Creating retail strategies where none exist.

Limited prime retail space and escalating real estate values. That's the initial market outlook for retailers seeking the best locations in New York City as we approach 2000. The key question: Where are the market opportunities for retailers who are trying to enter New York or expand their existing operations in the City?

Right now, available space in New York City, and the Manhattan market in particular, is at an all-time low. Retailers in search of good sites in Manhattan are confronting limited site selection opportunities. This heightened search for prime sites and the lack of retail space product have created an unprecedented scenario for real estate owners and brokers, both private and institutional, to apply new strategies for creating space. Innovative real estate professionals who see the opportunity are responding with a variety of strategies.

Existing Tenant Buyouts and Relocations Offer Up New Space

Tenant buyouts and tenant relocations are fast becoming the norm for responding to new retail tenant requirements for prime Manhattan space. Eager retailers requiring select locations as part of local and national roll-out strategies are identifying sites and pressing real estate owners and brokers to "work out" the details.

Smart owners will pursue credit-worthy tenants who may be the better long-term option in a fast changing retail real estate market.

In some cases, owners are buying out tenants with direct cash outlays; in other instances, owners are offering to downsize or relocate an existing tenant in that location to fulfill a new tenant's requirements; or, in other situations, an incoming tenant will directly purchase an existing tenant's position in that location. The finances of relocation consider various factors, focusing primarily on the strength of the tenant's brand name and its financial history.

Prudent owners are continuing to evaluate the sustainability of an existing tenant in light of increased demand for prime space. As a consequence, if credit-worthy retailers target the right locations, they might find them-selves with an opportunity. Savvy owners are considering deals that would never have come to the table in another economic environment.

New "Main Streets" Emerge

National and New York retailers are migrating from Manhattan "main streets" like Fifth Avenue and Madison Avenue, where leasing values are exceeding $400 to $500 per square-foot, to revitalized secondary "main streets" in outlying areas of Manhattan, such as the Meat Packing District or the Lower East Side, as well as Brooklyn, Queens and The Bronx.

The passage is transforming neighborhood shopping centers into full-scale community-based power centers. Big box retailers see the obvious opportunity in terms of increased space at lower rates. Smaller retailers are capturing merchandising opportunities that are supported by the convenience of locating flagship names in under-serviced retail communities.

Smart retailers who fully understand their demographic draw are creating unique merchandising experiences in sites and centers not traditionally viewed as "prime space." That marketing foresight is converting secondary and tertiary retail space markets into "top attraction" destination sites that are now commanding higher and more stable rents. While deals are still available, these new "Main Streets" are fast becoming fully-leased at strong but competitive market rates.

Newly Constructed Developments: Another Solution to Limited Space

With space at a premium, real estate professionals are working hand-in-hand with retailers to identify prospective sites to build new centers that will house an anchor retailer, as well as attract other complimentary retailers to create new community centers outside of the Manhattan market.

The decision to relocate for these retailers is usually based on their brand's history in community markets and their ability to merchandise at discounted prices. Community-based centers are emerging as a viable response to the growing market demand for conveniently-located brand name retailers, especially in a congested marketplace like New York.

Adaptive Re-use Offers New Space Options

Retailers' operational space needs are also changing as a result of Internet and catalogue sales, and a new category of space use in New York is emerging. In some retail sectors, some product providers are requiring less prime retail space, but need additional support space that will serve as a fulfillment center to process online and telephone orders.

The need for adaptive re-use of vacant or low-priced industrial space and dormant manufacturing space is creating still another market opportunity for viable retail space development. These creative re-uses in nonprime retail areas may be an important, cost-effective solution for meeting those emerging needs and retaining those retailers in New York.

How are these trends impacting on the retail market? From the retailer's perspective, the search to identify and lease good locations within the Greater New York area will require greater tenacity and creativity with respect to lease negotiations for previously unavailable sites. From the development side, the retail real estate story for this year will end on a strong note, and produce greater opportunity for increasing profits as a result of better site management and creative re-use of existing product.

Overall, the retail real estate market appears to be a strong one, despite cautions from Wall Street with respect to competition from online retailers. Owners and brokerage professionals who understand the retail sector and real estate market cycles may reverse a low vacancy market into a win-win situation for both retailers and owners.