With several new projects under construction and demographics in the boroughs changing,
New York’s retail scene is evolving.
Roundtable moderated by Jerrold France and Randall Shearin
Shopping Center Business held its annual New York Roundtable recently at the offices of Goulston & Storrs in Midtown Manhattan. More than 20 area executives [see sidebar] participated from the Tri-State area’s retail real estate community.
New York Retail Roundtable Participants
Samuel Mizrahi, President, Commercial Division, Century 21 Mizrahi Realty
Deborah Jackson, Managing Director, Cushman & Wakefield
Nina Kampler, President, Kampler Advisory Group
Stephen Stephanou, Principal, Crown Retail Services
Tim Collier, Vice President, Leasing, Acadia Realty Trust
Ed Hogan, National Director of Retail Leasing, Brookfield Properties
Richard Brunelli, President, R.J. Brunelli & Co.
Ariel Schuster, Executive Vice President, Robert K. Futterman & Associates
Michael O’Neill, Senior Director, Cushman & Wakefield
Victor Menkin, President, Menkin Realty Services, Inc.
Andy Graiser, Partner, A&G Realty Partners
Andrew Miller, Vice President, Forest City Ratner
David Rabinowitz, Director, Goulston & Storrs
Ken Simon, Vice President, Real Estate, Heidenberg Properties Group
Lisa Rosenthal, Managing Director, The Lansco Corporation
David Ruddick, Executive Director, Leasing, Westfield
Richard Cohan, Retail Consultant, 34th Street Partnership
Helen Putterman, President, Cohen & Company
Matthew Harding, President and COO, Levin Management
Mitchell Salmon, Managing Director, Garrison Investment Group
Peter Braus, Managing Principal, Lee & Associates
Joseph French, Associate Vice President, Investments, Marcus & Millichap
Special thanks to our host, Goulston & Storrs.
SCB: How has the market changed over the last year?
Jackson: What has evolved is that there are so many hot areas for new developments and retail expansion. We have areas like The Hudson Yards and Downtown that are booming with the World Trade Center and Brookfield Place. There have been huge deals down there with Zara and Urban Outfitters. Amazon has also announced a store at 34th Street; Microsoft is opening on Fifth Avenue. It is harder to sit here and say, ‘Gee, everyone is interested in Soho.’ Across the city, everywhere is exciting.
Stephanou: I agree. Areas that were not on everyone’s radar screen several years ago clearly are now. Downtown is probably the most important story because of what Brookfield is doing at Brookfield Place and what Westfield is doing at the World Trade Center. The Zara deal downtown is interesting because it shows that retail is willing to deal with challenges, like non-conventional spaces. The exposure is so great it outweighs the challenges. Outside Manhattan, there is significant activity occurring in the boroughs. A month ago, Macy’s opened a new store in the expansion of Bay Plaza in the Bronx. Related’s project in Brooklyn — Gateway — has a new JC Penney, Nordstrom Rack, DSW and other players. That project doubled in size and has opened strongly for retailers, from all reports I’ve heard. The Empire Outlets project in Staten Island is intended to capture a lot of tourists.
SCB: We have representatives from two of the largest projects downtown — Brookfield Place and the World Trade Center. Ed [Hogan], what do you see going downtown?
Hogan: Our recent exciting news is landing Saks Fifth Avenue for a full-line, 85,000-square-foot store that will be in the heart of Downtown. Our center is about 300,000 square feet; it is 90 percent leased at this point. We have established Brookfield Place as the destination for the luxury shopper Downtown. We also did a lease on Church Street with Saks Off Fifth, next to Century 21.
Ruddick: I’m amazed about what is being created Downtown. It is unique, from a global perspective. It is beyond shopping, if you look at what we are doing with events, digital and retail. It will be a total experience for customers. There is a new sense of place there. We have 150 stores under one roof that is temperature controlled. Our center will have contemporary design, high street, retail and entertainment all under one place. When we opened Westfield London — it was a £1.1 billion investment — I see a similar synergy in what’s being created in Downtown Manhattan. What we are doing, along with what Brookfield is building, is creating an epicenter of retail.
