Despite the uncertainty surrounding the ongoing spread of the COVID-19 delta variant, certain opportunistic retailers in New York City have been able to take advantage of tenant-favorable market conditions, successfully negotiating free rent, flexibility on term length and percentage-rent deal structures, and other previously unthinkable extras.
As the COVID-19 pandemic has turned New York City’s commercial retail landscape on its side, the city’s small businesses have faced an exceptionally challenging 2021 thus far. International visitor traffic is almost nonexistent, domestic tourism is lagging behind pre-pandemic numbers, and the majority of office workers have yet to return to the workplace. In light of New York City’s famously high rents and operating costs, small-business owners have always faced an uphill climb toward profitability, but the pandemic has likely forever changed the retail landscape.
Among the organizations ringing a cautiously optimistic note about brick and mortar is CBRE, the world’s largest commercial real-estate firm. According to its second-quarter Manhattan retail market report, warm weather and loosened restrictions were renewing confidence and demand for retail.
“The retail climate has improved noticeably as New Yorkers have gotten vaccinated and stepped back to their normal lives,” said Nicole LaRusso, CBRE’s senior director of research and analysis. “For NYC retailers, especially those in the heart of Midtown and Downtown business districts, demand is improving but there is still a way to go before things feel ‘normal’ again.”
The CBRE data on rents show some variation across the city, noting that across the board, landlords are much more negotiable, with deals being closed for considerably less than the asking rent — 14% on average.
“Landlords are giving generous concessions in the form of tenant improvement allowances and free rent periods,” LaRusso explained. “This is resulting in reduced returns for landlords, but it’s a great opportunity for tenants who want to enter into long-term leases.”
The CBRE report notes that leasing, asking rents and available space across New York City are still off from pre-pandemic levels; leasing velocity in Manhattan decelerated in the second quarter, marking eight consecutive quarters of decline. Additionally, the number of direct, ground-floor availabilities in the second quarter increased to 290 spaces from 275 in the first quarter in the 16 prime retail corridors tracked by CBRE. The average retail asking rent in Manhattan’s prime 16 retail corridors dropped 10.7% year over year and 0.6% quarter over quarter to $615 per square foot in the second quarter, marking the 15th consecutive quarterly decrease.
But there have been some signs of hope. As an example of a notable recent retail opening, CBRE points to Harry Potter New York, a 20,000-square-foot, three-story flagship that opened in early June at 935 Broadway in the Flatiron/Union Square neighborhood. (The shop includes 15 distinct areas as well as various handcrafted exhibits and unique experiences.)
CBRE also points to a handful of high-wattage imports — including the British jewelry brand Vashi, French fashion brand Ami, and Canadian winter coat purveyor Kanuk — having signed new leases for their first New York City locations as a vote of confidence in the city and its recovery.
Ongoing declines in retail rents are creating new opportunities and helping to drive market activity, according to a recent report by the Real Estate Board of New York (REBNY), the city’s leading real estate trade association. The June report revealed that asking retail rents throughout Manhattan have declined in 16 of the 17 reported corridors, as the market continues to adjust more than a year after the COVID-19 pandemic first hit New York City. In Manhattan, the average asking price per square foot throughout Manhattan’s retail corridors fell by as much as 37% year over year, according to REBNY’s spring report. Corridors located in neighborhoods with strong residential bases typically have seen less of a decline than those dependent on tourists and office workers. For example, the average asking rent in the Upper East Side has declined 15% since spring 2019, compared to the Madison Avenue and Fifth Avenue corridors which experienced declines of more than 25% during the same time period.
The findings suggested that the current market — with increased availability and reduced leasing costs — presents unique opportunities for both tenants and owners alike. At the same time, the data also indicates the importance of ensuring that office workers return to their workplaces and the city does more to attract tourists back to New York to generate foot traffic that supports retail businesses.
REBNY’s most recent broker confidence index, for the first quarter, found that broker confidence was 53% higher than the previous quarter, with a confidence in the future that was at its highest level since the 2015’s third quarter, signaling that brokers have renewed optimism about the market’s trajectory and the industry’s recovery.
“Our upcoming broker confidence index will show that broker confidence rose to record levels during the second quarter of 2021, attaining new peaks in both residential and commercial sectors,” explains Zach Steinberg, senior vice president of policy, REBNY. “While optimism has surged, this burst of confidence could be short-lived if several key milestones — Broadway reopening, a surge in returning office workers, and gradual rebound in international tourists — are not achieved in the fall.”
