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Lower retail rents spur leasing activity.

Towards the end of 1991 and the first half of this year, there had been persistent signs that retail store rents were coming down in a significant way. During this period, we weren't sure if it was a coincidence that deals were being made for less rent, or whether it was the start of a new trend.

At this point, it is safe to conclude that not only is this a new trend, but a broad and consistent repositioning of the marketplace as a whole. Retail rents are down across the board, and its official.

The net result is a sharp increase in the number of retail deals that are now being made in Manhattan.

As New Spectrum prepares to celebrate its fifth anniversary, our list of "leases out for signature" has increased 40 percent over last year. And last year was a record year for us. As much as we would like to attribute our heightened activity to excellent brokerage skills, organization, and creativity, (all of which is true), or to a stronger local economy, (which is debatable), the chief explanation lies in the fact that choice retail space is available for much less rent than in previous years.

Why is it that a growing number of landlords have finally determined that it's in their best interest to rent stores for less rent?

For one thing, many of the expensive leases that were signed over the last several years have not worked out as expected. Rare these days is the landlord who has not had to renegotiate a store lease with a retailer. Rent renegotiation became so common in the past year and a half we've stopped getting calls from landlords asking our advice on what to do. By now they know what to do from experience.

More common, and especially exasperating, are weal retailers who are constantly in arrears. With business down, their ability to pay rent in a timely manner had become more difficult. In more instances than not, these tenants have failed altogether, and turnover is a bigger problem for landlords than at anytime in recent memory.

The culprit hasn't been high rent, per se, but the quality of retailer who, in many instances, was inexperienced, undercapitalized, or highly leveraged, but nonetheless willing to step up to the plate and pay so called, "market rent."

Very simply, good retailers stay in business while bad retailers do not. Good retailers are careful about the rent they pay and usually avoid deals that are incompatible with sales projections. They wait patiently for the right opportunities to come along. Inexperienced retailers, in many cases, don't know any better, and usually cannot afford to wait.

In recent years, many landlords sacrificed sensible leases with sound retailers for the highest rent obtainable. In part, this was done to either show a more impressive bottom line to prospective lender, or to simply get as much money as possible, regardless of the long term risk.

A classic illustration of this occurred in the late 1980's, when a landlord elected to slice up a 10,000-foot supermarket space on Eight Street off Broadway in the Village, and rent individual stores to smaller retailers for $100 per square foot, rather than the entire unit to a national chain willing to pay $70.

Retailing pros thought the $100 rent was out of line, and stayed away. The assortment of T-shirt stores and hot dog stands which ultimately paid this higher rent went out of business, one by one. As a consequence, this landlord eventually went under, too. $70 a foot would have netted a very solid return. But on paper, $100 looked an awful lot better. They won the battle, but lost the war.

This lesson, and many others just like it, have hit home. More and more landlord are recognizing that, in a sense, they are in partnership with their retail tenants. The prestige of their properties and the impact on their cash flow is dependent, in many cases, on the health and stability of those tenants.

Despite the economic malaise we're now in, there are a number of stable national and local retailers out there in a position to take additional locations. These retailers are conservative, but they have good track records, and they're smart.

In a way, the skyline of Manhattan is only one story tall. Increasingly, more landlords are employing a conservative approach look of their own, and are finding that leasing space to "good" retailers for less rent is like putting money in the bank - year , after year, after year.
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Title Annotation:Review and Forecast, Section V; New York, New York
Author:Fox, Benjamin
Publication:Real Estate Weekly
Date:Jun 24, 1992
Previous Article:New criteria dictates lender underwriting.
Next Article:1992: the year of the department store.

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