SCB: Do you think Downtown will be the place to shop for tourists?
Ruddick: There is a new pulse; I think Manhattan is a series of many pulses. The size of the market here is extraordinary. There are more than 52 million tourists visiting each year, spending $35 billion each year, including their hotel room and food. That is a market by itself. We think we will be getting 13 to 15 million of those tourists a year to our center.
Hogan: Downtown is changing, and tourists will be part of that, but not the entire market. You’ve never seen $30 billion of construction happen in such a finite area in the U.S. before. Everyone is going to want to see it. If you add the tourists to the already dense demographics there, it is a marketplace that is much needed.
Braus: I don’t think it will supplant Midtown as a primary shopping district for tourists but, as Brooklyn has become more of the center of gravity for people to live, it will be so much easier for them to go Downtown than it will be for them to go Uptown. Brooklyn will be well served by the stuff you are doing.
SCB: You have been doing a lot in Williamsburg. How is that market changing?
Braus: Williamsburg is an exciting, emerging market. A lot of tenants are going there. The branding of going there is so big for these companies. J. Crew has just opened a store; Madewell signed there. Urban Outfitters has done a store called Space Ninety 8. These brands recognize that the opinion leaders are in Brooklyn. It is a great place for brands to try new and interesting concepts.
Stephanou: When you walk on Bedford in Brooklyn, there are so many foreign languages spoken. When you talk to the retailers in Williamsburg, they have very sophisticated customers who live there; the customers are not stumbling across the stores. These customers come from different parts of the world, and the United States, of course. There are other areas that have changed rapidly. Eataly has transformed the Flatiron District, and has been the catalyst for the area north of 23rd Street. Union Square is also fantastic. To sophisticated shoppers, these are all interesting places.
Schuster: One point about Downtown, for the retailers I represent the Condé Nast move was a pivotal moment [Editor’s note: Media company Condé Nast moved its headquarters to floors 20-44 of One World Trade Center in November, taking 1.2 million square feet of office space that will house 3,400 employees].
Jackson: Condé Nast also was pivotal in changing the perception of Times Square years ago.
O’Neill: So much of Downtown’s recent success and momentum is the result of clarity. If you look over the course of the last five years, there was a sense that retailers wanted to understand what was happening Downtown. They were paralyzed by what was unknown — what was coming down the pike. The retailers wanted to see the plans. Now they have that clarity. The retail community, by and large, follows rather than leads. Now we have the confines and parameters established in the market.
Graiser: I am excited about the markets that are growing. We spend a lot of time with retailers who are trying to close space and restructure leases. We are seeing more New York City leases come to us. Retailers are telling us that they can’t afford it anymore. These retailers have jumped in with both feet fast; it was the herd mentality. We hardly had any national retailers who were looking to dispose of New York City leases, now they are. Landlords won’t have a problem, because there is so much demand. I am a little concerned with how fast some of these retailers are growing in New York.
Rabinowitz: You do see some of that. Union Square Café was one case where they could not afford the increase in rent. How high are the rents going to go and how will retailers pay for them? I walked home last night to the Upper West Side and I did a very informal survey between Broadway and Columbus/84th Street. On the west side of Broadway I counted 11 retail stores that were closed. They may be re-leased, but they are closed. I also question where retail is here.
Harding: Our business is cyclical in nature. We’ve been going up for a long period of time. At some point, it will have to turn around.
Kampler: For some retailers, there are limitless opportunities because there is limitless capital because there is limitless consumerism and demand. For others, maybe it is time to end. When was the last time you went to a restaurant that was around 15 years ago, other than a few strong institutions?
Graiser: There was a great article in The New York Times over the summer about high end restaurants that were responsible for the development of some of New York’s neighborhoods. Many of the leases are coming up, and they are not going to be able to afford to stay in those neighborhoods. There is a long list of restaurants waiting to pay that rent.
