Pushing Empty Store Space As Office Latest Ploy To Weather The Retail Storm
Free-falling rents and record availability in New York City’s retail market is forcing landlords and brokers to think laterally in order to fill their spaces. Flexible lease terms and hefty incentives are all tools they are employing, but some are trying to reimagine and market space for office users, even amid the slew of challenges in that sector.
“We're trying to be as creative as possible. There's a lot of retail spaces out there that can work as office or showroom spaces,” said Paul Popkin, a senior managing director at Lee & Associates, who leases and sells office and retail space in SoHo and Downtown Manhattan. “We noticed, coming out of Covid, a lot of office tenants were a little bit reluctant to be in crowded office buildings and having to use the elevators and be with a lot of people.”
Popkin has two former retail storefronts, a 1,500 SF space on the ground floor of 637 Broadway and a 1K SF spot at 393 Greenwich St., that he is pushing as potential office spaces. He said it has garnered interest from office users who would typically only take a second or third-floor space that are seeing the value of a ground-floor frontage at cheaper rents.
A law firm leasing ground-floor space nearby gave him the idea that it could be a viable option, Popkin said. So far, small law firms have looked at the spaces as an office option, he said, as have design and marketing companies that already have space on higher floors.
“It could be people who just want to be able to look outside and see the street," he said.
People want to be seen, no matter what industry they're in, he added.
"They want people to know where they are."
He expects more brokers marketing retail space will push this as an option, though it is most likely to be prevalent on side streets, where the retail rents are lower and closer to office prices.
There is certainly no shortage of available ground-floor space right now. Leasing volume hit its lowest point in at least the past three years in the second quarter, per CBRE. Just 1.3M SF of retail space was leased in those three months, a 15% drop from the quarter before. Average rent prices went down to $615 per SF, an almost 11% drop from the same time last year.
Meanwhile, many predict that availability will rise when the commercial eviction moratorium lifts at the end of August, as landlords will finally be able to move to throw out tenants who have not been paying rent.
Marcus & Millichap Senior Managing Director Joseph French, who specializes in shopping center and retail sales, said marketing retail as office is just one more trick landlords are trying in an attempt to adapt to tough circumstances.
“It's not the dream, but it's better than nothing,” French said.
In the suburban market, the main use for retail as office is for operations like call centers, he said, because there are few windows and very little build-out demands. In a shopping center, however, it can be tough to get spaces switched over from retail to office, as anchor retail tenants often push back and require variances to their leases.
The issue is often parking — which is why many big retailers railed against gyms in the past. But when they are faced with the alternative of empty stores, he said they can often be convinced.
“The anchors, they’d much rather have people in their stores and their centers being filled," French said. "They would prefer to have you there because you're not going to go someplace else to do your shopping, you're going to shop in the center where you work. There's clearly more flexibility today than there was.”
Flexibility has been the name of the game in recent years when it comes to retail — and that created opportunities for many. As landlords have dropped rents and allowed for more relaxed lease terms, independent retailers have come into the market at a greater clip.
Online operators are taking advantage of the market, too, opening physical stores for the first time thanks to the lower rents. And as sales prices have fallen on retail properties, more retailers have stepped in to buy their own real estate as a way to control their destiny, as Bisnow reported earlier in the year.
Compass Senior Director Howard Aaron said it is worth holding out for a retailer in many cases because he is seeing green shoots after a grim 18 months.
“You have a glut of office space," he said. "The retail market is getting much better and deals are being made, though it all depends on the price.”
Aaron said landlords are attempting to secure the retail rent prices rather than agree to an office tenant at a discount (average asking rent for Manhattan offices was $75.67 per SF in Q2, per CBRE).
“We are creatively thinking about different uses, but a lot of people that closed their stores a year ago are coming into the market at more significant prices," Aaron said. "I think if we had this conversation six or seven months ago, I would feel differently, but there is a flurry of interest. People are renting.”
Robin Abrams, also of Compass, said the era of ground-floor space bargains could be coming to a close.
“As the market picks up and rents begin to climb back toward pre-pandemic levels, likely those alternative uses will no longer be able to compete for street level space,” she wrote in an email. “However, if they see that their sales volumes are dramatically increased with a retail presence, it might make sense for them to remain up front and center, versus going off the street, into buildings without the visibility that makes them ‘top of mind’ for passers by.”
Still, Adam Segal, the CEO of Cove, a Washington, D.C.-based workspace company, thinks on the whole it is too much of a heavy lift to put offices in retail spaces except in some circumstances. Cove was founded as a network of "neighborhood coworking" in retail spaces around D.C. before pivoting to office software.
“It's too much of an operational headache to be in a retail space from an office perspective, unless you really have a brand value creation where you're buying the brand component of people seeing your brand," he said. "[It's worthwhile] if it's office work but you want to be, you know, kind of a billboard for your company, which is not traditionally associated with the office or putting the office worker on display in that way.”