New York City Retail Market Embraces Change On The Fly

by Katie Sloan

Retail and restaurant re-openings this fall gave a modest boost to the New York City retail market in the third quarter. But even with the easing of some operational restrictions, business activity remains diminished in a city known for its hustle and bustle. 

Both retail tenants and landlords have had to regroup and quickly adapt to the curveballs thrown at them by COVID-19 over the past nine months. While retail and restaurant users in some areas are finding more success than others, the market as a whole has been characterized by falling rents and a pronounced shift to delivering goods, services and experiences through different channels. 

In order to get a better handle on current market conditions and the outlook for 2021, Shopping Center Business spoke with retail real estate experts in New York City, Northern New Jersey and surrounding markets.

Submarket Fortunes Vary

Without question, the city’s retail market is still suffering from a lack of office workers and a reduced tourist population as a result of COVID-19. According to recent data from CBRE, through September, the average office re-occupancy rate in Manhattan was 11 percent, meaning that roughly 89 percent of the borough’s office-using population is still working remotely. 

In addition, The Wall Street Journal recently reported that foot traffic across key Manhattan retail hubs like the Flatiron District, Union Square and Chelsea was down 50 percent compared with February based on data compiled by market research firm Foursquare.

With fewer people entering the city comes less business. Office workers isolating in home offices have “changed the dynamic of everything,” says Howard Raber, director of investment sales professional with New York City-based Ariel Property Advisors. “Even from a multifamily standpoint, people have left the city and returned to the suburbs. When people are no longer on the street or working in their offices on a regular basis, certain types of retail suffer on the local level.” 

Raber also says that the fortunes of retailers can vary greatly between districts that have greater concentrations of residential buildings, such as the Upper East Side and Upper West Side, as opposed to neighborhoods that have higher concentrations of office buildings like Midtown and the Theater District. Retail investors must factor this discrepancy into their buying strategies. 

“With retail in residential neighborhoods, investors can see people still going to their local coffee shop, drugstore or restaurant for takeout,” he says. “They can see people spending money at businesses that are ingrained in the community, have loyal followings and should continue to operate. The same logic applies to the suburbs, which are already more skewed toward residential and retail businesses that are entrenched in the community.”

“Every submarket has reacted differently to the pressures of the pandemic, but on average, asking rents have dropped between 20 to 25 percent in almost every major retail zone we track,” adds Richard Latella, executive managing director at Cushman & Wakefield and a member of the Royal Institution of Chartered Surveyors (RCIS). “However, almost every landlord has worked with existing tenants during shutdowns in the city, when it was not feasible to even be open, and most have come to arrangements to keep their tenants in place.”

With regard to the suburbs, Brian Katz, CEO of Englewood Cliffs, New Jersey-based Katz & Associates, notes that tenant demand has been growing in the core trade areas of Northern New Jersey and Southern Connecticut. “We should start to see noticeable absorption in these areas by the middle of 2021,” he says.

Katz & Associates recently represented Atlanta-based home improvement retailer Floor & Décor in the opening of two new stores totaling 154,000 square feet in Danbury and Fairfield, both located in the southern part of Connecticut.


American Dream in New Jersey plans experiential offerings that should be in demand post-pandemic.

However, regional growth in the home improvement space has hardly been limited to the suburbs. The Home Depot recently announced that it would be opening a new 120,000-square-foot store at 410 E. 61st St. on the Upper East Side in a space currently occupied by Bed Bath & Beyond. The deal represents one of the largest retail leases executed in Manhattan in recent years. 

The Atlanta-based retailer also signed an extension at its store at 28-40 W. 23rd St. in the Flatiron District and is opening a 330,000-square-foot distribution center in Perth Amboy, New Jersey.

Matthew Harding, CEO of North Plainfield, New Jersey-based Levin Management Corp., echoes the belief that certain types of users are also performing well in the suburban markets. These users often fall into categories of essential retail — grocers, pharmacies, convenience stores, home improvement stores — that have remained open throughout the entire pandemic. 

“In Northern New Jersey, where retail leasing activity is again picking up and the vitality of a property’s tenant mix is increasingly important, we are seeing rent reductions of up to 10 to 15 percent for the ‘right’ retailer or deal,” he says.

John Azarian, co-founder and CEO of The Azarian Group LLC in Northern New Jersey, adds that in his home territory, the strongest demand for retail space is coming from food and beverage users, as well as fitness centers. Soft goods and clothing retailers, he says, are “hanging by a thread.” 

“Most of our fitness and restaurant users adapted quite early by holding fitness classes in the parking lots and on sidewalks,” he says. “Eateries have moved outdoors onto sidewalks, used tents and implemented creative setups with lanterns, heaters and side  panels.” 

Tough Negotiating

Retail leasing velocity continues to decelerate. The third quarter of 2020 marked the fifth consecutive quarter of decline, according to CBRE. In Manhattan, the average asking retail rent was $659 per square foot in the third quarter, a 12.8 percent decrease year-over-year and a 4.2 percent drop from the prior quarter, according to CBRE. 

The brokerage firm argues that the wave of store closures, combined with landlords offering reduced rates at the onset of negotiations, will continue to put downward pressure on average asking rents in the months ahead. 

Retail tenants seeking deferrals or rent reductions have also affected the movement of rents throughout the course of the year, according to Azarian. What’s more, new tenants are “bottom fishing,” meaning they are seeking rents as much as 50 percent below market or pre-COVID pricing, he says. 

Landlord responses to rent reduction requests from tenants throughout the pandemic have varied greatly, especially depending on the type of owner, says Chase Welles, a New York City-based partner with SCG Retail, a division of The Shopping Center Group. “Real estate investment trusts (REITs) simply do not have the flexibility of a small neighborhood owner,” he says. 

