Store wars send retail rents into orbit.
Some bean counters are paying upwards of $1,000 per square foot for coveted corner street space and branches in some of the city's most high profile locations, such as the GM Building.
"In each an every neighborhood of New York--uptown, downtown or anywhere around town--retail rents are climbing," said Faith Hope Consolo, chairman of retail leasing and sales at Prudential Douglas Elliman.
"They have reached the highest levels ever across the board, rising an average of 15% and surpassing even last year's impressive numbers.
"This isn't about to cool down any time soon, proving that the market remains stellar as we head into the final quarter of this year."
According to Cushman & Wakefield senior director of retail, Joanne Podell, banks' voracious appetite for street level space, and in particular corner spots, has created virtual bidding wars, something unheard of in the retail sector.
"I've placed a bank branch across the street from one of its own branches because they heard that another bank was also looking at the space," said Podell during Cushman & Wakefield's third quarter review luncheon this week.
"Where there would traditionally be retailers, there are aggressive numbers being offered [by banks] and they are changing the market."
David Green, C&W's executive director of retail, said the situation isn't likely to end any time soon. "Until we have market consolidation, until we have rationale, this translates into happy numbers for landlords. We have Chase taking space in the GM building: the average rents for properties like that are staggering, to the point it excludes other retailers from entering into the game."
According to Richard Hodos, president of Madison HGDC, even high-end retailers such as Tiffany, Coach and Sephora are being floored by the hefty rents.
"These are stores that all do thousands of dollars per square foot," said Hodos, "but they won't pay $1,000 per square foot in rent. They can't afford to pay one third of their gross sales in rent."
David LaPierre, senior vice president at CBRE, thinks respite may be just around the corner and predicts the bank fever could cool sooner rather than later.
"I don't think the banks are done expanding and the competition still remains pretty strong, but their appetite may be a little more reserved than it was," he said.
"I think what you have seen is all of the low hanging fruits picked off and what we are starting to find is that, to get space opportunities, the banks have had to create space and that is a more challenging proposition. There are a lot of ways for them to that, including buying other tenants out. It's a much more complicated way of doing business, but there is not a lot of hanging fruit out there left for them to snatch."
While the banks pause for breath, the city's big brokerages are eagerly awaiting the release of more detailed plans for a 500,000 s/f retail package for the World Trade Center site that they expect will create a retail current flowing over the rest of Lower Manhattan.
"Retail will be the next big story in the recovery of Lower Manahattan," said Ken Krasnow, head of C&W's New York offices, who said the retail corridor will spread from river to river, from the WTC through Fulton Street to South Street Seaport, which was recently bought by General Growth.
According to Consolo, "A plethora of residential conversions has caused a resurgence for retail [in the Financial District] with Century 21 expanding and The New York Sports Club opening a mega fitness center at 225 Varrick Street, getting on board while the opportunity still exists."
LaPierre said the city has a rare opportunity to create a perfect retail landscape. "Unlike the rest of the city, where you are dealing with mostly individual landlords, here you have an agency with a singular focus trying to make the whole project work."
However, he said many firms were holding off on making any kind of space commitment until they see concrete plans.
"A lot of retailers that were there pre-9/11 have aspirations of returning [to the WTC site] then a larger group is waiting for the redevelopment opportunities. When the plans become more tangible, the interest will be enormous."
Hodos believes downtown has reached its tipping point. "We're now seeing a break in the log jam and the retailers that have opened since 9/11 have been very successful.
"Now we are seeing a problem of lack of space and retailers are anxiously awaiting details of both the Port Authority's plans for the WTC site and what General Growth is going to do with South Street Seaport."
Richard K. Futterman's senior managing director, Karen Bellantoni said the Time Warner Center on Columbus Circle had set a precedent for vertical malls that could affect the ultimate designs for the WTC spaces.
"Before the Time Warner Center, I would have said vertical retail was not strong, but Time Warner has proven that retailers can go to the second and third floors and still do strong volume. I think the most desirable retail in lower Manhattan will still be street level, but there are tremendous opportunities [at the site]."
In the short term, however, Bellantoni predicts fashion tenants will continue to keep neighborhoods such as SoHo, 34th Street and the Meatpacking District busy. "Union Square has been a phenomenal market with Wholefoods, Forever 21 and Diesel all operating some of their strongest locations there.
"The Upper West Side is probably going to have the biggest opportunities in the 40s and 50s where there will be a lot of fill-in in Columbus Circle as retailers feed off of the success of the Time Warner Center."
Hodos has a more tempered outlook citing rising gas prices, the nation's climbing deficit, the war in Iraq and the lingering prospects of inflation as big worries for the sector.
"Last month, consumer confidence dipped to a 15 year low," said Hodos. "If consumer spending takes a serious dip, it could send us into a recession.
"There may be some froth in the market and, although I don't see rents crashing, there might be a leveling off in some sub markets like Madison Avenue where rents really can't go much higher."
But David Green says Manhattan is virtually immune to such ills.
He explained, "Investment baking is doing well, hotel occupancy is great, tourism is up. The consumer sentiment and spending numbers that may lead to storm clouds on the horizon aren't applicable here.
"Retailers are gobbling up every space in sight, there are a lot of different groups competing for space for different reasons, demand is driving up prices and supply is diminishing and we don't see any indication that it's about to stop."
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|Title Annotation:||Third Quarter Review|
|Publication:||Real Estate Weekly|
|Date:||Oct 12, 2005|
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