COVER STORY, DECEMBER 2009

AN ADAPTING MARKET: NEW YORK RETAIL ROUNDTABLE
Realities are changing, but New York is still a strong market for retail deals.
Roundtable moderated by Jerrold France and Randall Shearin

Northeast Real Estate Business recently held its annual New York retail roundtable at the offices of Goulston & Storrs in Manhattan. This year, we decided to take a look at some of the national trends and see how they are affecting the tri-state area, as well as examine some ongoing projects.In attendance this year was: Ken Bernstein, Acadia Realty Trust; Joe Montesano, Northwest Atlantic Real Estate Partners; Alvise Casellati, American Continental Properties; Steven Kushner, Northwest Atlantic Real Estate Partners; John Hirschfeld, Class Green Capital Partners; Christopher Day, Coventry Real Estate Advisors; Nina Kampler, Hilco Real Estate; Darren Pinsker, HSBC; Douglas Taliaferro, HSBC; Matthew Harding, Levin Management; Aaron Fleishaker, Fairway Stores; Patrick Breslin, Grubb & Ellis; Steve Siegel, Marcus & Millichap; Kathy Crocco, S.L. Green Realty; Franklin Zuckerbrot, Sholom Zuckerbrot Realty; Frank Shea, Frank Shea Consulting; Stephen Stephanou, Madison Retail; and David Rabinowitz, Philip Herman and Matt Epstein of Goulston & Storrs.

(From left to right) Douglas Taliaferro, Frank Shea, Darren Pinsker, Patrick Breslin, Franklin Zuckerbrot, John Hirschfeld, Joe Montesano and Steven Kushner

NREB: There is a lot of development still ongoing in the New York area. Ken [Bernstein], can you give an overview of what your company has been up to?

Bernstein: We are developing in the Fordham Road corridor. We have concentrated on high barrier to entry markets, where it is difficult for retailers to penetrate. We are still seeing a fair amount of pent-up demand, albeit not nearly as significant as a year or two ago. Fordham Road, which is the Number 1 retail corridor in the Bronx, a retailer like Best Buy can open and do extremely well, even in a difficult economy. The retail at our project is 100 percent leased.

NREB: Joe [Monstesano], can you speak to your client’s entry into Manhattan?

Montesano: We do Costco’s work in North America. East River Plaza actually started 12 years ago for us. (see project profile on page 22) This project has been going a long time. From Costco’s perspective, the time to get into the urban markets is now. Costco waited out the boom. They weren’t prepared to pay the retail prices that land was commanding in the bubble. We sat on the sidelines and watched, accumulating cash all the while. Now, the opportunity to buy market share is there because you can gain market entry at a more reasonable price. We are aggressively ramping up expansion, looking at every opportunity in the boroughs for a chance to bring the brand and more heavily penetrate the market.

Stephanou: The larger users used to be frightened by pricing here. How do you answer the question, ‘Do we wait and get a better deal?’

Montesano: We watch the markets as much as developers watch the markets. We look at the access to capital the way a developer would. We are sitting back, watching and waiting for the opportunities to expose themselves in the cycle. We think the next holiday season will bring another churn in retail space.

Fleishaker: Why do you have to wait? I see a lot of retailers who are willing to pay; they want the landlord to make their deal now at their terms. There are a lot of retailers who are picking through the various vacant big boxes around the metropolitan area and who are willing to pay extra at the end of the lease. If anyone here can figure out how to pick the bottom or the top [of rents] let’s stop the meeting now and go get rich.

Montesano: We think there is more opportunity to come, but we are aggressively trying to find locations.

Zuckerbrot: Aaron [Fleishaker]’s point is on the money. We are at discount [with rents] already. Who deserves the bottom? That is what is getting retailers off the fence a little bit. This is an opportunity, especially for big boxes looking for space in the city.

Breslin: The tax incentives are going to be disappearing eventually. I don’t think the city is going to be giving retail development tax incentives forever.

Zuckerbrot: Anyone who is not on a subsidized program is starting to feel the decline in real estate. It is a serious issue. It is an interesting time in the city. We have vertical big box centers, some of them with small shop space, all open at the same time. When you look at East River Plaza, Gateway [Center] — we have all the big retail names testing it out right now.

