Word on the street is that Mac Cosmetics, a division of Estee Lauder, signed a lease at Vornado Realty Trust’s 691 Fifth Avenue building that breaks the record for the highest rent ever paid for a New York retail space at $3,000 per sq. ft.

The 1,400-sq.-ft. space, formerly occupied by Elizabeth Arden’s Red Door Spa, sits on a prime stretch of Fifth Avenue, near 54th Street.

Vornado officials did not confirm the deal.

If true, the transaction sets a new high for rental rates in an area that last year already ranked as the most expensive retail strip in the world, according to brokerage firm Cushman & Wakefield. In the fourth quarter, rents on upper Fifth Avenue averaged $2,388 per sq. ft., Cushman & Wakefield reports. The figure reflects 59.2 percent in rental growth over the past five years—a period that included some of the worst years on record for retailers. At the end of 2011, the vacancy rate on Fifth Avenue stood at 6.1 percent.

The East side of the street, where Red Door Spa was based, has been in especially high demand among luxury tenants and the space in the Vornado building has been the only one to come on the market in some time, according to Robin Abrams, principal and executive vice president with The Lansco Corp., a New York City-based real estate services firm. The West Side of the street houses the flagship stores of Uniqlo and Zara.

The store at 691 Fifth Avenue is “on the East Side, it’s pretty far North, it’s the only small piece [of retail real estate] available on Fifth Avenue,” says Abrams. “All of these factors provide the landlord the opportunity to price this at a significant level because many retailers have only this one option.”

“Additionally, there was a tenant in place at that particular location that wanted to stay if they could renew. The landlord was in a very strong position and if in fact Mac did lease that space, it would have required them to be very aggressive to encourage the landlord to do a new deal.”

Worth the price?

The question now is whether Mac Cosmetics could sell enough lipstick and eye shadow at its new location to justify maintaining such a pricey store. The retailer’s products tend to be on the more expensive side—a tube of lipstick, for instance, costs $14.50—but it’s no Apple. As of November 2011, sales at U.S. mall stores averaged $417 per sq. ft., according to ICSC. The only category of retailing whose average sales passed the $1,000-per-sq.-ft. mark was home entertainment and electronics at $1,551 per sq. ft.

“It’s very hard for me as a real estate guy to quote a $3,000-per-sq.-ft. rent number,” says Patrick Breslin, executive vice president with the national retail group at Studley, a tenant representation firm. “Because it’s going to get to a point when, no matter who you are, it’s nearly impossible for retailers to recoup that money. And the people signing these leases absolutely believe they can make money on it.”

Mac is likely banking on strong demand from tourists, as well as its regular customers, to drive up sales at the Fifth Avenue store, the brokers say. But the most likely explanation for its purported willingness to pay a record-breaking rent is that the company plans to use the space as a brand-promoting flagship, says Abrams.

The likely wider implication of the deal would be an upward movement in rents in the Fifth Avenue submarket, which might completely price out middle market retailers.

“Rents on decent streets [outside upper Fifth Avenue] are now at $400 and $500 to anywhere up to $1,000 per sq. ft.,” says Breslin. “For a lot of the traditional national retailers, those are big numbers for them.”