COVER STORY, DECEMBER 2010

Tourism Boosts New York Retail
New developments open, Wall Street is back, and older areas thrive on international and domestic tourists.
Roundtable moderated by Jerrold France and Randall Shearin

Shopping Center Business and Northeast Real Estate Business recently held their annual New York Retail Roundtable in New York City. This year’s roundtable was hosted by Weiser LLP at the firm’s offices in Manhattan. Attendees at this year’s roundtable were: Joe French, Sperry Van Ness; Ed Hogan, Brookfield Properties; Michael Hofmann, Cassidy Turley; Tamara Gold, CIBC; Marshall Felenstein, Felenstein, Was & Associates; David Rabinowitz, Goulston & Storrs; J.D. Parker, Marcus & Millichap; Dan Pisark, 34th Street Partnership;  Stephen Stephanou, Madison Retail Group; Chase Wells, Northwest Atlantic Real Estate; Ivan Friedman, RCS Real Estate; Danielle Brunelli, R.J. Brunelli & Co.; Ariel Schuster, Robert K. Futterman & Associates; Barry Fishbach, Robert K. Futterman & Associates; and Deborah Jackson, Weiser LLP.

SCB: What is the investment climate for retail properties in and around New York City?

(left to right) Joe French, Deborah Jackson and Marshall Felenstein.

French: In 2009, there was basically nothing sold. I thank Equity One every morning when I get up because they broke the market. They bought a center in Richfield, Connecticut, for a cap rate around 6.5, and it made others realize they could get that number. True, core assets all of a sudden became hot. The grocery-anchored center market is very hot right now. We are also seeing single-tenant assets be even better. That market didn’t die in the recession. In the city, this is good for retail condos. We have had about 100 transactions to date in 2010 with single-tenant assets in the area. Last year, we had about 15 assets trade, so it is a huge increase. One exciting deal was Thor Equities purchase of a building for $1,400 per square foot.

Parker: We have closed three Walgreens this year so far; two in Staten Island and one in Brooklyn. Two years ago, these were trading at 5 or 5.5 cap rates. We closed these three in the low 7s. There is a unique opportunity right now in the marketplace because the spread on what you can get for financing makes it a positively leveraged deal for cash flow. Two years ago, you were hoping to break even on those deals. We also closed 407 Park Avenue at nearly $2,000 per square foot; the highest retail trade per square foot in the city so far this year. The multi-tenant business is picking up. We closed a $20 million sale of a Super Stop & Shop-anchored center in Nanuet. We are also under contract right now with three Shop Rite-anchored plazas listed between $10 million and $20 million. I also just put a deal under contract on Long Island at a 6.5 cap rate. Financing has also come back. The market seems to be returning to a more normalized state.

SCB: Is there any particular category of seller right now?

Parker: There is pent up demand. There are your traditional sellers of death, disease and divorce that are always out there. Then you had the people who didn’t want to sell because they thought the world was collapsing and they delayed it. We’ve also had a few sellers who have told us they were selling because the capital gains tax is going up and they want to be out before the year ends.

Jackson: Last year, there was a disconnect between buyers and sellers. The buyers were thinking they were going to get these really great deals; the sellers were holding the line and wouldn’t sell for that kind of price unless they were in a financial situation where they had some debt issues. I don’t think there is that kind of disconnect anymore. The buyers realize that it is not a foreclosure sale in most cases. You have to come in and pay a real price. Sellers are saying if they have to sell because of capital gains or other issues that they are going to get the best price they can. The market is a little better now.

SCB: What we are hearing around the country is that not a lot is coming to market, but what does come to market trades at good rates.

Parker: Only if it’s quality product. Secondary and tertiary markets with short lease terms are not saleable because they are not financeable.

French: That product hasn’t had any success and has not been on the market. As the market gets better, we are seeing some of those deals in secondary markets that aren’t grocery anchored. Time is going to tell whether we will be successful with those or not. We are not sure how to price those because there haven’t been any transactions. The other product with some problems are the power centers. Everyone is comfortable with grocery-anchored. The institutions have some expired funds that they are trying to sell the assets of. Some have sold over $1 billion in assets each. There is product coming to market, it is just unclear how it will price. The core properties do very well.

