Times of struggle help separate the inherently strong from the weak, according to popular wisdom. While that principle has been somewhat at play in the performance of Manhattan’s retail real estate sub-markets during this downturn, it’s become particularly evident in the outer boroughs of New York City.

Compared to the rest of the country, New York’s outer boroughs, including Brooklyn and Queens, remain under-retailed, with less than 20 square feet of retail space per person. During the peak of the market, real estate developers sought to take advantage of the imbalance with a slew of new retail projects in areas with growing residential populations, including DUMBO (Down Under the Manhattan Bridge Overpass) and Williamsburg.

Today, however, retail brokers say that many of those formerly up-an-coming submarkets are struggling, facing double-digit vacancy rates and attracting fewer new tenants. By contrast, property fundamentals in established retail corridors have held up relatively well. Marcus & Millichap Real Estate Investment Services reports that while in many areas of Brooklyn retail vacancies reached 15 percent in the third quarter, vacancy on Fifth Avenue in Bay Ridge, a high traffic shopping strip anchored by department store Century 21, is still below 3 percent.

What’s more, many national tenants that were shut out of the boroughs’ primary corridors by exorbitant rents in years past have been trying to take advantage of more favorable leasing terms, brokers say. Those looking include supermarket operators, discount stores and fast-food operators. Soon, there might even be a new Walmart or two in the outer boroughs, if recent market rumors come true.

As a result, next week’s ICSC New York National Conference, taking place on Dec. 7 and 8, should be a more productive and optimistic event than last year’s event.

Retail Traffic talked with a few of New York’s retail brokers who are active in the outer boroughs to get a feel for the pulse of the market. They include Robin Abrams, executive vice president with the Lansco Corp., a New York City-based full service real estate firm; David Tricarico, director of retail services with Cushman & Wakefield Inc., a global real estate services firm; and Barry Fishbach, executive vice president with Robert K. Futterman & Associates, a New York City-based retail real estate services firm.

Retail Traffic: According to our sources, most of Manhattan’s retail corridors have made it through the downturn in decent shape. How much of an effect has there been in the outer boroughs?

Tricarico: I think it’s very similar to Manhattan, meaning the primary corridors are still very much in demand. You can talk about Fulton Street in downtown Brooklyn, Court Street, Seventh Avenue in Park Slope—there is very limited availability, rents are still strong. And 86th Street has seen some stores change, but the vitality of the area is still very strong. It’s the secondary corridors, with secondary retailers, that are being affected by the downturn. I think outside of Bedford Avenue in Williamsburg retail has really taken a bad turn. There is lots of new construction that’s not being filled. And some lifestyle centers that are three or four years old have not done well in recent years.

Fishbach: There are fewer retailers who are expanding. There is still demand, there are deals that are being done both from the national, as well as from the local retailers, but this has created more opportunity for regional retailers because the nationals are taking smaller spaces and the bank expansion has slowed as well. But on primary streets like Fulton Street in Brooklyn, Fordham Road in the Bronx, Jamaica Avenue in Queens, there is still activity. Leases are still being signed.

Abrams: There are a lot of national tenants who understand that the boroughs are under-stored and that things have become available in high traffic pockets in different areas. If you look at Fulton Street in Brooklyn and Fordham Road in the Bronx, retailers sometimes have higher sales volumes there than they do in their Manhattan stores. So the boroughs are being discovered and that’s something that started even before the downturn…. There is more vacancy in areas that are more “neighborhoody,” secondary locations. And I think there are certainly areas like Long Island City in Queens, where there was anticipated future growth and an assumption that there would be a need for services like supermarkets, that retail has suffered a bit.

RT: You’ve mentioned that some national tenants have been looking in the boroughs. Can you give any names?

Abrams: It’s a lot of discount-oriented, value-priced retailers whose sales are strong in this market and who are looking to expand. I think you have retailers like Target and Kohl’s and Walmart, which has looked in the boroughs in the past. There are a lot of food uses. You have Whole Foods and Trader Joe’s also understanding that there is a huge opportunity in the boroughs. You have a lot of fast food operators—Subway, Checkers, a hamburger fast food chain that has stores nationally.

Tricarico: We are getting a lot of requests for tours from tenants who are more boutique type fashion—not designers, but specialty retail. New entrants to the market are certainly out there. A lot of the discount/bargain guys are always looking. Supermarkets and large format big-box stores are always looking because they take a long time to make a deal.

Fishbach: I think with street level retail, you have more opportunities with the local retailers.… There are fewer big-box retailers, so you have less of a choice in potential tenants, due to the size of the space and obviously many big box operators are either not expanding or no longer in business.

RT: You all say that leasing terms have become more favorable for tenants. How much have rents come down from the peak of the market? How willing are landlords to negotiate?

Fishbach: It’s deal by deal and depends on the project. Some properties have been affected more than others, so for some it’s a 10 percent discount, for some it’s more than 20 percent. But it also depends on how many offers the landlords have and how much competition they have for the space. That’s why for the street level retail, for a 3,000-square-foot store, a landlord has many more options.

Abrams: I think rents have come down, depending on the strength of the location, anywhere from 10 percent to 30 percent. In some areas, like Fordham Road, rents were very aggressive and they softened a little bit, but not a heck of a lot. That’s because the nationals like to be right on the market, right in the epicenter of the action and they look at a very limited area for new stores. But landlords are stretching to make deals and maybe offering more flexible terms. We have had some landlords offer tenant improvement allowances for tenants, which is highly unusual for street locations. We’ve seen them give rent concessions, where the tenants could go a month or two rent free before they have to start paying. I think all over the city, including the boroughs, there is some flexibility and brokers can be more creative.

RT: How long do you think it will take for retail fundamentals in the outer boroughs to recover?

Abrams: I think over the next year, in the high-traffic areas business is going to pick up. In the more neighborhood type locations, it’s going to be harder because they depend on local retailers and that activity will take a couple of years to pick up. But it will be interesting to see how these areas re-invent themselves. If you look at an area like Red Hook in Brooklyn, there is actually some business being done there because it’s affordable, it’s cool, it’s still evolving. But they have a more artsy, boutique kind of user. And there are many wholesale businesses that had a showroom or an office before and now maybe it makes sense to open a store.

Tricarico: I would say it’s going to be 12 to 18 months—if at all—before the secondary markets recover to where they were before the downturn. There was a lot of new construction and a lot of it is still sitting vacant.

Fishbach: I think it’s going to be more than a year. Part of it depends on how flexible and realistic the landlord is as far as the rent expectations. Landlords who are motivated and reasonable and are not holding out for higher rents, their spaces are being leased.

RT: What do you expect to see at the ICSC show next week?

Tricarico: I think it’s going to be better than last year’s show. The market has settled substantially. There is less fear out there. Whatever deals there are to be done will get made.

Abrams: I believe and hope that there will be more deal-making than there was last year. It appears that a lot of national tenants are now back in the market, looking at opportunities and thinking that in the next six to 12 months their company will be in a position to take new locations. But I think people are still cautious and they are moving slowly and looking for good opportunities for the long-term. So there will be a lot of networking, catching up, and not necessarily leases [getting signed] at ICSC, but the beginning of what will hopefully be appreciation in the market.

Fishbach: It will certainly be better than last year…. There are retailers who are looking to 2010 and 2011 to meet their expansion quotas and they want to take advantage of lower rents and in many cases, there are spaces available that weren’t available before. If they have capital to expand, they understand that now is a good time, based on the current rents. They are able to sign a 10- or 15-year lease at a favorable rent at a location for which there was no opportunity before because there either was no vacancy or there was competition from a bank or a drugstore.