NREB: Who are some of the names looking or launching in the city?

Breslin: Target, Best Buy, Wal-Mart, Kohl’s — really any player that is greater than 60,000 square feet. They are all looking at this market.

Montesano: We just executed our Rego Park deal yesterday. It was an opportunity. The Home Depot pulled away and we jumped in and took the deal. In a matter of a year, we finalized two large format spaces that you couldn’t have easily capitalized on before because those numbers were higher.

Stephanou: Economically, was the deal much more incentivized this go around?

Montesano: Absolutely.

NREB: Is this true with smaller spaces within the city as well? Five years ago, everyone at the roundtable was griping because the banks were taking all the corners.

Breslin: Now the banks have given up all the corners! We have looked at a lot of corner locations over the last 2 years for a number of small users between 4,000 to 5,000 square feet. Real estate taxes here in New York are more than the base rents that landlords are asking in other parts of the country. Retailers coming into New York have that issue in front of them when they are doing triple-net deals. The taxes can be $30 to $40 per square foot. That goes right to the bottom line. They have to get themselves accustomed to the New York way of business.

(From left to right) Matt Epstein, David Rabinowitz and Philip Herman

Rabinowitz: There are other issues that come with the incentives. I think the incentives are going to continue and that is going to spark more redevelopment in this area, as well as the boroughs and New Jersey. With the incentives come some baggage, which is the compliance requirements for the retailers. They are all manageable.

Breslin: Even if you are not a public entity, there are a lot more people looking at how we are doing business and the way we do business.

NREB: There is more scrutiny on the lease side?

Rabinowitz: Because there is more money flowing in from the government, they want to make sure that retailers are incentivized to hire locally. There are a lot of guidelines in place.

NREB: There are some new retailers entering the market. Steve [Stephanou], are there any notable new retailers to the market?

Stephanou: Nordstrom Rack did a deal in Union Square, which was its first store in New York City. It has been looking at the boroughs and Manhattan for a long time. We had looked at the deal before August 2008. It was much more friendly when we finally completed it. That is a perfect example of a retailer in the current climate who will have a lot of opportunity.

NREB: Kathy [Crocco] Can you give us an update on the appetite for ground floor retail space in office buildings in Manhattan?

Crocco: SL Green is the largest landlord in Manhattan. We are not a shopping center developer, but my background is in retail leasing. Given our locations, which are for the most part prime Midtown and Grand Central locations, the interest still remains strong. We have one space in Times Square that is getting lots of interest. If a space is the right location, tenants are going to have a lot of interest in it.

(From left to right) Ken Bernstein, Christopher Day and Matthew Harding

NREB: What streets are holding up in the economy?

Stephanou: If you look at the streets that have maintained significant value, I would point to Broadway in SoHo as being the best example. It has continued to have the excitement as well as the numbers. There is opportunity in some of the previously hot areas like the Flatiron District. Retailers used to put a store on the East side, then on the West side, then they would go to SoHo and the Flatiron District. When the economy was great, some of the areas were more desirable. With fewer dollars being spent, now the more tertiary locations in the city are feeling it moreso than main and main locations.

Harding: In the suburbs, you see that with the apparel retailers as well. Those tenants used to fill a lot of space in shopping centers. They’ve really shut down expansion. The exceptions are TJX stores and other value-oriented retailers who are taking advantage of this market. The guys in the 5,000- to 7,000-square-foot store range aren’t there. It is a tough category to fill.

Stephanou: Two areas I would point to are Greenwich and Westport [Connecticut]. The rents had gotten crazy. National tenants with mall and street stores were backing away from deals on Greenwich Avenue because the numbers didn’t work. Now, the number of opportunities that are on Greenwich Avenue is really unfortunate. A lot of owners bought those stores at the top of the market. If you can find a tenant, frequently the landlord has to subsidize part of the rent.

Harding: It may also change the complexion of those streets a bit also because of the different types of retailers who are making deals.

Breslin: I agree with you. A few years ago if you went to a main street in Westport or Greenwich, the landlords wouldn’t talk to you if your tenant wasn’t up to their rating. Now, if your tenant is willing to pay rent, the landlord will talk to you.

