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Category ArchiveRobin Abrams

Is High Street Retail (Finally) on the Upswing?

It’s been a bumpy few years for high street retail, and at the risk of taking us off high alert too early, it looks like we’re finally entering a period of stabilized rents, increased deal activity, and a détente between e-commerce and bricks-and-mortar sites.

At the height of the market in 2015, everyone lost sight of the fact that retail stores needed to perform and that sales had to support rents. On prime Madison Avenue, for example, rents jumped seemingly overnight from $1,100 to $1,500 per square foot to an all-time high of $1,800 to $2,200 per square foot.

Putting aside the jolt e-commerce delivered to the rest of retail, this was never sustainable. Landlords increased rents to unrealistic levels and tenants grabbed spaces at any cost. There were painful repercussions for both, ultimately prompting stores to exit the market. Landlords who continued to demand top dollar found themselves saddled with vacant spaces.

Today retail rents have declined by 30 to 50 percent from the peak and leveled off, delivering a much-needed correction. Now those prime Madison Avenue rents have returned to their previous $1,100- to $1,500-per-square-foot level.

Not surprising, the rent adjustment is bringing about a renewed demand for retail spaces.

Tenants initially tiptoed back into the market with pop-ups—short-term scenarios to occupy a space, move some product, build a brand and make a statement. Brands like Amazon and Google did experiential pop-ups, while other brands did exciting collaborations like Supreme X Louis Vuitton. And then there were multiple pop-ups that provided great brand exposure for everything from Casper Bedding to Yankee Candle to Unilever’s multiple pop-ups for St. Ives skincare, Magnum Ice Cream Bars and Pure Leaf Tea. On top of that, it is now becoming the norm for many fashion apparel and shoe brands to do pop-ups in retail spaces for fashion week—i.e., Bogner and Sophia Webster. Lastly, some brands take pop-up space to conduct sample sales to clear out merchandise. Christian Siriano occupied a space on Madison Avenue for a week, and featured fabulous merchandise at much-reduced prices.

Now we’ve gone from very short-term pop-ups to seeing tenants sign one- to three-year leases with options for long-term extensions, a scenario that is limiting risk for both landlords and tenants. If sales are strong and the stores perform well, the tenants plan to stay long term.

Brands are reengaging, perhaps taking fewer stores or spaces with a smaller footprint, but making a real commitment, spending money, and opening retail locations with substantial product.

Retailers that aren’t yet ready to commit to five- or 10- or 15-year leases are nervous about the changing retail climate and future of the industry. Their anxiety is heightened by the constant drumbeat that e-commerce will continue to take market share away from bricks-and-mortar stores.

But I believe that retailers should relax because retail is all about driving sales and there is now less concern whether those sales originate online or in a store. If customers visit a store and it helps them make a decision to go home and buy merchandise online, then that store is serving a purpose.

A classic example is a luxury online brand we represented that wanted to test the New York City market. The tenant opened in a pop-up space in Soho, which was so successful we found the store a permanent space in Soho where sales have been phenomenal.

This retailer understood after opening the pop-up how important it was to have a physical presence. The managers learned that there were expensive products customers weren’t comfortable buying online. Instead, customers wanted to go to the store and see and touch these high-ticket items before making such a significant purchase.

For bricks-and-mortar shops, the lesson is that the internet isn’t something they should fear but embrace and integrate into their brand identity. For e-commerce sites, the lesson is that to increase sales, online retailers should open a physical store, which today is more doable than ever in this climate of reasonable rents.

Robin Abrams is a principal and vice chairman of retail at Eastern Consolidated.

Source: commercial

Euro Retailers Sense Opportunity Here While US Brands Look to Old World for Salvation

Last week, while JLL retail pro Michael Hirschfeld was in London for business, he learned of three U.K. retailers collapsing.

Those were the U.K. arm of Toys “R” Us, which went into insolvency administration, Maplin Electronics, which failed to find a buyer to get it out of administration, and dining chain Prezzo, which is being restructured. In addition, the 600-fleet London fashion chain New Look is looking to make deals with landlords to close underperforming stores and reduce rents.

The news sounds eerily similar to headlines in the U.S. as bankruptcies, e-commerce and the popularity of discount department and specialty stores have impacted the retail business on both sides of the pond.

