Karen Bellantoni, a vice chairman with Newmark with more than 30 years of retail property brokerage and merchandising experience, said retail leasing activities in New York these days are the most “vigorous” since the 1990s. And she's not the only one who's surprised about the current state of retail in the nation's biggest commercial real estate market.
“I’ve never been busier,” Bellantoni, who represents both landlords and tenants in New York and other urban markets, said in an interview at the 2022 ICSC conference in Las Vegas this week. “The last four months has surprised me. All of a sudden, it’s as if the lid was lifted off the bottle. Everything started to flow. It just seems the switch just turned on. I would have thought the switch would have turned on in ’23 instead.”
As New York seeks to bounce back from the fallout of the pandemic, some Big Apple brokers at the ICSC event said that while they watch the effects of rising gasoline prices and other inflationary pressures, higher interest rates, supply chain and labor shortage concerns, and whether the United States will possibly plunge into a recession, market uncertainties haven’t cut retail leasing demand, especially in hot neighborhoods including Manhattan’s SoHo and Williamsburg in Brooklyn.
“Good things happen to good real estate, and it doesn’t matter whether you are in a good or bad market,” Kenneth Schuckman, president of Schuckman Realty, said in an interview at ICSC, recalling the words a top New York developer once told him. Broadway in SoHo “may have a dip, but it’s going to come roaring back, same with in Times Square. Best location will get re-leased. New York will come roaring back faster than markets outside of New York. You can’t bet against New York.”
Part of the surprise is that the office market, which has traditionally brought retail customers who commute into the city and who shop near their workplaces, is still struggling as workers slowly return. But in a sign of the city’s appeal, 22 retail brands looking to open their first brick-and-mortar Manhattan locations leased over 184,000 square feet of new deals in the first quarter, representing 35.3% of all retail transactions, according to a CBRE report.
For instance, Michelin-starred Taiwanese restaurant Din Tai Fung signed a 15-year, 26,400-square-foot lease just north of Times Square for its first East Coast location, while California-based Remedy Place, billed as the world’s first social wellness club that offers services including cryotherapy and vitamin injection, signed a lease in the Flatiron district for its first New York location and its second after its West Hollywood, California, flagship. Celebrity chef Todd English, meanwhile, signed a lease at 15 Park Row in lower Manhattan to open a restaurant, nightclub and lounge to mark his return to New York since his namesake food hall closed during the pandemic.
Overall, leasing volume totaled 520,832 square feet in the first quarter, up 15% from a year earlier, and included three deals over 25,000 square feet each, according to a Newmark report. Leases were signed for space that had been available for several years.
Besides leases by tenants opening their first New York locations, luxury retail brands and high-end restaurants that had been inactive during the pandemic also signed “significant deals” last quarter, according to Newmark. That followed Manhattan’s annual leasing volume recovering last year to just 80,000 square feet, or 2.9%, short of the 2019 level pre-pandemic, Newmark said.
“We’ve seen activities start to pick up,” Keith DeCoster, director of market data and policy for the trade group Real Estate Board of New York, said in an interview. Concepts with “unique products and immersive experiential retail are what customers are responding to. … People want to go out, whether it’s to a gym or dining or to a club. There’s no digital spa treatment that I know of. You can’t replicate and reproduce that over the internet. That was the trend for landlords pre-pandemic. That’s also what landlords and retailers are investing in post-pandemic.”
Available Space Shrinks
Manhattan’s retail availability rates in 10 out of 11 neighborhoods have declined in the first quarter from a year earlier, continuing “its positive trajectory,” according to a Cushman & Wakefield report. While many leasing activities have shown residential markets, including Manhattan’s Upper East Side and Upper West Side and Brooklyn’s Williamsburg, outpacing tourism- and office worker-dependent areas around Times Square and Grand Central Terminal, those hard-hit neighborhoods are also showing improvements as visitors return and corporate headquarters welcome back employees.
Cushman’s first-quarter Manhattan retail report, for instance, pointed to availability for retail space in prime luxury corridors, including Upper Fifth Avenue, Madison Avenue and SoHo, has dipped far below their pre-pandemic inventory levels and are down 4% since the first quarter of 2020. SoHo’s availability has fallen below 20% for the first time since the third quarter of 2015.
“As soon as mask mandates all came off, it was like a light switch,” Davie Berke, executive vice president of JLL’s retail brokerage, told CoStar News at ICSC. “Every space we are working on in SoHo has active tenants behind bidding on it. The market is coming back. The availability rate is dropping.”
