COVER STORY, DECEMBER 2011

HIGH PRICES FOR HIGH VOLUME
New York area retail executives see high-end properties and discount retailers active in market bifurcation.
Roundtable moderated by Jerrold France and Chris Thorn.
Transcribed by Liz Burlingame. Edited by Randall Shearin.

Northeast Real Estate Business recently held its annual New York Retail Roundtable, hosted by law firm Goulston & Storrs. While the retail sector in New York is doing well, some attendees pointed to a bifurcation of the market, with high-end retailers and discounters being the most active tenants.

Attendees of this year’s roundtable were: Stephen Stephanou, Crown Realty Services; Christopher Conlon, Acadia Realty Trust; Stephen Plourde, The McDevitt Co.; Marshall Felenstein, Felenstein Was & Associates; David Rabinowitz, Goulston & Storrs; Ariel Schuster, Robert K. Futterman & Associates; Deborah Jackson, Weiser Realty Advisors; Patrick Breslin, Studley; Arnold Paster, Peconic Bay Realty; Esther Paster, Peconic Bay Realty; Matthew Harding, Levin Management Corp.; Andrew Schulman, Thor Equities; Samuel Polese, Thor Equities; Richard Brunelli, R.J. Brunelli & Co.; Lauren Holden, Equity One; Nina Kampler, CB Richard Ellis; and Matt Ogle, SRS Real Estate Partners.

(left to right) Stephen Plourde, Christopher Conlon, Marshall Felenstein, Stephen Stephanou and Nina Kampler.

NREB: Deborah [Jackson], what is your overview of the retail sector in New York?

Jackson: It’s challenging but we are in exciting times. What I’m finding exciting is the activity in Williamsburg [Brooklyn]. Most people would say that currently we’ve had three fashion [areas] — Madison Avenue, Soho and The Meatpacking District. But we’re seeing a lot of tenant interest in the Williamsburg area. Why? A lot of [tenants] get priced out of other areas and you have the traffic and you have a young crowd. Vintage retailers and other types are in the area. On streets that weren’t exciting before, people are now saying, ‘Wow this is promising.’ There’s a lot of foreign interest and a lot of new retailers. When our economy goes south, people become more creative.

NREB: In what specific areas do you see the biggest demand in the New York market?

Schuster: Times Square, Fifth Avenue and the 50s have been discussed over and over. It’s clear the rents there are higher than they ever were, even before 2007. One market that’s really picked up in the last 12 months is the Flatiron district, which a year ago had six prominent vacancies. It has really filled up. You’re seeing a street that seemed to be going the wrong way completely — it’s now one of the hottest markets and you can’t find space for the right size. The interior of Soho has also been shockingly strong in the last 6 months, like Greene and Mercer streets. We are seeing that the area of Soho from the south around Grant Street has really improved. The foot traffic is still not there but rents have doubled in the last 6 to 9 months and that’s not even talking about Broadway, which is incredibly hot, and central Spring [Street]. Those streets that were never really considered $150 to $200 streets are now coming up, which to me is really incredible.

NREB: As a public company, how does Acadia look at New York and the surrounding areas and boroughs, as far as retail opportunity?

Conlon: Acadia Realty Trust chose to focus on an aggressive program to recycle and invest new capital into the urban markets. In New York, in our opportunity fund business, we have a rather large urban development platform. The largest project is in downtown Brooklyn and called City Point. We’ll be announcing anchors there probably before the end of the year. New York treats us very, very well. The barriers to entry couldn’t be higher and population growth in certain selected areas is still occurring.

(left to right) Deborah Jackson, Matt Ogle, Esther Paster,  Arnold Paster, Richard Brunelli and Matthew Harding.

NREB: Andy [Schulman] and Sam [Polese], how do you, as owners, look at retail opportunities today and as you move forward?

Schulman: We love New York and we love the high streets. The high streets really hold their value. Even when things get a little bit tougher, they come back much faster. The climate for high streets is incredible right now for retail, especially because space is very tight.