SCB: Ivan [Friedman], from a global perspective, what are your clients asking you?

Friedman: We have started to see more activity requesting new locations. A lot of our clients are mall-based. We are finding that more of our tenants are looking for space in the outlet world, and in Canada. The outlet centers seem to be fairly well occupied. Everyone is clamoring to get into Canada because it hasn’t had the declines that the U.S. has. Most of the centers there are 98 or 99 percent occupied. We represent Disney USA; we have opened a series of stores for them in traditional malls. We are going to open some major downtown areas for them as well. There are tenants that are taking advantage of the market and looking for new locations. The discount stores have had a field day.

(left to right) Barry Fishbach, Ivan Friedman, Tamara Gold and David Rabinowitz.

Fishbach: A lot of the space that was available has been taken. A lot of the Circuit City and Linens ‘N Things locations have been taken. Tenants have taken advantage of those opportunities, whether it be TJ Maxx, Marshalls, or Bob’s Discount Furniture. They are great locations. Same with the surplus Walgreens stores after the Duane Reade acquisition. Secondary locations are the ones that are available.

SCB: There are high barriers to entry in this market. Did you see a wave of retailers trying to get in who couldn’t have a few years ago?

Fishbach: Rents have definitely come down for inline locations and big box. We represent PetSmart. We’ve probably done a half dozen new deals for them in the boroughs. Some retailers are taking advantage of the rents and the spaces available.

Felenstein: There is an emphasis among retailers looking for value-oriented space. The outlet business has had a turn of events. We had a plethora of space and now we have very little new space, particularly in strong outlet centers. There are only two new outlet centers under construction in the U.S., and both are opening in the next few weeks. There is only one center that looks like it is going to get built next year. Our retail clients want value. We are getting a lot of interest in the boroughs, in places that national retailers weren’t interested in for the longest time.

Fishbach: Fifteen to 20 years ago, there were no big box developments in the boroughs. There are still only two malls in Queens. Forest City Ratner and Vornado developed a few projects, so now there are opportunities. The value retailers are also going outside the outlets.

Felenstein: A lot of the specialty retailers are looking in the boroughs right now. We are doing some work with a few retailers who have expressed significant interest there and they’ve said to me, ‘we’re just not ready for Manhattan.’

Wells: Concessions are another incentive. We are getting a lot of rent from landlords that we would never have even asked for 3 or 4 years ago, for unglamorous tenants. The deals I’m working on now — the Whole Foods in the suburbs — are almost all ground up development. We’re looking at vacant parcels of land being able to get financed.

SCB: How far out are those deals — 1 year, 2 years?

Wells: We’re just signing the leases on them right now, but they are ground up development. Some are for late 2011.

SCB: Have you seen retailers come to the table saying, ‘we have to open this many stores now’? Many have stalled their plans and then realized things weren’t as bad as they thought.

Rabinowitz: I had one retail client say that. They are located on the west coast, but they didn’t hit their numbers and now they are looking for more deals. I think that is the exception and not the rule, though.

Friedman: I think that is the exeception as well. Retailers are being very selective. There are, however, more stores being looked at this year than in the last 18 months or so, but nothing like it was in 2005 and 2006. I’d like to go back to the outlet centers: there has been a consolidation in the ownership in outlets. There are basically two landlords in outlets. They own a healthy percentage of the product. We are finding that where the landlords have traditional centers and outlet centers, where there was a big disparity in the rents, the outlet rents are going up significantly. There isn’t going to be that much of a spread between traditional centers and outlet centers.

SCB: Are you talking nationwide or New York area? This area has some extremely strong outlet centers.

Friedman: Nationally.

Fishbach: Consolidation has also been a theme among the retailers. Pathmark is closing some stores. Time will tell what happens with Borders and Barnes & Noble. Blockbuster is another story.

Danielle Brunelli and J.D. Parker.