Kampler: In New York, you have to ask if it is a neighborhood location or a tourist-driven location. Besides the fact that New York is the epicenter of tourism in the U.S., there is something else at play. Ninety percent of tourists now say that their number one activity is shopping. Tourists are reinforcing all the retailer expansion. How many tourists are going to the Upper West Side? Downtown, when you are done with the museum and the memorial, you can go to Brookfield Place and Westfield and Empire Outlets on Staten Island.
Menkin: We are not stockbrokers. We don’t have posted exchanges. At the end of the day, there is a strong element of confidentiality that runs throughout our industry. Because of that, it is difficult for landlords, tenants and brokers to get a good read on what is happening with certain [lease] situations. The effective rents have to be considered with the landlord contribution, the rent concession and the percentage provisions. These elements of the deal are known to the parties to the deal. It is unusual for anyone outside those parties to get much insight to that. The Upper West Side stood as one of the premier areas to live in the city. It still is, but as housing took the turn that it took, and more people began to live in Brooklyn and other areas, that lifestyle component doesn’t work for retailers on the Upper West Side anymore.
SCB: Change is constant in retail. Richard [Cohan], there have been some new changes in the 34th Street area.
Cohan: New York has recovered from the recession stronger than anyone would have believed. We are thrilled that Amazon is coming to 34th Street. It will bring even more people. The publicity and media coverage has been phenomenal. We are finding in our district that new restaurants are opening successfully.
French: The boroughs also have huge growth. There is 4 percent population growth [yearly] in each of the boroughs, 6 percent in Staten Island. The boroughs are underserved from a retail standpoint. Upper Manhattan — formerly known as Harlem — is missing all kinds of services.
Mizrahi: In Brooklyn, specifically, there is a lot of change occurring. There is regentrification happening. Flatbush and Knickerbocker avenues were always underserved; there are a lot of vacancies in those neighborhoods but the rents are climbing. We have seen a big change in services that are coming into those areas. I’m doing a lot of deals with urgent medical care facilities, dental care facilities and pharmacies. Retailers are not able to service those communities anymore because of all the hipsters are moving into the area. There used to be apartments that were renting for $1,100 per month; now developers are coming in and rents are $2,500 to $3,000 per month. A lot of people who were living in those areas are moving away. The retailers who were left cannot service this new affluent renter. There are bars and restaurants that are opening; it is becoming a much nicer area. This is not just Williamsburg, it is all moving south.
Brooklyn is unique. Jamestown is creating a project out of warehouses they have under control [known as Sunset Park]. It will be everything from manufacturing to photo studios to artisanal bakeries. There are opportunities. In Williamsburg, the opportunities were created because you could rent spaces that were inexpensive. On Bedford now, the asking rents are $200 or $300 per square foot. There are people who are priced out. I’ve told a number of retailers that I’ve worked with that they are sitting on a time bomb in Manhattan. They have leases that are maturing; they may have options but they are at fair market rents. If you are not a retailer who has hundreds of stores, you may find that you can’t pay the rent, even though you are doing well. Stephanou:
Rosenthal: There is a disconnect right now. A number of stores have indicated that they are not breaking even right now. In areas like Madison Avenue, prices are very high. There is also a lot of vacancy right now. Some European retailers might take a Madison Avenue property as a billboard, but for companies who need profitable stores they will either have to negotiate hard or go to Third Avenue.
Menkin: So far, I haven’t heard anyone raise the Internet. A lot of what we are talking about is ‘experience’ retailing. Whether that is Brookfield Place or the regentrification of Williamsburg, when you go to these places you are going there not just to buy something, but to have an experience.
Collier: Successful retailers are going to be the ones who figure out omnichannel retailing.