Harding: I remember mentioning last year that we had a large vacancy in one of our centers and we were approached by a nursing school. We didn’t want to make the deal, but 3 months later we were talking to them. Fortunately, they backed out and we got retailers to fill the space.

Breslin: Landlords within 150 miles of New York were fixated on high volume, credit-rated tenants. Now, the economy has opened up the doors for lots of uses.

NREB: New York is an unusual market, compared to the rest of the country. Retail is king here. You have a lot of flagship stores. Has that thought process changed? You see droves of people here. We don’t know if they are spending money. Isn’t the branding aspect an important part of having a store in New York City?

Breslin: Retailers ambitions for that type of real estate have not changed. They all want it; they all want to be here. Now it is a matter of looking at the numbers, and the numbers have gotten so out of proportion here compared to other parts of the U.S. Rents on Fordham Road in the Bronx are more expensive than some of the best real estate on Chicago's Michigan Avenue.

NREB: Are the owners still not realistic on where the market is?

Breslin: I think they would get realistic a lot quicker, but a lot of people bought their real estate in very high times. Low rents won’t work on some of these properties for some landlords.

Rabinowitz: I just got a call yesterday from a department store who wants to come to New York. They are very close to making some deals. That makes me believe that the market is still attractive.

Aaron Fleishaker

Fleishaker: New York City and the tri-state area will always be strong for us because you can’t beat the density of population and spending power. Fordham Road is a good example. If you walk out of the subway at 5 o’clock on Fordham Road, there are more people on that block than there are in most states in the country. Westport and Greenwich are suffering; those markets are lined with high-income people. When they stop shopping, there is an enormous dent [in sales]. In the boroughs, there is tremendous foot traffic. Even if they are buying less, the amount of traffic drives sales. A few years ago, if you had a chain that was flying high across the country, you felt you had to open a store here so that people would know your business. Today, very few retailers are making branding decisions. Every store has to stand on its own success.

Stephanou: We represent a lot of tenants. Most retailers will not look at this as branding. Maybe there were some deals that were done where part of the rent came from an advertising budget. But most people on the operations side would argue that the store makes money. Part of the challenge is that luxury will be shrinking as a category. It has rapidly expanded over the last 10 years and become a broad category. A lot of people were aspirational luxury shoppers. The moderate shopper is coming back. That’s one of the reasons we saw JC Penney open at Manhattan Mall this year.

Fleishaker: I can’t tell you how many retailers I deal with on a daily basis who, if they are candid with you, will say, ‘My Number 1 volume store in the chain is in Manhattan. It is my Number 743rd in profit.’ They will say it’s worth it because having that store appear in Law & Order or Good Morning America so their customers can see them. You will see billboards sitting empty when people were paying $1 million a month without thinking twice about it. The stores are going to be empty because no one will have the luxury of saying that their highest volume store is not the moneymaker.

Nina Kampler

Kampler: You have the retailers who have taken the loss leader now struggling to justify that while their juggling their P&Ls to make their businesses profitable. When that lease is over, if that landlord doesn’t figure out how to get the lender — that invisible third party — to agree, that store is history. When all of these leases come due, all of these retailers with these expensive stores are going to take them off. They are going to realize that real estate doesn’t have to be their Number 1 marketing tool. There will be some opportunity for retailers who haven’t been in New York. I have spoken with the C-suites of six restaurant chains in the last month. None of them have a presence here, but they are ready to gobble up space. They think the market has been reset.

Montesano: I can go to almost any other market and do two stores for the price of one in New York. The retailer is really looking at it from a very simple perspective: how much money can I bring to the bottom line?

NREB: How easy or difficult it is to find financing these days?

Harding: We recently purchased a grocery-anchored center and found the lending market to be very tight. More recently, in the last 30 to 60 days, we found things are loosening up a little bit. The insurance companies, especially.

Kampler: People need to get out and shop to change things.

Fleishaker: In the food business, volumes are strong. The customers are visiting as often as before, but they are eating out less. They are also trading down. They are buying less luxury and they are buying a lot more staples. You have to make sure your merchandising meets the needs of the customer. That has been the biggest change of this downturn. I don’t think it will change in the near future.

NREB: Has this impacted retailers, with doors closing? This has impacted restaurants and apparel the most.