Brunelli: In New Jersey, of the 12 Linens ‘N Things, about 70 percent of that space has been absorbed. Fifty-five percent of the nine Circuit City boxes have been absorbed. In our vacancy survey, we found at least 50 sub-anchor and anchor locations that are available along the highways of Central and Northern New Jersey. There is definitely still some opportunity out there. Certain categories, like health clubs, grocery and discounters, have been in the market looking to take advantage of these deals.

Felenstein: There are a number of retailers out there — we have four in our client roster — who have given us fairly significant open-to-buys for next year. However, that hasn’t changed with the fact that they are much more demanding in what they want. It doesn’t mean they will take space indiscriminantly. They will negotiate hard, and if they don’t get a good deal, they will pass and move on.

Stephen Stephanou.

Stephanou: A lot of deals that were done 10 years ago are coming up on the streets. Tenants, whether or not they have renewal options or not, are in a dialogue with the landlord. The questions they have are, ‘is this the right location now, 10 years later? Is it the right size?’ They are becoming very specific about size, particularly in the apparel category. Even when they have been successful in that location for 10 years, it is challenging. We are finding the decisions are very hard for retailers to make, even when they like the market. In an ideal world, they would want to stay, but they are questioning whether they want to do that. The other side of that is there were some retailers who went into these markets at the top, in 2005 or 2006. They have a fair amount of term remaining on their leases. Those leases are at rents higher than the current market.  We have been involved in some painful transactions over the past 2 years. These were where the landlord hasn’t let any tenant go; the tenant has to decide how much they are willing to subsidize a sub-tenant. That, unfortunately, has been the case. Going back to your comments on the big box tenants, what I find fascinating is the infill that’s happened between 49th to 42nd Streets. In the last year, retailers have been aggressive — like Urban Outfitters who is taking space at 521 Fifth Avenue. That is exactly the kind of tenant who belongs there.

Felenstein: We get a lot of stuff that comes in with terribly unrealistic expectations. A lot of companies have one person sitting on their board who reads everything and they think they can get a break on New York rents. That comes from no depth of knowledge about any of the particular factors that are there. Some of them come to us in October with the expectation they can open a pop-up store by November 1st. These are the same clients that took 3 or 4 months to get the legal papers done for a mall lease.

SCB: Are there a lot of changing areas in the city?

Jackson: There is ‘new’ news and old news. One changing area is 34th Street. Times Square is another area. Outside  New York there are still different perceptions of these areas. All you have to do is come here and see the density of the daytime workers and the average household incomes. Everyone at this table would say that 34th Street is an area that will continue to transition. A lot of the new retailing over the past few years has gone to this area. Another area is the Bowery — 7th Avenue down to Delancey. Whole Foods came there along with a few other areas. There is a lot of exciting activity in that area.

Friedman: You can’t get any space on 14th Street. It is a small area, but the prices are almost the same as Times Square.

Stephanou: There are two new projects — East River Plaza and Rego Park. What are your impressions?

Fishbach: I was at Rego Park yesterday. There is also Bronx Terminal Market that is new. All of these are multi-level big box centers. Not all the retailers opened at the same time in these centers. The test will be a year or 2 from now when everyone is open and the residents have been exposed to the retailers who are there. We did a PetSmart deal at East River and it just opened. East River has the only Target and Costco in Manhattan.

Jackson: There is also Skyview in Flushing [Queens] that is now open.

Chase Wells.

Wells: These urban power centers are a new product for the consumer [in New York]. They are not used to it. If you ask, you will find that the sales growth exceeds their expectations, but that may take a couple of years to get to the projections that they initially had. When the stores mature, I think it’s all going to be good.

Rabinowitz: There is an education that has to occur on both the retailer and consumer side. Retailers need to learn how to operate in these urban, vertical environments. People in Manhattan are not used to shopping at Costco. They have to adapt to that. You’ll see some things that occur at these centers that make that easier for the consumer.

Pisark: Since it’s my ‘hometown,’ I’d like to speak about 34th Street. There has been a noticeable up tick from the brokerage community in the last year in inquiries for pedestrian counts and subway data. We have the third busiest subway station at Herald Square in the entire system. There have been lots of questions about what Vornado hopes to do for the redevelopment of the Pennsylvania Hotel site. We’re proud to say we’ve weathered the storm on 34th Street. We say, ‘what recession?’

