City's retail market is strong, despite faltering economy.

Despite a faltering economy, there is still plenty of retail activity in New York City. As always in soft markets, new categories of retailers appear and lease in pockets where the prices are right and the traffic will sustain their businesses. Right now, we are seeing such local and regional retailers as Modell's, Duane Reade and Mandy Shops expand into the Manhattan market.

Moreover, many of the big box retailers that opened in the mid-1990's, such as Bed, Bath & Beyond, Circuit City and H&M, are still flourishing in this market.

Why do some types of stores prevail in every economy, while others that were strong previously barely hold on or close? Much of it has to do with who is buying their merchandise and the cost of the overhead, especially the rents. Landlords have a critical effect on the fiscal viability of a retail business and the savvy ones opt for keeping their spaces leased. Another benefit is that the surrounding retail areas remain solvent.

The "Line of Value" is essential in retail businesses. The value of a retail space is based upon how much product or services are sold per square foot in that space. A surge in sales or an active market such as the one we enjoyed until a couple of years ago, can often justify a rent hike. But the opposite holds true, too.

The rule of thumb for "Line of Value" says no more than 10 tol2% of a store's sales should be allocated for rent. ]3ut in many shopping districts at this time, retailers are trying to hold onto their businesses with 20-25% of the monthly gross going to the rent -- and even higher in some instances.

We have seen this happen repeatedly in New York City, as well as in the malls throughout the country. But what enables the New York City market to overcome economic odds, escalating rents, etc., is its constant influx of prospective shoppers. People travel to Manhattan from all over the state, as well as Connecticut and New Jersey, to go to museums, theatre, restaurants and shops. In New York City, people walk; elsewhere, people drive.

All of which makes this a unique market for retailers because it is "driven" by an abundance of foot traffic. Let's face it; whenever a New York resident leaves his or her apartment, a retailer has a potential sale.

Market cycles are an inherent part of the economy. Since opening Garrick-Aug nearly thirty years ago, we have experienced four retail downturns: 1975, 1982, 1988 and 2003. I have found that there is generally lag-time between general economic slides and the effect on retail.

This current one was entirely predictable: Between the demise of the dot-coms in the late 1990's and the Wall Street investment banker types spending big dollars, there had to be a ripple effect that would especially have an impact on luxury retail. Of course, exacerbating the lag in the sales of luxury, items was the dramatic cut in tourism due to 9/11 and other contributing factors. In addition, the softening of the stock market has resulted in many people losing income or profits, which discourages spending.

Ironically, not all that much is different between this cycle and any of the others. In 1975, there were 40 million SF of vacant commercial space, primarily office space, in midtown Manhattan. The figures for retail vacancies were less daunting; retail primarily represents the first and second floors and much of the surplus was absorbed at that time. But the vacancy rates are comparable between 1993, which marked the end of the 1988 downturn when there were 2,915 .empty stores in New York City, and today, with the current rate of 2,643 vacancies.

It's also important to realize that at the peak of our boom period in 1999, there were still 1,522 vacant stores in New York.

These are the times when tenants become cautious and landlords more flexible. This is a tenants market for the time being and right now, the landlord's best friend is the retail bank. This sector is expanding almost daily with such new entries into the New York market as Washington Mutual and Commerce Bank. Some of the regional banks, like North Fork, are expanding into the city from the peripheries. Finally, certain bank mergers and acquisitions, such as JP Morgan and Chase or Republic and HSBC, have produced new retail bank outposts.

Then there are the mid-range and value-oriented merchants that re-appear in this kind of market. A decade ago, it was the 99-Cent stores, today there's a Duane Reade or CVS on every corner (that's not already occupied by a retail bank, that is). Other categories that are entering or expanding into the New York City market include clothing accessories, home furnishings and health and fitness. Rule of thumb: whenever there's a recession, the middle class consumer slows its spending.

The retail negotiability factor ("RNF") has jumped up and is enabling retail businesses to function and profit. (The RNF is the difference between the asking and negotiated rent.) As long as landlords remain realistic about the current economy and hold the leases at realistic levels, all sides will do well. We will continue to talk to each other, negotiate the best deals and do our part to keep both sides successful -- and the economy flowing until the cycle swings high again.