Less than two years ago, the financial crisis took a toll on Times Square. With many hotel rooms empty and unemployment rising, pedestrian traffic slowed. Some storefronts sat vacant. Now, the hard times have nearly passed. More than 360,000 pedestrians course through the district every day, up 15% from 2008, according to the Times Square Alliance, a business trade group. Retailers are rushing to take space. Over the past 12 months, the list of chains that have signed leases includes Oakley, a seller of sunglasses and sportswear, and teen-oriented fashion sellers, such as Aeropostale, American Eagle Outfitters, and Forever 21.
On the hottest section of Broadway between 42nd and 47th streets, asking rents have skyrocketed, climbing from $891 per sq. ft. in the fall of 2009 to $1,700 a year later, according to the Real Estate Board of New York, an industry group. “The market is on fire,” says Richard Hodos, executive vice president at real estate firm CB Richard Ellis. “There is just not much space available in Times Square.”
Led by Times Square and other prime areas, New York is showing clear signs of revival. After falling sharply in 2009, asking rents are climbing and vacancy rates are dropping. The gains are strongest in upscale markets. On the posh section of Fifth Avenue from 49th to 59th Streets, asking rents climbed from $2,050 per sq. ft. in the fall of 2009 to $2,367 a year later. On Madison Avenue from 57th to 72nd Streets, rents climbed from $919 per sq. ft. to $1,049.
A variety of factors are enabling New York retail markets to rebound quickly. As they recover from the recession, financial firms are rehiring. Wall Street banks that survived the financial crisis are paying rich bonuses. All that is boosting the income of consumers. In addition, foreign tourists are crowding the hotels and stores.
The total number of foreign visitors reached 8.6 million in 2009, up from 4.8 million in 2003. Tourists have been spending with special gusto because the weak dollar makes prices of New York merchandise cheap compared with similar products in Europe and Japan.
One of the biggest beneficiaries of tourism is the flagship Abercrombie & Fitch store at Fifth Avenue and 55th Street. At a time when the chain is struggling around the country, the flagship is so crowded during the summer that customers must wait in line for 15 minutes or more to enter. With only 4,500 sq. ft. at street level, the store is not huge, but it has annual sales of $120 million, says Hodos of CB Richard Ellis. “You see people filling up suitcases at the store and taking [the goods] back home to Europe,” he says.
Arriving from Japan
Many of the newest stores opening in New York are foreign chains seeking to expand a foothold in the U.S. market. Recent arrivals include Britain's Topshop and H&M from Sweden.
In April, the biggest retail lease ever signed in New York went to Uniqlo, a Japanese fashion chain that agreed to pay $300 million over 15 years for 90,000 sq. ft. at Fifth Avenue and 53d Street. The space is owned by Carlyle Group, Kushner Cos., and Crown Acquisitions.
The Japanese company operates 950 stores, most of them in Japan. Several years ago, it opened a 37,000 sq. ft. store on Broadway and Spring Street in New York's SoHo district. The store has been an enormous hit. More than 20,000 customers visit on some Saturdays, walking out with armloads of cheap slacks and T-shirts. Haim Chera, a principal with Crown Acquisitions, says that the success of the SoHo store has given the Japanese chain the confidence to step up to the more expensive location on Fifth Avenue, which will cost more than $2,000 per sq. ft. “They have been doing incredible sales numbers in SoHo, and they should do four or five times more on Fifth Avenue,” he says.
No area of the city has benefitted as much from tourism and economic revival as Times Square. Once a seedy location known for X-rated bookstores and drug dealers, the city's most crowded section has °been undergoing a renaissance that began two decades ago.
At the time, Mayor Rudolf Giuliani campaigned against pornography and urged mainstream businesses to open in Times Square. Among the first to heed the call was Disney, which renovated the New Amsterdam Theater in 1997 and began showing The Lion King to sold-out crowds. More family-oriented businesses began to appear. Among the most recent businesses to arrive are mall-oriented retailers catering to young people. Having expanded in the suburbs, the chains are looking to enter new urban territory.
Part of what attracts the chains to Times Square is the potential to achieve enormous sales. The sales can be especially high because many stores stay open past midnight. In contrast, mall stores typically close at 9 p.m.
The long hours help some Times Square stores in prime locations record sky-high sales of more than $3,000 per sq. ft. “These are home-run locations,” says Faith Hope Consolo, chairman of retail leasing and sales for Prudential Douglas Elliman Real Estate. “The best locations are at a premium, but they guarantee sales.”
The high rents may also be worthwhile because a location in Times Square presents powerful marketing opportunities. Stores located on Broadway act as billboards for brands that aspire to reach global markets. Tourists who see a fashion outlet in New York may be inclined to shop at the chain when they return home to Europe or Asia. “Tenants will pay extra to have their name and brands in Times Square,” says broker Robert Futterman.
As more stores have opened since the recession, investment sales have climbed. Prices have returned to previous peaks seen in 2006 and 2007. “Prices have been improving for the last two quarters,” says David Monahan, managing director of broker Savills.
Magic Kingdom on Broadway
With much fanfare, Disney opened a new 20,000 sq. ft. flagship store at Broadway and 45th Street in November. At the grand opening, the company set off fireworks and hosted celebrities who star in Disney programming.
The hoopla is part of an effort to revive the Disney chain of stores, which had struggled while it was operated by a licensee, Children's Place Retail Stores. In 2008, Disney took the 350 stores back from the licensee and closed 98 outlets. The company is renovating the remaining stores to make them more entertaining for young customers.
