manhattan saw a year-over-year 18% drop in the fourth quarter, according to CBRE, but other indicators signal that a new day could be dawning for the sector.
Over the course of 2017, the decline in average asking rent across the 16 corridors CBRE tracks for its market reports slowed down noticeably in Q4, and leasing activity picked up. While no one is throwing a party just yet, it does seem to some in the industry that tenants are finally seeing the deals they need to add locations in the market. In other words, the market might be ready to hit bottom.
When retail rents were approaching their peak in 2014, the amount tenants were spending on rent was accelerating far faster than the amount consumers were spending on those companies’ products — a sure indicator that the trend was unsustainable, according to CBRE Research Director Nicole LaRusso.
The downward spiral in rents was a particularly harsh regression to the mean, made to seem more cataclysmic by the growing influence of e-commerce on consumer behavior and widespread retailer bankruptcies and store closures.
“As rents are inching back down, [consumer] spending continues to trend up, and they’re approaching alignment,” LaRusso said. “As the two lines come closer, it tells us that we could be getting close [to the bottom].”
Leasing activity has been increasing as a result of tenants and landlords alike being more open to shorter-term leases and more creative arrangements. Not every landlord can afford to shorten terms, but those that can swing it are finding tenants who want to dip their toes back in the water.
“If a landlord has a vacancy and a tenant wants to test out a space without a 10-year deal, we’re advising landlords to let them test it out for a shorter lease,” RKF Vice Chairman Ariel Schuster said.
The SoHo Experiments
Nowhere is this more true than SoHo, where rents have dropped 30% from their peak. Yet it was the most active corridor in terms of leasing activity in 2017, according to CBRE. Though its sheer size means that plenty of availabilities are still out there, it is the top choice for new-to-market tenants that want to test out a first brick-and-mortar location, a new experiential concept or even a pop-up shop.
“SoHo has seen a lot of activity, because the internet has changed the way retailers look at real estate,” Schuster said. “If a retailer came into the U.S. from Asia five-10 years ago, they would put in 100 stores. And what’s happening now is that those retailers only need 10-15 stores, without needing to be in every top mall, or on every street. But where they need to be is a place like SoHo.”
SoHo has the fairly unique ability to draw both tourists and native New Yorkers to shop, thanks to its diverse mix of price points and demographic appeal. As rents have dropped, and with short-term leases more available than ever, retailers have a lower barrier to entry and are coming off the sidelines, said Cushman & Wakefield Executive Managing Director of Retail Services Steven Soutendijk, who named SoHo the premier neighborhood for pop-up stores.
“Tenants who have given it a go on a pop-up in SoHo are seeing success, and I believe that they will take more long-term leases in 2018,” Soutendijk said. “You look at a brand like [online shoe retailer] Allbirds, which opened a pop-up store on Prince Street, and products are flying off the shelves. So they’ve stayed longer than they thought, and if they don’t stay there long term, they’ll do a deal somewhere else.”
Though short-term leases certainly have their drawbacks — it can be harder for landlords to sell buildings without long-term tenants, the tenants themselves may not want to invest as much in the space — but the value in getting customers engaged and activating spaces seems to be outweighing such concerns for both sides.
One area that is making long-term plans is one that has not even become a submarket tracked by major research yet: Hudson Yards. The new district’s unprecedented amount of construction means that thousands of people will be working and living where there is not yet a retail scene to speak of.
“Residential and office development is pretty dramatic in that area, as well as tourist and cultural traffic,” LaRusso said. “You need all of those factors to attract retail, and all of those needles are pointing upward, so that’s going to attract the attention of retailers.”
The Shops and Restaurants at Hudson Yards by Related Cos. and Oxford Property Group, filled with a massive Neiman Marcus and eateries from celebrity chefs, is a 720K SF bet that Hudson Yards can become a serious retail contender.
“We might look at 2019, when [The Shops and Restaurants] delivers, as the first year we start tracking stats there,” Soutendijk said. “And it might start just with that center, but it could turn into that 34th Street corridor. There’s just going to be a ton of people there where none existed, and that will turn into a dramatic run-up on rents.”
The area is in such early days that no one has a good idea of where rents could ultimately land, or where in the Manhattan retail pecking order it could wind up. It does not have the central location that keeps Times Square rents in the stratosphere, but from what the area was five years ago, there is nowhere to go but up.
“Rents on 10th Avenue are $75/SF, and if it turns into $200/SF, that will be a dramatic change, but there are a lot of corridors [in Manhattan] that have that level of rent,” Soutendijk said. “I don’t think it will turn into Madison Avenue, but I do expect it to be successful.”
Since Hudson Yards is being built from whole cloth, it cannot yet be considered part of retail trends in Manhattan on the whole, where construction in retail has slowed to a crawl. Combined with the decrease in rents and boost in activity, it is beginning to look more cyclical than apocalyptic in Manhattan.
“At the same time that retailers were figuring out how to deal with Amazon, they saw record rents which made it difficult for retailers to stay in spaces,” Soutendijk said. “It was a bit of a perfect storm.”