SCB: Perhaps that is because of your anchor — Macy’s — which draws people from all over the world.

(left to right) Ed Hogan, Dan Pisark and Ariel Schuster.

Pisark: Our ‘anchor’ has done well in the past few years, in spite of a little downturn in tourism. It depends heavily on international travelers. The other anchor, the observatory at the Empire State Building, has been booming as well. There have been a number openings: Aeropostale, Geox, Aldo and Esprit in the last year. Stores have done well. When we started our business improvement district in 1992, we had one quality tablecloth restaurant that was in 2 Park Avenue. Now we are proud to say we have 18 quality restaurants in the district. The rents do not make it possible for them to be on 34th Street, but they are on 33rd and 35th Streets. Most are local operators.

French: The key to 34th Street is the [sales] volumes that are done there. I was involved in the Kmart deal there in the 1990s. Kmart paid 10 times its average rent anywhere else in the country. The key to that deal was the sales level at Macy’s. Retailers can do more sales there than anywhere else in the country.

Pisark: JC Penney has done exceedingly well at Manhattan Mall, and the store is two levels below grade.

Schuster: We do a lot of tenant rep work so we do a lot of research. In 2007, the retailers wanted to know what the comp rents were. Now, they are asking us what the sales volumes are. When you look at the markets in Manhattan, they are established. The markets that have softened tremendously are ones where the sales and rents were never inline. If you look at the markets that are doing well — 34th Street and SoHo in particular — the sales were always great.

Friedman: In Times Square, Forever XXI opened a 90,000-square-foot store in June. About 75,000 square feet of the 90,000 square feet are subterranean. They will probably do $100 million in sales per year at that location.

Stephanou: If you look at retailers after the holiday season of 2009, everyone was down. It is interesting how things have changed. Department stores are doing better. Macy’s and Bloomingdale’s are good performers. Nordstrom is doing well. The high end specialty stores are still more challenged. But some stores seem to be holding their own, even in this economic environment. The fast-fashion category — Forever XXI and H&M — continues to be extremely aggressive. They are eating the lunch of a lot of mall-based retailers.

Jackson: It is all about sales and rent. When you look at 34th Street 10 years ago, and look at where they are now, and the kinds of tenants there now versus 10 years ago, it is a dramatic change.

Pisark: The fact that 34th Street is able to support two H&M stores is amazing to me. The crowds in both stores at all hours are amazing. It was like that through the worst of the recession years.

SCB: One of the strongest reasons that New York’s retail has continued to succeed is the tourist traffic is tremendous.

Pisark: In our district, we have 10 locations that are effectively maps of the district that list every store. They are in English, Italian and Spanish. They are used all the time. Macy’s also makes things available in many languages.

Schuster: The dollar has been falling by the day recently, so you see the foreign tourists start to pick up when that happens.

French: My wife is Irish and her cousins come over to shop. The first thing they want to do is go to Woodbury Commons.

Schuster: When the dollar was at its lowest, there were three direct flights every day from London to Minneapolis [for the Mall of America].

Rabinowitz: It is great that there are so many nice things happening. When you look at the economy, not only in this country but around the world, if the job situation doesn’t improve in our country, retailers have to think about the domestic situation. People still are not secure enough in their jobs. There are still too many unemployed to be too positive.

Parker: That is nationally. New York City has added 77,000 jobs this year. We lost about 175,000 jobs total in the recession. The dollar is weak. Travel is up 3 percent year-over-year at metro airports. We are scheduled to add 46 hotels this year; occupancy is around 90 percent, with the ADR around $200. It is relatively cheap to come here for domestic travelers and international travelers.

Jackson: Go to Ohio or Michigan. When you look at retail vacancy in New York versus nationally and then look at what is going on elsewhere, it is positive. If you lost a Steve & Barry’s or a department store a few years ago in Ohio you are not replacing that. There is no one waiting. The other positive for New York is that the unemployment rate isn’t as bad as it is elsewhere. The advantage that we have is that there are retailers who are looking at this market. Discounters are looking, and the shopper wants those kinds of goods. Manhattanites understand that product.