The new Broadway store includes many features designed to enliven the chain. But the Times Square unit is four times larger than the typical Disney outlet, and the flagship is open from 9 a.m. to midnight every day. The ceiling rises 30 feet above the first floor. The store has a 350 sq. ft. theater where customers can select videos and films to view. There is also a 20 ft. high castle. The store aims to attract attention with a massive animated billboard that extends 68 ft. above Broadway.
Ghostly streets
While prime markets in Manhattan have rebounded smartly, some second-tier locations are still struggling. Asking rents have been flat in Harlem around 125th Street. One of the softest areas remains the Financial District, which includes Wall Street. Although asking rents improved in 2010, they remained at $150 per sq. ft., down from $189 in the fall of 2009. After plummeting following the destruction of the World Trade Center in 2001, rents began to recover along with the stock market. As Wall Street firms boomed, some luxury retailers opened near Wall Street for the first time. But the growth in retail rents slowed as the global financial crisis unfolded in 2007, and worried consumers dramatically cut back on their spending.
“In 2008 and 2009, retail activity dropped off in the financial district,” says Futterman. “Some streets were like ghost towns.”
Futterman says that the financial district is slowly showing signs of new life. He says that as construction on the site of the World Trade Center progresses, the number of jobs in the area will increase, and retail sales will revive.
Asking rents have been flat at $255 in the Flatiron district, which is centered on Fifth Avenue from 14th to 23d streets. While it is home to trendy architecture and Internet firms that are drawn to the old buildings, the district is not a magnet for tourists.
Stores in the area have been eclipsed by nearby competitors in SoHo and Greenwich Village, which draw crowds of tourists. Hodos of CB Richard Ellis says that Flatiron locations have produced strong results for a few chains, such as Victoria's Secret and beatify chain Sephora.
However, the results have been uneven. “Many stores are not showing the sales results that they hoped for,” he says.
Even in weaker neighborhoods, restaurants have remained a mainstay for the city. According to the office of Mayor Michael Bloomberg, there are 20,000 restaurants in the city. Seeking to provide tourists with familiar food, casual dining chains — such as Red Lobster and Applebee's — have been opening in Times Square.
Pubs are also sprouting throughout the city. “This year we are seeing lots of moderately priced places opening up,” says Futterman. “No matter how the economy is in New York, people eat out all the time.”
Stan Luxenberg is a New York writer.
NEW YORK: BY THE NUMBERS
POPULATION
8.4 million
Source: U.S. Census Bureau
UNEMPLOYMENT RATE:
9.3%
Source: U.S. Bureau of Labor Statistics
METRO AREA VITAL SIGNS
Office:
11.6% vacancy 3Q 2010
11.4% vacancy 3Q 2009
$43.68 per sq. ft. 3Q 2010*
$47.17 per sq. ft. 3Q 2009
Source: Reis *effective rent
Multifamily:
3.6% vacancy 3Q 2010
2.9% vacancy 3Q 2009
$2,756 monthly rent 3Q 2010*
$2,662 monthly rent 3Q 2009
New York retail condos are tiny, but oh, so pricey
Throughout much of the country, investors in retail space focus on shopping malls. But in New York, there are few malls. Investment properties are mainly condos carved out of the lower floors of office buildings.
Many of the condos are small, selling for $5 million to $12 million, says David Monahan, managing director of broker Savills. But several noteworthy transactions have closed recently. In April, GLL Partners, a German investor, paid $41 million for 9,400 sq. ft. at 465 Broadway in the SoHo district. The price was about $4,400 per sq. ft., a record for SoHo.
The property houses an outlet for Bose, the sound system company. In October, Ashkenazy Acquisition paid $51 million for an 18,000 sq. ft. space at Madison Avenue and East 70th Street, which houses a Prada store. Ashkenazy owns $5 billion worth of property, including Union Station in Washington, D.C.
Monahan says capitalization rates, or the initial yield to investors based on the purchase price, for premier condo deals are drifting down from 5% toward 4%. He estimates that Starwood Hotels may have recorded a subpar 5% cap rate when it sold 24,700 sq. ft. of shops in the upscale St. Regis Hotel at 55th Street and Fifth Avenue. The price was $117 million, or about $4,700 per sq. ft. The buyers were Crown Acquisitions and Lloyd Goldman. The space houses such tony retailers as De Beers Diamond Jewelers and high-end apparel designer Pucci.
Racking up car sales
While hundreds of dealers nationally have shut down because of depressed sales, the Manhattan market has thrived. Part of the success amounts to simple supply and demand.
In the crowded city, there has never been an excess of dealers. Most are crowded onto 11th Avenue, a strip located a few blocks from Times Square that is zoned for auto businesses. In addition, Manhattan holds more than its share of high-income households who have continued buying luxury cars throughout hard economic times.
In one noteworthy deal, Mercedes-Benz USA paid $189 million for 330,000 sq. ft. at 11th Avenue and 54th Street. The price per sq. ft. is about $560. The German automaker's only company-owned location in the U.S., the dealership aims to set standards for franchisees. The space, set to open in 2011, will include free Wi-Fi in the waiting room, a coffee bar, and 72 work bays.
In another large deal, Volkswagen is spending $125 million to acquire and renovate a 265,000 sq. ft. space at 55th Street and 11th Avenue. The space will serve as the flagship location in the U.S. for the German company.
— Stan Luxenberg