Plummeting Rents Open The Door For A New Generation Of Retailers
At first, brothers Frank and Shawn Gorelik were fixing guitars as a side hustle out of the back of their two Upper East Side hardware shops. But as the coronavirus pandemic wore on through 2020, guitar sales soared with the quarantine-weary searching for something to fill their time at home. The Goreliks' guitar repair demands began to pick up so much they realized that side business needed its own location.
By November, New York City retail rents had fallen so far in tenants’ favor, they considered it time to strike and find a brick-and-mortar space.
“It seemed like everything was half-price,” Frank Gorelik said in an interview. “The key for us is no overheads and no credit. We don’t want to smother ourselves.”
They had a budget for rent of between $3K and $5K per month, and they stuck to it. The space they eventually rented, at 316 East 84th St., was much bigger than they had hoped, and already built out for the official opening last November. Their store, Brothers Guitar Shop, is the only one of its kind in the neighborhood and they run jam sessions and classes in addition to sales and repairs.
“In New York, the retail experience and brick-and-mortar is still really relevant,” Shawn Gorelik said. “The Upper East Side is such a communal neighborhood, and brick-and-mortar allows for convenience and a personal touch.”
In a brutalized retail market, green shoots are beginning to emerge as some tenants who had been locked out of the market have begun making the most of falling rents and flexible landlords. The asking rents for retail spaces in Manhattan’s top corridors dropped 10% last quarter from a year earlier, according to CBRE. Leasing velocity fell for the sixth consecutive quarter, dropping below 2.1M SF for the first time in four years.
Rising cases at the beginning of winter and the closure of indoor dining threw more cold water on the market, but rays of optimism are beginning to shine through in the form of vaccines and the approach of spring. The tenant-friendly market is paving the way for new businesses to get their foot in the door.
“It’s bittersweet, the old tenant has lost his shirt, and the new tenant is coming and they are grabbing the deals,” said Compass Senior Director Howard Aaron, who recently arranged for a deal for a new café and wine bar in Hell's Kitchen.
“I see things changing. And a lot of mom-and-pops are running in the city … There are a lot of people running around and making very low offers, which are not necessarily accepted," Aaron said. "But the landlords are beginning to decide, [and think] if things have changed, we have to change our mindset and change our numbers.”
The Goreliks are hoping for something of a retail renaissance in the city, they said, as more mom-and-pop operators can afford to get their foot in the door as landlords desperate for income drop rents to their lowest in years. With the pandemic accelerating shifting retail trends, new types of stores can proliferate in the vast vacancy.
“I definitely think it's gonna be a renaissance,” Frank Gorelik said. "A lot of people especially now they have some time, they’ve saved a bit little bit of money, they realize that they don't need to go to work for their full-time job. A lot of people are working from home, they can do that anywhere ... You can turn your side hustle into a real hustle."
It’s not just independent retailers seizing on the new opportunity. In SoHo, once one of the priciest locations going, Chanel, Amiri and La Perla have all signed deals in the last few months, per Bloomberg, as widespread store vacancies pushed landlords to drop their asking rents by as much as 15%. The once-glorious Fifth and Madison avenues are plagued with empty spaces too.
On Fifth, rents were more than $3,900 per SF back in 2018, per the Real Estate Board of New York. Some have speculated that will plunge beneath $1K for the first time in 20 years.
“I knew the market was declining, and it fell off a cliff post-COVID, so this was an opportunity not to settle for side street retail but enter prime markets,” said Brik + Clik CEO Hemant Chavan.
Brik + Clik brings online stores into physical retail and already has a space in the World Trade Center Oculus and in San Francisco. Right now, he said he is negotiating to take space on Fifth Avenue and is looking at spots in SoHo.
"We looked at deals in August 2019, when the concept was first formulated, and some of those spaces are still in the market," he said. "And these are prime spaces."
Many of the deals Chavan is looking at are percentage rent deals for at least the first year and are more likely to be short-term — all points that favor tenants.
"The balance has shifted," he said.
That creative deal-making is dominating the market, CBRE Executive Vice President Annette Healey said. Landlords are more likely to agree to a low base and a percentage of the sales for the first two years — though that is generally only something institutional landlords can manage, she added.
The most active tenants in the market are health care offerings, she said, though the “next generation” of food and beverage is starting to emerge.
“People are getting really geared up for when the vaccines take hold, people are so cooped up … They will just be so eager to not be in their home,” she said. “If you sign a lease in the spring, you are opening late summer, early fall, you may catch that wave perfectly."
That is what Robbie Lecchino is hoping will happen at his new café, All the King's Horses, at 521 East 12th St. He opened the doors in October after moving from Australia to the city three days before lockdown, with the goal of helping another Australian hospitality company set up a new operation.
The company canned the idea, so Lecchino subleased the space from them on a percentage rent deal for 10 years.
“I had everyone screaming at me to come home," he said. "But, what a fucking opportunity" to move forward with his own operation, which is largely grab-and-go coffee, pastries and soup.
“It did make me question it, but my gut — if I hadn’t been living in New York prior years, I probably would’ve packed up and gone, but I knew how resilient the city is," he said. "That’s the only thing that’s got me over, is that I’ve learned to be resilient.”
In Hell’s Kitchen, Michael Garcia has a similar approach. He opened his Italian restaurant, La Bella Valentina, on 51st Street between Eighth and Ninth avenues late last month, in the depths of winter, with no option for indoor dining, purely to start generating name recognition in the neighborhood.
He was previously a server for the restaurant's predecessor, but he bought the business with a few other employees in late 2019 with plans to launch last April. With the help of an understanding landlord, who he said has given them a break on the rent, they were able to hit pause without abandoning the business.
“We are waiting for Broadway to open and for the tourists to return,” he said. “We are confident with hard work we will make it happen … but we knew we wouldn’t make money right off the bat.”
On the whole, retailers and landlords are all over the map when it comes to reaching agreements. Multiple tenants and building owners are suing each other over leases and unpaid rents, but others say they have been able to reach agreements that work for both sides.
“We are working with retailers, where appropriate and depending on the circumstances that they are facing, whether that be free rent or the deferment of rent, and offering help and support,” Rudin Management Vice President Nick Martin said.
At the company’s building at the corner of Madison Avenue and 26th Street, chef Mark Strausman, who previously ran the bistro Freds at now-shuttered Barneys New York, opened his new restaurant Mark’s Off Madison a week before indoor dining was paused by the state in November. Gov. Andrew Cuomo has since announced indoor dining at 25% capacity as of Friday.
“I do think you are going to have huge pent-up demand for everyone to be out and back,” Martin said. "Everything from the social nature of the office to going back to restaurants and bars.”
CORRECTION, FEB. 11, 11 A.M. ET: Annette Healey referred to retailers opening in late summer, not late September. This story has been updated.