Schuster: Sales have dropped significantly less in New York City than they have elsewhere around the country. For tenants who do want to grow here, they may be forsaking growth elsewhere to focus in New York. They see dollars here.

(left to right) Marshall Felenstein, Barry Fishbach and Ivan Friedman.

Felenstein: They are kicking tires. They are conservative to their approach to New York City.

Stephanou: We have retailers who are seriously looking in Brooklyn. It doesn’t seem like any of the apparel players are doing incredible sales numbers. Before the recession, everyone viewed Brooklyn as a little hipper, maybe a place to introduce yourself to the boroughs.

Parker: The condo product there is turning into rentals because it is overbuilt. The retail has gotten ahead of itself as well. In 5 years, it will be great.

SCB: Let’s step back to this side of the bridge. Ed [Hogan], can you give us an update on the Downtown market?

Hogan: The Downtown story is pretty exciting now that people see the World Trade Center above ground. One World Trade Center is almost 30 stories tall now. The dates they’ve set have been met. There is $130 million in construction per month going on at the Trade Center site, so there is progress. The residential population in Battery Park City downtown has grown considerably since 2001; it is now around 60,000. The tourist population is also growing downtown. The [World Trade Center] memorial will open next September. People forget that the third-highest grossing mall in the U.S. was at the base of the World Trade Center towers in 2001. The demand for that center is not being met. We have been talking about renovating our retail at the World Financial Center and we are pursuing those plans. You will see a significant retail community grow there. It is needed today.

Jackson: For the timing are you talking about 2013 to 2015? The reason the retail did so well was partially because of the towers. Until the new buildings are built, there are a lot of retailers who are not interested in downtown. They see it in the future.

Hogan: I see it very differently. I have seen our sales go up over the last 24 months because of the commitments by the office tenants like Goldman Sachs, who moved its headquarters Downtown. The average income in that building divided by the number of employees is about $650,000 per year. There is a lot of disposable income! Condé Nast will be another office tenant like that. In 2001, there was 100 million square feet of office space downtown. Today, there is 90 million square feet; downtown would be the fourth largest city in the U.S. It is the most densely built square mile in North America and by far the most underserved retail district in the nation. The Downtown Alliance says there is over $1 billion worth of unmet retail sales every year. The demand is still there, whether or not the office towers are rebuilt. The office space at the World Financial Center is not fully leased and we are at an all time sales volume with retail.

Stephanou: The problem is there is not that much [retail space] to show retailers right now. We represented Borders, which was the first store to reopen that was in the World Trade Center. At that point, it was its highest volume store in the country. We relocated them on Broadway. Sephora was another tenant who relocated to Broadway. Both of those stores have done well, but not as well as they did when they were in the World Trade Center.

Hogan: Retailers want to see what the options are downtown. It will be west of Broadway. The World Trade Center had a 16-acre one-story mall. What is getting rebuilt is not that. There will be up to five levels of retail there, but it will not be the same box that was there before. We are looking to reposition the World Financial Center so that all of Downtown is being linked.

SCB: What categories do you see needed now and that you see filling in as time goes on?

Hogan: Immediately, there is a need for more restaurants in every range. There is also a lack of fashion and apparel Downtown. All categories of services are needed.

Felenstein: You have the luxury of time to plan ahead. Most of the retailers we deal with are concerned with Christmas 2010. They want to go to a space in 2011 that will have plenty of sales volume for them to accomplish their goals.

Hogan: Tenants who are looking at new developments are looking at 2012 and beyond. It is not that far off.

Hofmann: Retailers do not like uncertainty. For those of you who know the Washington, D.C., market, it is uncertain. You could go to Virginia, you could downtown. Downtown New York is the same. You have three sites to choose from if you are a retailer.

Parker: We get paid to do deals. As a broker, you are not going to run around looking at space unless there is a deal to be made and you want to get paid in the next quarter.

Stephanou: The reality is that tenants go to the obvious places that we all know. They want the Upper East Side, the Upper West Side, the Flatiron District, the Plaza District, and maybe the Meatpacking District. It is hard to get them focused, to get them prospecting new areas.