Polese: At the end of the day, tourism drives a lot of what’s going on in Manhattan. This year, I believe there will be more than 50 million tourists coming to the United States. I think the bulk of them are coming to New York. While they’re here, they happen to buy everything they see because the dollar is weak against their currencies. That is why you see side streets in Soho performing so well and why we see Fifth Avenue now extending down to 42nd Street. We believe that could even continue to 34th Street in the next 5 years.

NREB: Patrick [Breslin], what areas are in great demand by retailers?

Breslin: Fifth Avenue is one of the most sought after. People are always inquiring about prices and sales. People are more interested in hearing about how the sales volumes are equated to the enormous rents they need to pay here. A lot of retailers just knock it out of the park from day one. Until space runs out, Fifth Avenue is going to be on fire.

Schulman: In Flatiron, you had all of those vacancies and now all of a sudden there are no vacancies. Everyone wants to be there when they didn’t want to be there.

Polese: We own a building, 929 to 933 [Broadway], and we’ve watched the rents escalate $100 a foot in 6 months.

Stephanou: It’s a great set of buildings that you’ve renovated too, by the way. The north end of the Flatiron District has really activated, which was also activated by Union Square. So it’s just become a win-win situation for that whole area.

Kampler: When REI opens next month in the Puck Building, we’re going to see a continued southern movement of the retail. There’s a lack of availability and congestion elsewhere and seemingly bargain prices, compared to other parts of the city.

(left to right) Patrick Breslin, Ariel Schuster, Samuel Polese, Andrew Schulman and Stephen Plourde.

NREB: With the World Trade Center and World Financial Center, is retail starting to come back to Downtown? Is this going to be great?

Kampler: The answer is yes. We’re not going to know exactly how this shakes out until the next 6 to maybe even 18 months go by. But in terms of interest level, it’s escalating. I think the latest statistic was 56,000 people are now living in the tip of Manhattan, so you now have a 24/7 market.

Plourde: It really is incredible, a lot of people don’t think about it but downtown south of Chambers Street is the fourth largest central business district in the entire country, behind Midtown, Chicago and Washington, D.C. There’s 90 million square feet of office space down there and when the World Trade Center comes online, that’s another 10 million square feet. The residential is huge. That changes the dynamic into a real 24/7 neighborhood. We’ve talked about the tourism, that’s a huge ingredient with The World Trade Memorial Center opening up. It really will be a special place.

Stephanou: The residential population of lower Manhattan has doubled in the last 10 years. In other words, it doubled after 9/11. People didn’t flee it, people still were involved in it. What’s interesting is that before that it was sort of Tribeca and those areas were more of an adult community versus family-oriented. What has happened now — and part of it has been driven by some good public schools that have been put there — is many young families living there now. So the demand for apartments there is sky high. There has not been the pool of retail properties in an assemblage to drive a lot of new retailers [to the area]. They’re still a little bit fearful of it. They see Broadway, sort of below Chambers Street, which is a little down and dirty. But there are huge opportunities and you have basically the three central retail venues that are underway. There is Westfield at the World Trade Center. Besides the World Financial Center, Brookfield’s modification and expansion of its retail venue and then a rescripting of South Street Seaport that Howard Hughes now has from GGP. The dust hasn’t settled on all of that at this point.

Plourde: The interest level from aspirational retailers and luxury retailers is higher than ever before at the World Financial Center. Once all the construction settles down, the dust goes away and the two transportation centers come online, you will have a wonderful underground concourse. The connectivity between Westfield and World Financial Center will help create that critical mass of complementary retail between those projects.

Felenstein: If you look at this morning’s newspaper, Wall Street jobs are going down right now at a heavy level. Stephen [Stephanou] and I were talking when we first walked in about the luxury part of the world here in New York City. One of the major reasons that New York is so powerful is the fact that you do have all of the luxury that tenants want and need to be here. They’re still doing okay. However, it’s the middle guys that are suffering. Their costs are high and the sales do not justify, in many areas, the cost of being in New York.

