Building owners review retail leases to maximize value.

As Manhattan continues a period of unprecedented growth, local, national and international retailers are clamoring to find space that will help them further establish their brands and take advantage of a booming market.

Not surprisingly, owners of office and residential properties have begun paying more attention to the retail space in their buildings, positioning the spaces to attract higher rents. Now more than ever, retail space is an asset with additional potential.

The Manhattan retail market is buzzing as retailers seek to open a New York store. While more new space is becoming available, the overall retail market boasted a vacancy rate of just 3.6% as of March 2007, according to IGDNY Inc. The city saw a 10.4% drop in overall available retail space since January 2007.

Recent representative retail deals include Gucci taking 46,000 s/f at 725 Fifth Avenue, Vera Wang renting 2,500 s/f at 158 Mercer Street, China Grill renewing 9,000 s/f at 60 West 53rd Street, Walgreens signing for 10,873 s/f at 292 First Avenue, and Food Emporium leasing 6,500 s/f at 42 West 39th Street.

In Midtown South, retail space vacancies have fallen nearly 22% since January 2007; while in Midtown, space availability has remained virtually unchanged. Downtown has seen its retail space availability increase, rising a bit more than 7% since January 2007. More space appears to be coming on the market, however, in all three submarkets.

The heavy interest in Manhattan retail space has fueled a surge in average retail rental rates, with rents on Madison Avenue as high as $1,000 psf or more for prime spaces. Even Downtown stores are leasing for rates of as much as $200 psf on Broadway, an amount approaching rents achieved by owners of retail space around Grand Central Terminal and Rockefeller Center.

Stellar rents have prompted owners to rethink their retail strategy to ensure they are maximizing value. However, as owners reevaluate their approach, they must be careful to find the most appropriate retailers for their buildings, and they must ensure their leases contain language that protects them if conditions change.

For those owners considering a restaurant or food retailer as a tenant, food preparation can be a major issue. The lease must address the issue of whether food can be prepared on site, and whether the establishment will offer seating. If these issues are not clarified, an owner may wind up facing responsibility for problems ranging from smoke exhaust and trash management to fire, building and health department regulations.

Owners must also balance the different categories of tenants leasing space in their buildings, carefully crafting contracts that ensure stores do not sell similar products and create counter-productive competition. This is not only important for the tenant, it is in the owner's best interest to ensure that its tenants remain profitable and able to pay rent. By adding language to the lease that bars competing products or retailers, the owner can maintain a peach among tenants and avoid the possibility of expensive litigation.

As the retail boom continues, owners will be faced with increasing options, many of which create unforeseen problems. It is an ideal time to reassess leases and to create a forward-looking plan to maximize value while preventing possible conflict.

BY JAMIE HEIBERGER-JACOBSEN FOUNDING PARTNER AND PRESIDENT HEIBERGER & ASSOCIATES PC