Hofmann: We could go around the table and ask ‘if you are building a mall, who are the first five guys you’d want to sign a lease with and will you give them a deal at any price?’ and we’d all say ‘yes.’ Downtown, they will need to show that they have done some deals with tenants to get other tenants to follow.

French: No one has mentioned this, so I will ask: is Walmart coming in the next year?

[Editor’s note: Several people responded ‘yes’ to this, with speculation on the first location. Walmart has not signed any agreements known to SCB.]

SCB: David [Rabinowitz], as one who works with both sides of the table, how are negotiations between retailer and landlord today versus a year ago?

Rabinowitz: It has changed tremendously. My landlord clients are definitely taking tougher positions than a year ago. They have learned a lot from the mistakes they made over the last 2 years. It is a real negotiation now. When retailers think they can have whatever they want, that is generally not the case anymore. The better the property, the tougher the deal.

Friedman: The landlords are ahead of the retailers in that respect. The landlords are taking a tougher stance against retail when retail sales are still less than they were 4 or 5 years ago. Every landlord is taking a tougher stance, and I think it is a premature. Retailers cannot afford the stance of the landlord and there is going to be some pushback.

Rabinowitz: The rents are lower.

Friedman: In many cases, they are not inline with the tenant’s sales.

Rabinowitz: I don’t think any deal will be broken on this, but I think the negotiations are tougher. We have so many landlord clients that, because of the co-tenancy agreements they created, it is unmanageable. They can’t bring in new tenants and they can’t lease up a center, which is to the benefit of the retailer and the center. There is a meeting of the minds.

Friedman: I guess we are Democrat versus Republican!

SCB: Tamara [Gold], could you discuss the lending climate?

Gold: We are back in the market, lending money. We like to see tenants having money in their space. In terms of TIs that landlords are offering, we don’t want them to give away everything in anticipation of a tenant coming in and the possibility of the tenant going dark a few months later. We are seeing some owners who are giving away free rent in lieu of TIs. We are looking at occupancy costs and historical sales. We are open to different deal types.

Wells: Has anyone noticed any adverse impact of the new FASB regulations? I have clients who won’t sign long-term leases because of this.

Friedman: By the time it kicks in, it could be modified or the tenants will figure out how to deal with it. All of our retailers are nervous about it, but the rule can’t destroy retail.

French: The Wall Street guys I talk to say that it will not change anything; they already value those leases as a liability.

SCB: How are luxury tenants doing in New York?

Jackson: The luxury retailers here have been slammed. In some ways, they thought they were immune. We are seeing some recovery there. There was a return to consumer confidence from the higher income bracket. Sales for certain retailers are going up. There is a lot retail activity on Madison Avenue. There are chains who are seeing the return of the customer.

SCB: We ran an article in our October issue on the recovery of the high street markets in the U.S.; rents are starting to grow. Fifth Avenue is included on that list. Changing the subject, are there centers for sale? Is there an influx of foreign investors or pension funds looking to acquire?

French: There are distressed funds who have been waiting for the world to come to an end. It hasn’t happened. That money is starting to loosen up. There are also equity funds. There is money coming from China. The Germans are still looking to invest here. You have foreign money because we are on sale. We have three deals presently with Canadian owners. They like this area because it is close to home. There is also a lot of money on the sidelines. The issue with the lack of investment sales was never to do with the lack of money.

Parker: As a percentage of buyers in the marketplace, foreigners make up a small amount. They invest with local operators. We will probably close between 45 to 60 retail properties in the tri-state area this year. The market is extremely active relative to last year, but not as active as in 2006 and 2007. There are several active funds who are buying everything in sight, as long as it is quality. We are having bidding wars on most of our listings that are A quality.

Jackson: There are a lot of deals where partners are buying each other out of deals.

French: CMBS hit a high of $280 billion in 2007. Last year, there were almost no CMBS loans. We have a deal right now where the buyer has all the old players who want to underwrite the deal. The underwriting is tougher, but the fact is that 6 months ago, these guys weren’t even in the market. That is a positive sign. Even at the peak, the CMBS market only represented 25 percent of the lending market.

©2010 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.