“I think the retail challenges are universal,” said Hirschfeld, a vice chairman of national retail tenant services at JLL who spends 80 percent of his time bringing retailers from Europe to the U.S. and vice versa.

This comes, however, with a big caveat.

It is often said that what happens in the U.S. market will then follow in Continental Europe and Great Britain. But JLL warned in a retail report comparing the U.S. and Europe at the end of 2017, “we shouldn’t assume markets automatically mirror each other.”

In Europe, and the U.K. in particular, retailers braced themselves for the change in shopping patterns due to e-commerce faster and earlier than did their U.S. counterparts, according to the JLL report.

And beyond the internet, there are clear differences between the two markets.

One of the big ones is the sheer amount of retail space available in the U.S., in large part due to an excessive number of shopping centers. In the U.S., there is 13,713 square feet of leasable shopping center space per 1,000 people, JLL determined at the end of last year. In the U.K., by contrast, there is 3,175 square feet per 1,000 people, and in Europe as a whole, there is 2,335 square feet.

And the European retailers smell the opportunity—many view the U.S. as if “it’s on sale,” Hirschfeld said. “You’re seeing rent levels that you could achieve in the financial crisis. It’s a very opportune time. The demand is super strong.”

Hirschfeld brokered deals to bring British clothing company Superdry to various cities in the U.S. and is working on a deal for British toy store Hamleys to come to New York City. Accessories brand Furla, which comes from Milan and already has a store in Manhattan, is expanding with a new lease in Aventura Mall in Miami, Fla. (one of the top malls in the country), and one in the Forum Shops at Caesars in Las Vegas (another top U.S. mall) with likely another three or four more in major markets, he said of his client.

Susan Kurland, an executive vice president and a co-head of global retail services at Savills Studley, said that the difference between retail in Europe and the U.S. is the vacancies.

“The difference is their spaces are filled,” Kurland said. “You walk down our Madison Avenue, and almost every store on Madison Avenue is available.”

She is working with a high-end Chinese-owned Milan-based company, which is looking to enter the U.S.

“[The owner] feels the only places to expand are China and the U.S. as those are the two most important markets,” the broker said. “They’re in…the exclusive places in China. They’re on the important street in Milan. He feels that the U.S. is really important for his expansion.”

While there will be more store closures in Europe, JLL determined that the continent is “unlikely to experience the sheer volume of closures currently being forecast in the U.S.”

Another distinction between the U.S. and Europe is that most of Europe employs a high-street model rather than a shopping-center model. Furthermore, in shopping centers, the U.S. has relied on department store anchors (which have been one of the worst victims of e-commerce and commoditization), JLL noted. In Europe, on the other hand, shopping mall owners have been quick to switch gears with their anchor tenants, often turning to food-and-beverage concepts, and they are more diverse in their offerings.

Yet another important difference between European and U.S. leases is the rent structure. In the U.S., when a tenant signs a lease it knows what the rent is for the entire term. In the U.K., for example, you may sign a 10-year deal, but every couple of years you go through a fair-market rent review process, Hirschfeld said, so you don’t know your rent.

But one thing both places have in common is that consumers have so many options for how they want to shop.

“We’re seeing across the board a fragmentation of distribution,” said Betsy McCullar of Hilltop Alliance, who develops and executes marketing and strategy solutions for brands and businesses. “Western Europe is even more fragmented than the United States because, for example, the U.K. and Germany—and France, to some extent—have a big mature structure of department stores. But Italy and Spain are still dominated by one-off specialty stores.”

Among the European brands that are on the fast track in the U.S. are fast-fashion brands Swedish Hennes & Mauritz (H&M), Zara from Spain and the U.K.-based Reiss Ltd., The Wall Street Journal reported in May 2017. Amsterdam-based Scotch & Soda is also popping up in the U.S. with 28 free-standing retail stores, with a store at Woodbury Common Premium Outlets in Central Valley, N.Y. opening on March 30. European discounters like German grocer Aldi, German competitor Lidl and Irish clothing company Primark are on a tear in the U.S., Bloomberg Gadfly pointed out last October. International cosmetics companies like Rituals from Amsterdam are taking New York City by storm. Plus there are food chains like Wagamama, an Asian food concept that actually hails from London, that has set up shop in New York City and Boston.

