Across the country, thousands of retailers have been forced to close their doors because of financial difficulties. But in New York City, American and international tourists still roam Manhattan's glamorous Fifth Avenue, buying expensive trinkets at Cartier or the occasional suit at Georgio Armani. Still, the economic malaise is creeping toward Fifth Avenue and it is likely to darken many storefronts throughout the city's boroughs.

The nation's economic crisis has intruded on a lucrative period in the financial capital. Over the past year, retailers engaged in a frantic bidding war as they tried to lease prime space in Manhattan. Abercrombie & Fitch set a city record in July when it agreed to pay $2,500 per sq. ft. for 20,000 sq. ft. at 666 Fifth Avenue. Armani set the previous record earlier this year when it leased 40,000 sq. ft. at 717 Fifth Avenue for $1,700 per sq. ft. “Demand for the best locations has been strong,” says David Green, executive director of retail services for Cushman & Wakefield.

Tourism has spurred consumer sales and strengthened demand for retail space. The national retail vacancy rate exceeds 7%, and Manhattan's rate remains competitive, says Edward Jordan, East Coast director of net lease property for Encino, Calif.-based broker Marcus & Millichap.

Can New York's good times last much longer? Probably not, says Henry Goldfarb, executive managing director of Santa Ana, Calif.-based broker Grubb & Ellis. With financial markets in turmoil, more retailers are bound to close.

As layoffs on Wall Street continued to spread, the city's unemployment rate hit 5.8% in August, up from 5% in July, according to the New York State Department of Labor. Finance jobs in the city numbered 181,000 in July, down 11,000 from the year before. Since July, thousands more jobs have been lost.

Retail vacancies are likely to start in fringe areas and spread to the main shopping districts, says Goldfarb. And bank branches may be among the first victims of the economic downturn.

In recent years, Washington Mutual, Citigroup and other banks opened dozens of branches around New York, 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 sq. ft., a bank would come in and offer $350.”

Now many of those expensive storefronts seem likely to go dark as banks merge and struggle to cut costs, Goldfarb adds.

Cracking a tough market

New York real estate tends to be a lagging indicator, Goldfarb says, tumbling well after the big plunge on Wall Street. In the stock market collapse of October 1987, when rising interest rates and a slowing economy triggered the decline, demand for retail space stayed firm for a year after the market decline, he says. But beginning in 1989, real estate markets suffered for four years as vacancies spiked.

The current cycle could follow a similar pattern. “We have had some record rents in the past year, but the trouble in the financial markets will start hurting eventually,” Goldfarb says.

Although layoffs at investment banks 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 sq. mile, compared with 12,649 per sq. mile in Chicago, and 8,205 in Los Angeles. The teeming New York sidewalks provide an ideal environment for retailers.

But while other cities have a surplus of shopping centers, developers are hard-pressed to build stores in New York because of tough zoning and the high cost of land. Faced with little competition, the city's top outlets produce an enormous volume of sales. “New York has some of the most successful stores of chains like Target and Home Depot,” says Dan Fasulo, managing director of Real Capital Analytics, a real estate research firm based in New York.