REITs and other institutional investors typically lack this flexibility because they have fiduciary responsibilities to shareholders, unlike private investors. These owners also tend to have more stringent covenants with lenders that, if broken, cause them to incur greater financial losses. 

In other instances, the ability to renegotiate is less a factor of the owner’s financial situation and more so a function of the real estate itself. For example, some retail locations do not have the physical space to dedicate to curbside pickup, or cannot create that space without eating into another user’s parking space. Particularly for users that occupy smaller spaces and must get flexible with how they deliver product to customers, being able to renegotiate the uses of these spaces with landlords goes a long way. 

“In the current climate, the ability to restructure and defer rents ties less to the submarket and more to the property — its relative strength, type of financing and other microeconomic factors,” says Welles. “But central to the success of many small to mid-sized retailers has been a focus on moving forward with an enhanced level of advocacy, flexibility and support from property operations and ownership.”

Harding of Levin Management says that his company has assisted retail centers with social media marketing and signage to both promote public health protocols like mask wearing, hand sanitizing and social distancing, as well as to communicate the fact that the businesses are open. “These efforts have enabled retailers to tailor their operations to the wants and needs of consumers,” he says. 

Rent deferrals or forgiveness can be difficult to provide if a landlord has a mortgage to pay and must seek relief from its lender, notes Bill Walzer, a partner with Davidoff Hutcher & Citron and chair of the New York City law firm’s commercial banking and finance practice. 

Small and mid-sized owners have an incentive to reach agreements with lenders regarding rent disparities in
order to avoid lawsuits, says Walzer. But larger landlords and national
tenants “who have the money and stomach for litigation” are less incentivized to do so. For retailers that do attempt to cut restructured deals with landlords, there’s no one-size-fits-all solution.

“We have seen deferrals both with and without interest [payments], and some of the deferrals eventually become forgiven rent after a period of compliance by the tenant at the reduced rent,” says Walzer. “We’ve also seen some landlords restructure retail and restaurant leases so that the tenants only pay a percentage of gross sales for a predetermined period of time.”

While there have been a handful of high-profile tenant and landlord disputes and lawsuits, most retail chains have successfully executed deferment deals and are now paying rent, adds Katz. “Many local or regional retailers, however, simply do not have the funds to pay rent. Some landlords have been supportive, while others have had to aggressively pursue whatever rights they have under the lease,” he says.  

A Focus on Food

The pandemic has created numerous challenges for the restaurant sector, but there are examples of creativity and evolution that offer glimmers of hope. 

For instance, ghost kitchens are helping absorb space and creating new platforms for serving customers. This professional food preparation and cooking space is set up for the sole purpose of facilitating food delivery through partnerships with third-party outfits such as UberEats, DoorDash and GrubHub. 

The expansion of outdoor dining helped bring a sense of normalcy to the streets of New York City in the third quarter, sources agree. And despite the hardships facing thousands of restaurant owners both nationally and locally, food and beverage was the most active tenant category in Manhattan in the third quarter both in terms of square footage leased and total number of transactions, according to CBRE. 

Examples of these deals include Avra Estiatorio, an upscale Greek seafood eatery owned by Tao Group Hospitality that leased a 16,000-square-foot space formerly occupied by Fidelity Investments at 1271 Avenue of the Americas in the Plaza District. Temperance Wine Bar also signed a 10-year, 4,000-square-foot lease to take over the former Carma Asian Tapas storefront at 38 Carmine St. in the Greenwich Village.

Welles of SCG says that deal activity is picking up for what he calls “premium product.” This type of restaurant product includes spaces that are located near street corners or subways in Manhattan, or which have ample parking in the outer boroughs or feature drive-thrus in the suburbs. The ability to convert some of these outdoor spaces into patio seating should still be an important operational asset, though perhaps less so during the winter. 

There is considerable demand from grocers, clothing discounters and general merchandise retailers looking for mid-size boxes in the range of 30,000 to 70,000 square feet, according to Welles. Whole Foods Market opened a 60,245-square-foot store within Hudson Yards over the summer. 

The office components of Hudson Yards and other mixed-use destinations will also help create densities for retailers, especially after a vaccine becomes widely available and encourages more companies and workers to return to their offices. 

“With Hudson Yards and Essex Crossing and these larger developments that provide that insulated environment, the proof of staying power lies with Facebook, Amazon, Google and Netflix,” says Raber. “These large companies and tech users are all banking on the return of the New York City office market. That will have a trickle-down effect on retail and tourism, and that’s a big reason for optimism.” 

In the meantime, landlords are getting creative and finding new ways to attract visitors. At Hudson Yards, owners Related Cos. and Oxford Properties Group hosted several outdoor events in 2020, including free movie screenings that could be enjoyed in socially distant pods. (Pods are closed off to allow small groups of friends or family to congregate separately from the general public.) There was even a socially distant scavenger hunt for Halloween. 

Sources agree that there is also some optimism among restaurateurs that business will return in 2021. 

“We have utmost confidence in the ability of the food and beverage market in New York City to adapt and thrive in a post-pandemic future,” says Latella. “In particular, despite the challenges the pandemic has created for restaurants, we believe that every single restaurant space that lost a tenant will be reborn as a new restaurant in 2021 or 2022.”

 “Operators that could not manage through 2020 will be able to take advantage of lower rents, more flexible landlords, new open dining regulations and a limited capital requirement for second-generation spaces,” concludes Latella. “For these reasons, 2021 and 2022 should be banner years for food and beverage leasing in New York City.” 

Kristin Hiller and Taylor Williams 

This article was originally published in the December 2020 issue of Shopping Center Business magazine. Click here to subscribe. 

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