Salmon: When you have an omnichannel network, coupling online with bricks-and-mortar, if a shopper returns something, the retailer has a 107 percent sales return [people will buy more than their original purchase] once they enter those four walls. That is part of why Amazon is locating on 34th Street. They also realize that the experience is part of living. An exchange with a computer is not necessarily satisfactory.
SCB: Many online retailers have reported that their sales have gone up when they started opening physical stores.
Kampler: Omnichannel is the integrated experience. It is not about segregation of the different experiences, it is about the integrated experience.
Rabinowitz: We work with retailers who are traditional bricks-and-mortar, but they are doing more online. The result of omnichannel retailing is that retailers are going to have smaller stores. We are already seeing that. Maybe in Manhattan it won’t be a big deal because it is a challenge to find large spaces anyway. In the suburbs, I think it will be more apparent.
Ruddick: The convergence of retail and digital is happening now. It is about the sharing of information. As soon as we can determine the trust formula — the sharing of information with retailers and landlords — that will give us the completed package. The visit to World Trade Center starts on the couch. It doesn’t start when you get to the door. That is usually the research for the trip, and the social media associated with the fact that you are going to the World Trade Center today and linking that with your friends. When you arrive, you will have a personalized, customized message greeting you. It is not just saying there is 50 percent off today; it’s about personalizing the experience you have to your taste. It is about recommending the next store you visit. Everyone wants to go to a place. When this convergence happens in the next few years, everyone will understand the nature of the Internet. There is a huge advantage, not a threat.
Stephanou: There are commodity products that are easy to buy on the Internet. The savvy retailers are buying into Internet companies for the technology. One retailer I work with has invested in several young tech companies who are pushing Internet selling technology. In-house, that would take them 10 years to develop, but they can easily buy it.
Menkin: Luxury retail is about as strong as it has ever been. The experience of going to Madison Avenue and buying that beautiful bag or pair of shoes is part of what people are buying into.
Salmon: We own and asset manage millions of square feet in secondary and tertiary markets. A lot of what we are seeing in Manhattan is that the middle of the market is gone. The high end is there and the value-oriented shopper is there, but the middle is less there.
Kampler: And it will be less there when we gather again next year.
Salmon: You need to shop in the supermarket, but you also want to have an experience when you go. That’s why there is an entertainment component to shopping. You have to be a smart owner by recognizing these things. Buying by the pound in secondary and tertiary markets isn’t necessarily the answer.
Kampler: The retailers who are not just surviving, but thriving, have figured it out. They are taking a bifurcated approach to the consumer demand. Ralph Lauren, for example, has its luxury component at Madison Avenue and 72nd Street, taking over the old Disney store. They also have the Polo store there, which is more aspirational. H&M is capitalizing on its infrastructure, realizing what people can aspire to and what they can access.
Simon: As a small owner, creating a sense of place has tremendous implications for me. We could never afford to do what a Westfield or Brookfield is doing — creating a sense of place.
Ruddick: You can buy a spin bike for $750 and use that at home every morning at 6 a.m., or you can go to SoulCycle and pay $35 for a class. There will be 70 people there tomorrow morning, all of whom have trudged to get there to have this sense of community. If you do the math, why wouldn’t you put earphones in and ride a spin cycle in your bedroom? Because you want to be part of a community or have a sense of place. For developers like us, the investment to create places like this is critical. There’s also a flight to quality among all retail owners, which is where you want to own the best assets. That takes a continual investment.
Harding: On a smaller scale, we see a flight to quality in our suburban portfolio. You still have to be number one in the market if you want people to come to your center.
Simon: As a management company, if you can develop that technology you offer a tremendous advantage to owners like me because we can’t afford to do it.
Salmon: We looked at a number of properties in suburban New Jersey. They were best in class in their markets. Maintaining those environments is an expensive proposition. The more you allow them to slip, the more you are dinged for that when you sell. When you are in a market that is not as galvanizing as New York City, you have to look at all the resources available to you in that market and work them.
