The 'malling' of New York City continues.

The face of New York retailing is undergoing a dramatic change.

Within the last few years, we have been experiencing an influx of national chain stores - retailers who grew up and made their home in suburban malls. Today these stores are displacing the neighborhood merchants that, together with department stores, have long been the foundation of New York retailing.

This is a new phenomenon in New York City, and has been called the "malling of New York."

These stores - often larger than traditional New York City storefronts - can range in size from 2,000 to 30,000 square feet, and more. They are assembling the space they need in several ways: By combining several storefronts into one large space; moving into large buildings that previously were used for other purposes - and by taking upper floor and basement space to develop impromptu multi-level mall-type layouts. The phenomena is referred to as vertical retailing.

Thus we see stores such as The Gap and Barnes & Noble because of their requirement for larger selling space, not only spreading their wings horizontally, but climbing up - or down - buildings from street level. Here again we see a departure stores. The smaller retailers were fixed in from traditional New York City retailing practice. Merchants in the City had left multi-story retailing to the department their belief that they couldn't entice their customers to shop off the main floor.

But, the national chains that flourished in the multi-level suburban malls are not intimidated by second floor or lower level space. In fact, these retailers are bringing the multi-floor mall concept with them into the City.

An example is 611 Sixth Avenue, which was opened up to retail by Bed, Bath and Beyond, a housewares discounter. That store has been enjoying strong sales and attracted another low margin national retailer to the site, Filene's Basement, which, appropriately, moved downstairs. Now TJ Maxx, a clothing discounter, has just opened on the floor above Bed, Bath and Beyond. The public has access to each of these stores from an attractive center lobby with escalators and elevators. Storefront display space is shared, and visibility is enhanced by flags that can be viewed from a distance. Thus, we have the birth of an inner-city mini-mall.

Real estate brokers and property owners now recognize this phenomenon. Brokers who represent one or more retailers who need larger space, are now reviewing multi-floor space at locations where only the street level was considered suitable a few years ago. In negotiating leases for these properties they are creating "blended rents" that factor in different rentals that have traditionally been asked for each of the different floors.

For example, a. large discounter seeks to move into a storefront and needs the basement for additional selling space. First-floor space might be offered at $125 a square foot and the basement at $35 a square foot. In this case, the broker tries to negotiate a blended rent for the entire area of, say, $85 to $95 per square foot.

As previously less desirable basement space becomes much more attractive to the market in cases like this, look for prices to climb out of the cellar (forgive the pun).

Even in areas of Manhattan known for upscale retailing, the national chain stores are shouldering in and displacing small shops. A good example being Ann Taylor on Madison Avenue.

Parts of 57th Street, near Fifth Avenue, have been transformed by the opening of corporate-sponsored "theme stores" such as those of Warner Brothers and the soon robe opened Disney store, the kind of large-volume retailers that used to be found only in suburban shopping malls. Niketown is replacing the former Bonwit Teller/Galleries Lafayette and is slated to open in the Fall of 1996.

Third Avenue from 60th to 72nd streets has become "mall city" with the recent emergence of large stores operated by Eddie Bauer, The Gap, Ann Taylor, Country Road, Talbot's, The Limited and Dockers.

Most of the national chains are now seeking a presence in New York City, despite the fierce competition. In the drug and health and beauty aid store category, for instance, Rite-Aid, which recently bought out Pathmark's Drugs and a number of Sloan's leases, is now going head-to-head with the long-established Duane Reade chain.

National retailers, having saturated the suburbs, have come to realize that New York City is where the shoppers are. Observers have long believed that New York City was underserved by retailers, that the opportunities existed for well-managed retailers to be highly successful in the City.

They saw savvy merchants such as Sport's Authority, ABC Carpets, Burlington Coat and others attract shoppers not only from the City, but from the suburbs and from among the many foreign visitors.

They saw that these operations established themselves as strong attractions, drawing not only customers but other retailers to their neighborhood, creating retail centers in areas which had not previously been shopping destinations. In a relatively short time, a number of new areas of the city, outside of Midtown, are emerging as shopping centers, such as Union Square and the former Ladies' Mile.

This retailing "revolution" also, for the first time, is attracting "big box" retailers, the giant supermarkets, discounters and others who need 50,000 or a 100,000 square feet or more. Thus we see the first entrance into New York of such well-known suburban retailers as Circuit City, Bradlees and Pathmark's Superstore.

The full impact of these new competitors is yet to be realized. In any event, the real estate scene in New York is being rapidly transformed. It is fascinating to watch the malling of New York, a phenomenon that is destined to create new property uses and new opportunities for the real estate industry that would have seemed unlikely only five years ago.