Despite dire forecasts that New Yorkers will reign in their spending for everything but the basics, Spanish retailer Zara is forging ahead with opening a store on Manhattan's Upper West Side. The 15,000-square-foot storefront, located on Broadway between 66th and 67th Streets, the sixth store in New York City for the mid-priced apparel retailer, is set to open next year.
The opening comes at a time when the effects of the Wall Street collapse and a worsening recession continue to accumulate. Manhattan could see a rise in unemployment as a result of cutbacks at investment banks and other financial firms.
The city of New York Office of Management and Budget reports the crisis on Wall Street has gravely damaged the city's finance sector. Before it is over, the agency forecasts 31,000 jobs will be lost in the securities sector and by the end of 2009 in excess of 147,000 private sector jobs lost; nearly 60,000 more than initially forecast. In addition, in October, the Conference Board's consumer confidence index fell to 38.0 — an all-time low and down from 61.4 in September. That means even well-heeled residents are reducing what they spend on apparel and fashion accessories.
At the same time, souring fortunes internationally as well as a newly resurgent dollar are translating into anemic growth projections for the number of international tourists expected to visit New York.
Many retailers that once had expansion plans now are waiting, says Robin Abrams, executive vice president with the Manhattan-based real estate firm, Lansco Corp. “I think there will be more and more buyers looking for good deals,” says Abrams. Since September, New York retail is “pretty much a different world,” says Abrams.
Overall, U.S. retail sales fell 1.2 percent, their sharpest drop in three years in October, according to the Commerce Department. Retailers reporting double-digit same-store sales declines included Abercrombie & Fitch, with a 20 percent drop, and Neiman Marcus and Saks Fifth Avenue, with 17 percent and 28 percent drops, respectively.
Reading the headlines has left the industry wondering what's next, says CB Richard Ellis' senior vice president Gary Trock. The national slowdown in consumer spending, the credit crisis and consolidating financial institutions and their branches are expected to contribute to a rising number of bankruptcies, liquidations and store closings, putting upward pressure on vacancies and downward pressure on rents.
That's precisely why some observers think Zara's push makes a certain amount of sense. Cushman & Wakefield's executive director for retail services in Manhattan, Gene Spiegelman, says the Spanish chain is capitalizing on weak demand. That could put it in a good position when the economy does eventually rebound.
Citywide, asking rents are off 3 percent from a year ago to $129 per square foot, according to the Real Estate Board of New York. Districts with falling rents include the East Side, Third Avenue between 60th and 72nd Streets, down 6 percent to $287 per square foot and the Flatiron on Fifth Avenue from 14th to 23rd Streets, down 7 percent to $276 per square foot.
In the fashionable, high-traffic Flatiron District, Prudential Douglas Elliman's chair of retail sales and leasing, Faith Hope Consolo, is marketing a Fifth Avenue property. Not long ago, ground level in that district might have gone in a blink of an eye. Now spaces can stand empty for weeks or months as newcomers bide their time, waiting for the best offer.
At the property Consolo represents, the landlord is asking $258 per square foot for the 4,500-square-foot ground floor space and larger selling basement.
That's a bargain for the Flatiron District, Consolo says. Asking rent for the full building, including upper-floor office space at $75 per square foot, totals $2.4 million annually, down 7 percent from what the landlord would have sought a year ago. In addition, she says, the landlord offers “generous” rent-free time and will remodel the high-visibility storefront.
As landlords become more flexible, retailers who once wanted to enter the New York market but couldn't make the numbers work may find opportunities as rents falter.
Landlords are helping with build-out costs and reducing rent for up to a year to attract tenants, Abrams says. Landlords may also forego rent increases for two years instead of one. “We have not seen asking rents being significantly reduced, but are being told for the right deal landlords will be flexible and work with the tenant.”
Brokers see signs of a recession. Consolo says, “Landlords are not giving away the store, but they are beginning to offer tenants more enticing deals, [they] are starting to offer four or five months of free rent.”
In recent months, a dozen retail vacancies have appeared, says Henry Goldfarb, executive managing director of Santa Ana, Calif.-based broker Grubb & Ellis. More retailers are bound to close, says Goldfarb, and the vacancy problem will worsen in 2009. Troubled retailers usually hang on during the Christmas holiday.
The national retail vacancy rate exceeds 7 percent and Manhattan's rate is competitive, says Edward Jordan, East Coast director of net lease property for Encino, Calif.-based broker Marcus & Millichap. With retailers such as Circuit City, Linens 'n Things and Starbucks closing stores, it doesn't bode well for vacancy rates.
Retail vacancies are likely to start in fringe New York City areas and spread to the major shopping districts. Bank branches, Goldfarb says, may be among the casualties of the economic downturn. In recent years, Washington Mutual, Citigroup and other banks opened dozens of branches around New York City, many on prime retail street corners.
“The banks helped to hold up the market by overbidding for spaces,” says Goldfarb. “If someone was willing to pay an asking price of $250 per square foot, a bank would come in and offer $350.”
Now many of those expensive storefronts are likely to go dark as banks merge and struggle to cut costs, adds Goldfarb.
Although Wall Street layoffs seem certain to hurt retailers in the Financial District, New York still stands apart from much of the rest of the country. With a population of nearly 8.3 million, the Big Apple has 27,147 residents per square mile.
The teeming New York City sidewalks of Fifth Avenue, the Upper East Side and Soho, where international tourists visit, provide an ideal environment for retailers. Over the past year, retailers engaged in bidding wars as they sought to lease prime space. Abercrombie & Fitch set a city record in July when it agreed to pay $2,500 per square foot for 20,000 square feet at 666 Fifth Avenue.
“Demand for the best locations has been strong,” says David Green, executive director of retail services for Cushman & Wakefield.
Intrepid New Yorkers
What does all this mean for big developments? In Brooklyn, Atlantic Yards developer Bruce C. Ratner cited the downturn in the economy could delay the controversial $4 billion project for years. Forest City Ratner Cos. called its 22-acre mixed-use development “a long-term project that will extend well beyond the current financial situation.” Ratner's plans now call for breaking ground in the spring of 2009.
Back in Manhattan, the proposed redevelopment of the James A. Farley Post Office into Moynihan Station, a transit hub and public-private mixed-use development is “still moving forward,” says Erin Duggan, deputy press secretary for New York Gov. David Paterson. The $3 billion project calls for renovating the train hub under Madison Square Garden and building 6.5 million square feet of commercial and retail space. Governor Paterson has asked for a report on the project by mid-November.
The city's financial crisis, Duggan says, is “definitely something that will have to be taken into consideration.” According to her, “the governor says ‘infrastructure projects still have to go forward even when the economy is tightening.’”
Stan Luxenberg contributed to this article.