Kampler: Really the whole trend now is the bifurcation of retail. We’ve seen it coming and it’s a confirmation of that. Someone who is an affluent customer with endless disposable income is still going to buy scarves and belts and Anthony luggage. Then, you have the person who is either part of the 9.1 percent unemployment rate or they are underemployed. Or they are just nervous, such as a 50-year-old who is not quite sure how their money is going to sustain itself. That person may become more of a shopper at Target, Kohl’s and TJ Maxx, and the value that started getting Flatiron going to begin with. You’ve got that bifurcation and I believe that will continue.

Ogle: It’s been interesting to see how investors are looking at the market today. We’re seeing a lot more international investors saying, ‘Where do we need to focus in New York?’ Across the board, the interest level has been very high in transit-oriented markets. For downtown, I hear 86th Street all the time and I hear Grand Central. You see a lot of development at Port Authority. I think you have more margins for error. You have more people passing by your properties. When you look at it, it’s a less risky investment. Investors are more willing to pay that low cap rate to get in.

NREB: Are investors still bullish on Manhattan?

Holden: I’m with Equity One and we’re fairly new to Manhattan as an investor. In the last 18 months, we’ve entered Manhattan, and this comes from meeting with the retailers. Now we have grocery-anchored, necessity-based retailers and we are meeting with the grocery stores, meeting with Walmart, meeting with TJ Maxx, meeting with Kohl’s; they all want to be in Manhattan. We keep hearing this over and over again, so that’s really one of our top markets.

Harding: In the suburbs, companies such as [Equity One] are really looking at the New York market as a core market also. They’re seeing cap rates on grocery-anchored stuff right back where it was or better. A lot of capital out on the sidelines is eagerly looking for core, grade A properties in core markets and we’re seeing that throughout the suburbs surrounding New York City.

NREB: In Manhattan, you had JC Penney, Target and Costco enter. Has that opened the door for retailers who have stayed away and might have been awakened?

Stephanou: Penney, to the surprise of some, has been successful in the Vornado project Manhattan Mall. It sort of got forced into a physical plant that wasn’t conventional. Notwithstanding the fact that they were up against the 1,000-pound gorilla of Macy’s across the street. Our understanding is that they’d love to have other opportunities in Manhattan and you can sort of figure where those will likely be. But the challenge for anything that’s 90,000 square feet or larger is finding a location, and finding a location that makes economic sense. When you look at a model of the big deals that were done in the Plaza District, those kinds of rents are not the kind of rents that department stores or large specialty stores are likely to step up to. In Brooklyn, a lot of those buildings at one time were family-owned department stores and they got carved up. Now, they are reassembling them for larger retail. We represent Nordstrom Rack in the city. The challenge is finding a suitable location that’s got the kind of column spacing and the ceiling heights that you want.

NREB: Where do you see New York a year from now? Are you still looking for buying opportunities?

Polese: Absolutely, we are proactive right now. We probably have $1 billion that we’d like to put out, and we’d like to put the bulk of it out right here. And I agree with what everyone else has said. We preach this to everyone we talk to — we’re living in a tale of two cities. There’s New York City, and then there’s the rest of the country. A year from now, New York is going to be stronger and rents are going to be higher. There’s going to be an expansion of neighborhoods like in the Soho market where you see those side streets starting to expand. You are going to see strength in Brooklyn, when you go to streets like Court and Smith that are going to get better. There’s no doubt that Fulton Street is going to get stronger. Montague Street is going to get stronger. I feel very good about being in this market right now.

Rabinowitz: I think the high end is going to be fine; the trophy property is going to be fine. That’s where the money’s going. It’s sobering to think about what’s going to happen with the economy and the politics in the city. In New York, we’ve had Giuliani and Bloomberg — good mayors, at least in terms of commercial activity and the business end. I don’t know what the future holds. Wall Street is losing a lot of jobs. If we go into another recession, I think that’s going to impact the retailers’ appetite to do more deals, especially at higher rents.

This is an abridged version of the roundtable. To read a full transcript, please see www.shoppingcenterbusiness.com/articles/DEC11/story1.shtml which includes a discussion of New Jersey retail and the Hamptons as well as retail financing.

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