Brunelli: The best shopping centers have the best tenant mix. In the suburbs, creating a sense of place could mean that you host a car show on a Friday night.
One area that we haven’t touched on that is such a critical component today is food and restaurants. The white table restaurant business is changing drastically. Food brings frequency and extends the shopping experience to any development. Time Warner Center has been a wild success, even 10 years in. The most important tenant they landed there was Whole Foods. It brings a tremendous amount of frequency to Time Warner Center. O’Neill:
Stephanou: You need to have approachable food — places where people can go to lunch every day.
Hogan: For Brookfield Place, food is a huge component of our success with the neighborhood. Food is a different business than it was a few years ago, because of the Internet and because of TV. People care about what they eat. If you are 25 and making a living in Manhattan, you are going to treat yourself to good food and a good experience. That is where you see younger people splurging.
SCB: Aside from projects, how important are food venues and grocery stores to neighborhoods?
Menkin: In New York, there are three segments to the food industry. One is the major developments that manage their tenant mixes effectively. The next is the in-house food services, like catering, hotel and corporate food services. Last, you have the Wild West — the restaurants and cafes. It is every man for itself; one landlord could not care less about what the
building next door is doing. It is challenging for a restaurant or café operator to break into any kind of market. The cost of entry is huge. I’ve been marketing a location on the Lower East Side where a California firm invested $5 million to build out a 5,000-square-foot restaurant that lasted two years.
Ruddick: It used to be that you had to have food because people had to eat while they were in your development. Now, people travel for food. Everyone is a culinary expert.
Kampler: Other than the uber wealthy with the giant apartments that are mostly empty, you have young people who are marrying later and having smaller houses. People do relatively little in their apartments: they exercise and shower at the gym, they eat out and they live at work.
Salmon: Regarding the impact on communities, the Meatpacking District has a project underway [Gansevoort Market] that hopes to create food as an anchor. New Yorkers want to have diversity and energy with the food offerings.
Cohan: Even Macy’s Herald Square has embraced food. They have four Starbucks in Macy’s. There is a McDonald’s, there is a pub; and Stella Restaurant is on the sixth floor.
Simon: There has been a startling change in this area in the size and scale of supermarkets. Fairway, Whole Foods and others have changed that.
Menkin: A lot of supermarkets are now incorporating on-site dining.
French: We are clearly under-supermarketed. There is greater demand in the boroughs. The Bronx has one supermarket. There are 150,000 people within a mile and there is one supermarket; over 1 million people in three miles.
SCB: Is there a need for more daily use retail, like drug stores and grocery stores, in the boroughs?
Mizrahi: In the boroughs, there are great incentives for supermarkets. They are trying to lure more healthier foods into the markets. There are quite a few supermarkets that are moving into those neighborhoods. They are generally smaller operators.
Miller: We find that a lot of it is about educating retailers who are accustomed to a suburban environment. There are so many people in New York who walk to shop. If they need a livery, they will take one home. Most are in the immediate vicinity. You have to get the national retailers comfortable that most of their metrics are not relevant in New York and environs.
Simon: The distribution and logistics are also issues for them.
Rabinowitz: Are you seeing retail condominiums being created and sold in the city? Some funds just want to acquire retail; they do not want a mixed-use building.
French: It is huge in the city and they are in high demand. Cap rates [for retail condos] are very low. You have a mixed bag of buyers, including institutional buyers who view them as stable assets. Maintenance is less expensive. The demand has pushed prices up.
Putterman: Last year, we added a department just to sell retail condominiums. In the last six months, we closed one per month in Manhattan.
O’Neill: One of the reasons why you have seen such incredible demand [for investment] in the retail sector is the percentage increase in rents people are able to underwrite comparative to other asset classes. If you look at an investment in office or residential, you are looking at a modest increase in rents each year. Historically, in Manhattan, you have submarkets where you have had 50 to 100 percent increases in retail rental rates. That aspect allows for underwriting that is completely different than other classes. SCB