Fleishaker: There’s no question. The fast casual chains have developed a dinner for two package. Customers are trading down.

Kampler: Starbucks has done something interesting: it closed 600 stores, then looked at its remaining 10,000 or so stores and figured out how to reposition them. It was a good move.

(From left to right) Stephen Stephanou, Steven Siegel, Douglas Taliaferro and Frank Shea

Shea: Today, you have a benchmark on sales volumes. Best Buy has enough stores in the market to know what its sales should be. As much as we talk about rents, you have to start with sales. Last week was one of the best for sporting goods retailers in Manhattan. You have all the people in for the marathon who have to buy last minute supplies. One of the challenges in this climate is tracking shopping behavior and seeing what people are buying.

Zuckerbrot: The value players are out there. We represent several companies who have really been sidelined over the last few years. Some of them are still pretty strong today. Take a company like Party City. They have 1,000 stores. A store like that is where people can go buy supplies for a party for a value. Men’s Wearhouse was another one that was sidelined. They are looking around to see what the environment is like.

Day: This goes back to the point earlier: perhaps there is a bargain in rent to be had. The third-party banker behind the scenes might say to the landlord that he can’t make the deal unless they write the note down, and they may not be prepared to do that.

Breslin: Most of my tenants are asking for a non-disturbance clause.

Day: They should have the lender on the phone making him realize that we are all in this together. Why are we pretending that all the parties can’t talk to each other?

Rabinowitz: In all the rent relief and termination discussions that have occurred, you have to get the lender involved.

Kampler: What’s happening a lot of time is that if the landlord will not work with the tenant, the tenant is sometimes forced to file bankruptcy. Sometimes the landlord needs to realize that if the tenant fails, he will have greater vacancy, which may put him at risk.

Bernstein: In defense of the landlord, the lenders have not been equipped to respond. In some cases, like securitization, the lender’s clause prevented the lender from being proactive. That has only recently been amended. In other cases, the denial that some of you may be feeling from the landlord is far more significant at the lender level. We haven’t used a lot of debt, so we aren’t stuck in this position. The level of dysfunction in the lending market is a critical issue.

NREB: David [Rabinowitz], have you found owners starting to get more interested in selling?

Rabinowitz: You still have a disconnect between the prices. That’s why I don’t think you are seeing a lot of investment transactions. There’s a lot of delaying and extending going on by the banks. At some point that will stop and there will be properties that are taken back. When the lenders get those properties, that’s when you are going to have to reset pricing and you’ll see some transactions happening.

Siegel: The owners who are selling are the ones who are in trouble right now. They either have a loan that’s coming due in the next 6 to 12 months, or it is the lender approaching us saying that they are going to be taking the property back. We recently sold a property that had a $15 million loan. It appraised for $20 million 3 or 4 years ago. We sold it for a little over $2 million.

NREB: There are a lot of funds building to buy distressed retail assets. Is there going to be a feeding frenzy?

Siegel: There is a lot of money out there. The problem is that these funds don’t think the prices are right yet. The problem with the right price is that you could previously get a 5 or 6 cap rate here in New York. Now you can get a 7 or 8 cap. If you buy at an 8 cap, you look at the underlying real estate and that lease is coming due in a year or two, and the rent is 50 percent over-market. An 8 cap all of a sudden is a 3 or 4 cap.

Fleishaker: What I find fascinating on the leasing side is that when we are negotiating with the landlord, he will say, ‘I’m not going to give you that rent. Two years I could have gotten 20 or 30 percent more.’ Well, I’m not asking for reductions on rents I signed 2 years ago. You can’t sign a lease based on past history, but where the market is today. The landlords do not want to lock-in for anything; and a sale is the ultimate lock-in. The landlords, even on long-term leases, still feel that the market is coming back. It is hard to make a deal when the attitude is that they will get a better rent in 2 years.

Day: If they are right, they are right to wait.

Rabinowitz: If a tenant goes for rent relief, the landlord should have the right to ask for a larger commitment in terms of lease length and have the right to adjust the term of the period for the rent relief.

Breslin: A lot of the landlords here in New York are beginning to forget percentage rent. They want to talk about the retailer making up the money from the rent relief on the back-end.