When seen alongside the recent retail rent data, as well as the many positive signs around economic recovery, one can see that brokers, particularly in the commercial market, are both seeing more activity and expecting to see even more deals being struck as the year goes on.
“Brokers in Brooklyn note that prime corner spaces on streets like Franklin Avenue Prospect Heights are seeing multiple bids as tenants snare locations that are rarely available,” Steinberg said. “Rent is still below its pre-pandemic levels, but retailers should not assume that they can capture the double-digit discounts of late 2020. Landlords and retailers are both showing some flexibility — many landlords are willing to sign shorter lease terms but are understandably concerned about the stability of the tenant.”
Ari Harkov, a Manhattan-based real-estate broker, has seen a sea change take place across the city’s retail landscape over the past few years.
“In 2019, NYC was riding high from an economic perspective and many small businesses were struggling to keep up with rising rents and operating expenses,” Harkov said. “Now, the city is in a much more positive place than it was a year ago and a drop in rents has allowed some small businesses to take a chance and open in areas where it would have been economically impossible just two years ago.”
Harkov, like most industry experts and small-business owners, is pinning his hopes on September, with a huge shift in foot traffic expected due to residents returning from pandemic-inspired temporary moves outside the city and commuters returning to offices in the biggest push since the start of the pandemic.
“I don’t think anyone is expecting a 100% return to February 2020 levels, but we’re all hoping for maybe 50-65% of where we were pre-pandemic, which would be a huge shift from the 20% or so we’re at now,” Harkov said. “There is no way to sugar coat it. Retail in residential neighborhoods where people make their homes has done reasonably well, but retail in commercial and tourist neighborhoods has been decimated.”
Mirroring those thoughts is the veteran restaurateur Gianfranco Sorrentino, managing partner of Il Gattopardo Group and president of Gruppo Italiano.
“I am in the hospitality business, and as such, it has been an industry simply decimated by the pandemic,” says Sorrentino, whose experiences show that the real-estate market has resumed some of its less forgiving practices.
“With business coming back to New York City, we have seen many of the appealing and enticing offers that were once available during the pandemic already have disappeared,” says Sorrentino, who owns three restaurants in Manhattan. “For a while you did not have to pay brokers, no extensive deposits and fair rent. Now, all [enticements] are gone.”
Small-business owners, lacking the financial backing and resources enjoyed by the corporate chains and conglomerates that can better handle such uncertainty, have been largely left to fend for themselves, navigating a web of federal and local resources.
In June, Mayor Bill de Blasio and the NYC Department of Small Business Services (SBS) launched an $11 million initiative to support small businesses. Billed as a concierge service, the so-called Quick Start program has been designed to eliminate red tape, with an aim to make New York City among the easiest places in the country to open or reopen a small business.
“This program will give business owners all the tools they need to run their businesses smoothly and build a recovery for all of us,” said de Blasio in a statement announcing the program.
An estimated 50,000 small businesses are expected to benefit from the Quick Start program, a collaboration between 100 city personnel across a host of agencies.
From the onset of the pandemic last year, SBS launched 35 programs and initiatives — including the distribution of more than $63 million through five grant and two loan programs — to help reopen businesses and provide the necessary guidance and support. Since the start of the pandemic, the department has helped 4,200 businesses apply for approximately $305 million in SBA Paycheck Protection Program (PPP) loans, and has connected around 5,000 businesses to more than $156 million in local, state, federal, and philanthropic funding, according to data provided by SBS.
And this support could prove to be crucial. According to a study by The Partnership for New York City in July 2020, as many as a third of the 230,000 small businesses that populate the city’s neighborhood commercial corridors may never reopen.
“New York City entrepreneurs are the heartbeat of our city and the most resilient business owners in the world. We have devoted every resource at our disposal to ensure their survival and an equitable recovery over the last year, including financial support and the direct delivery of services to business owners in over 100 commercial districts,” said Jonnel Doris, SBS Commissioner. “The city’s business community has a history of rebounding from health and economic challenges, and we expect a full recovery as we continue to see new businesses opening across the city, vaccinations climbing and workers returning to offices.”