In SoHo, for instance, the availability rate on Broadway pre-pandemic was about 38% to 40%, Berke said, and by year-end, he expects that rate may fall below 15%. He said as more international tourists start to return, areas surrounding Times Square and Fifth Avenue that are heavily dependent on visitors will also follow suit in leasing activity.
“In New York, there’s been tremendous amount of absorption of retail space,” Brian Katz, chief executive at retail brokerage Katz & Associates, told CoStar News, referring to a key metric of more space being leased than vacated. “Our guys in New York are touring actively all over New York in five boroughs.”
Foot Traffic Returns
The sense of optimism among brokers comes along with several positive indicators regarding New York, once the U.S. epicenter of COVID-19. Residential pricing, amid rising demand, has topped the pre-COVID level, and many areas are attracting crowds again. For instance, Times Square saw foot traffic recover to just 9% shy of pre-pandemic levels on its best day.
New York’s place as a retail and culture mecca luring brands of all stripes wanting to make their mark also proves the city isn’t going out of fashion even as retailers such as Victoria’s Secret and The Children’s Place reduced their footprint in Manhattan, and chains such as sporting goods retailer Modell’s shuttered all their brick-and-mortar locations.
“New York city is vibrant again,” Brandon Singer, founder and chief executive of brokerage firm Retail by Mona, said in an ICSC interview. “COVID was the knockout punch for a lot of brands that should have gone. They are all replaced by new-age companies [for] new-age consumers. As much as retail changed, it’s the way people shop that’s changed. There’s a disruptor out there. I used to go to LensCrafters. Now I go to Warby Parker. It’s just modernized.”
Indeed, leasing activities are showing the new face of New York’s retail scene, where brands that are expanding in the city include upscale athleisure or performance wear sellers including Alo and Vuori that are popular with millennial shoppers. Many online retailers, meanwhile, are taking up the same playbook employed by Warby Parker and Allbirds in expanding their physical store footprint as a key part of their growth strategy.
“Digital native brands are a huge part of the brands that are expanding” in New York, Steven Soutendijk, executive managing director at Cushman & Wakefield, told CoStar News. “Every single one of them recognized the importance of brick and mortar. There are so many ads online. Nothing can stand out.”
Besides luxury, other sectors that are expanding include fast casual concepts such as Sweetgreen and Cava, and small-format coffee shops, brokers said. Singer at Retail by Mona, for instance, said he’s helping to find spots to help grow the Blank Street coffee chain that opened during the pandemic. He’s also working on deals for cannabis dispensaries and cryptocurrency firms eyeing physical locations to use as educational showrooms to raise awareness about their industries.
“Cannabis is on fire,” Singer said. “We get so many people reaching out for cannabis.”
Ariel Schuster, vice chairman of Newmark retail, said in an interview at ICSC that the leasing performance last year from his New York retail team was 40% better than the 2019 level. He expects the sales performance this year to be “way above last year.”
“All of a sudden there’s an amazing amount of demand,” Schuster told CoStar.
Positive Signs, But Caution
Madison Avenue, which had seen many luxury stores shuttered during the pandemic, had the most significant quarterly and annual decrease in availability, down by 11.3% as retailers such as Valentino and Calvin Klein took advantage of discounted pricing for prime spaces, Cushman said in its report.
The availability rate on the stretch of Fifth Avenue between 49th and 60th streets is at the market’s lowest level since the first quarter of 2018, driven by Swarovski signing a 13,500-square-foot lease at 680 Fifth Avenue, according to Cushman.
All the positive sentiment aside, New York’s retail brokers are mindful of many market uncertainties that may dent both consumer and investor sentiment.
“The jury is out,” on what's coming economically, Singer told CoStar News. “Up until now, the stock market was doing very well. Luxury and luxury goods have been performing well. We’ll see what happens with inflation and the talk of recession.”
Brokers said they are also factoring in labor and supply chain shortages affecting critical building issues such as not being able to get an elevator put in for a two-level retail space in time, for instance, when they negotiate leases.
“Those are real headwinds,” Schuster said.
Meanwhile, while the luxury sector may be going strong in New York, Schuckman, whose firm is helping German discount grocer Lidl scour sites for its plan to open 100 stores in the market in five years, said higher food costs and gasoline prices have already led to a change in consumer behavior.
Inflation is going to “start hurting companies that don’t have that value proposition,” he told CoStar. “People start to change their behavior. There’s a transition of customers that happen in an inflationary environment.”