Fleishaker: Or they will give short-term relief because they need to keep the center occupied for the next 2 years.

Harding: Why should you have long-term rent relief when we are in a cycle? I’ve gotten so many letters that all start out the same: ‘Dear Mr. Landlord, we have thoroughly reviewed this store…’

Breslin: You could be like one retailer here who just mailed out his rent checks on time for amounts that were discounted 25 percent across the board.

Bernstein: Eventually, this cycle will play out and we will get to normalized rent. It may take a few years. We have to get mentally prepared for a lengthy releveraging period. The banks are nowhere near where they were a few years ago.

PROJECT SPOTLIGHT:  EAST RIVER PLAZA East River Plaza Manhattan’s first Costco has just opened in East River Plaza on FDR Drive at 116th Street. “The retailer is a dynamic addition to Manhattan,” says Rich Pesin, executive vice president and director of retail development for New York City-based Forest City Ratner Companies (FCRC), which is developing East River Plaza.  The five-story, 500,000-square-foot East River Plaza is the first power center in Manhattan, and it will also be home to Manhattan’s first Target, when the retailer opens a 130,000-square-foot store in July 2010. Additional retailers, which will open in spring 2010, include Marshalls, Best Buy, Bob’s Discount Furniture, Old Navy, Kids Town and PetSmart. The project also has a 1,250-space parking garage. East River Plaza has been a long time in the making. Syosset, New York-based Blumenfeld Development Group acquired the former Washburn Wire Factory in 1996. In 2004, the company formed a partnership with FCRC to complete the development. According to Pesin, every step of the project was complex: zoning, public/private financing, and the logistics of construction in an urban environment. “Six acres is a very large assemblage for Manhattan,” Pesin notes. “This is a great opportunity for Costco and Target to enter the market, and these are the best two anchors we could hope for in a project like this. Furthermore, they provide jobs and tax revenue that are vitally important in today’s world.” Costco has created 400 jobs and Target will create approximately 340 jobs. FCRC has completed similar vertical projects in Queens and Brooklyn during the last 15 years. Pesin believes FCRC’s expertise in public/private financing and its relationships with tenants has helped bring East River Plaza to fruition. — Jaime Lackey

PROJECT SPOTLIGHT:  WESTCHESTER’S RIDGE HILL Ridge Hill Plaza On an elevated site that runs between the New York State Thruway and Sprain Brook Parkway in Westchester County, New York, Forest City Ratner Companies (FCRC) is developing Westchester’s Ridge Hill. The 81-acre, 1.3 million-square-foot retail and entertainment project is located approximately 22 minutes from Midtown Manhattan and is the first open-air center in New York’s affluent Westchester County. “The Westchester County consumer has not seen this type of center,” says Rich Pesin, executive vice president and director of retail development for New York City-based Forest City Ratner Companies (FCRC). FCRC is currently constructing 1.1 million-square-feet of entertainment and retail space, which will open in 2011. Saks Fifth Avenue has signed a letter of intent to open an 80,000-square-foot store. Additional anchors will include a 60,000-square-foot Whole Foods and a 12-screen Cinema De Lux. Tenants will include Ann Taylor Loft, Cheesecake Factory, L.L. Bean, New York & Company, and Sephora. An additional 200,000 square feet of big-box retail space is planned for the south end of the site. The project also includes a 160,000-square-foot office building, which was built in 1981 and is undergoing a complete redevelopment. FCRC is currently negotiating with a tenant who is interested in leasing half the building. Westbury, New York-based The Horizon Group is currently building 160 one- and two-bedroom apartment units at The Monarch at Ridge Hill. At completion, the Ridge Hill project will include a total of 1,000 multifamily units; Horizon plans to develop a total of 500 units, and FCRC plans to develop 500 units as market conditions permit. FCRC also has entitlements for a 175-room hotel with a 20,000-square-foot conference center. The down economy has resulted in a delay for the Ridge Hill project, which was originally scheduled to open in 2010. When the project does open, it will create 4,000 full-time jobs and should generate an estimated $24.2 million in sales tax revenue annually. In the meantime, the project’s 5,500 construction jobs are helping the local economy, too. — Jaime Lackey

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