When entering the U.S., European retailers focus on major cities for entrée.

Since they’re used to high streets at home, European retailers want to rent on a U.S. high street. And they generally enter by way of one of the gateway markets of New York City, Miami, Los Angeles, San Francisco, Chicago and Las Vegas, Hirschfeld said. They often choose a U.S. location that is most similar to where they hail from, Hirschfeld said.

“Brands usually like to do either the East Coast or the West Coast initially, and I believe that most start on the East Coast first,” said Robin Abrams, a vice chairman of retail at Eastern Consolidated, with New York City being a priority due to its tourist population, ease of navigation, walkability and great public transportation. For U.K. retailers, New York is logical, Abrams said, “because it is more similar” than other places in the U.S.

Interestingly, CBRE’s most recent annual global retail report highlighted Philadelphia as a target city for international retailers in 2016. That year, Italian furniture company Natuzzi Italia and Superdry set up shop in Philadelphia, the fifth-largest city in the U.S. The market was appealing, the report said, because of its increased millennial population, income growth, new multihousing developments, burgeoning food and retail scene and reputation as a tourist destination.

But there’s no refuting that New York City often is the beau ideal market for European retailers looking to expand abroad.

21 Euro Retailers Sense Opportunity Here While US Brands Look to Old World for Salvation

“Retailers looking for a first or second opportunity look at New York,” said Mark Kostic, a vice president of retail leasing in the U.S. at Brookfield Property Partners. “Everyone’s next step is a global flagship in New York.”

Kostic worked on the deal to bring European suitmaker Suitsupply to Brookfield Place. The brand has fared well since the men’s store opened about a year ago, and the women’s store Suitstudio opened this past November, he said.

Jason Pruger, an executive managing director at Newark Knight Frank, said he will be helping Black Sheep Coffee expand from London into the U.S. come springtime. He anticipates that Black Sheep will enter the country by way of New York City.

“We are looking to expand in the U.S. because we have be inundated with customer requests, particularly in the last few months—mostly Americans living in the U.K. or who came across Black Sheep while visiting the U.K.,” said Gabriel Shohet, one of the co-founders of Black Sheep Coffee. “New York City has many Black Sheep fans but is one of four U.S. cities [including Chicago, Washington, D.C.. and Atlanta] we have shortlisted as a potential starting base for a U.S. market entry.”

Faith Hope Consolo, the chairman of Douglas Elliman’s retail leasing, marketing and sales division, said that New York City is “the shopping capital of the world, and the No. 1 leisure activity in this country is shopping. Yes, New York City is the center of the world. Companies are willing to risk everything to make it here. Just like the song goes, ‘If you can make it here, you can make it anywhere.’ ”

Going the other way, U.S. retailers often start in London for their European expansion, where English is the native language. Indeed, companies from the U.S. marked the majority of new international retail entrants to London in 2016, according to CBRE’s global retail report. (Hirschfeld called London “probably the retail capital of the Europe in many ways.”)

But London is desirable for just about any retailer looking to make an entrance on a global stage. “Overseas brands continue to see London as the pathway to greater expansion” in Europe, the Middle East and Africa, or EMEA, the CBRE report said. London was the second most-targeted market globally for international retailers entering new markets in 2016 (behind Hong Kong) and 10 markets in EMEA made the list of 19 global cities with the greatest international retailer presence. And this was the year of the Brexit vote for the U.K. to leave the European Union, so presumably the vote did not rock anybody’s faith in London retail.

At the end of last year, New York-based high-end fitness brand Equinox opened its first standalone E by Equinox location—an even higher-end Equinox—in central London. “Opening our first standalone E by Equinox in one of the most esteemed neighborhoods in London was only fitting,” Gentry Long, the managing director of U.K. operations for Equinox, said in a press release in December 2017. “We’re thrilled to introduce an elevated take on the private members’ establishment with fitness at its core.”

Some in-demand cities for U.S. retailers going abroad are Germany’s Munich, Berlin, Hamburg and Frankfort for fashion brands and food and beverage brands, Hirschfeld said. And there’s Paris, France and Milan, Italy. He has not seen a lot of demand for a Spain brick-and-mortar location.

In the last coupe of years, Hirschfeld’s team has brought Detroit-founded Shinola watch, bicycle and leather company to London. And his team brought Seattle-based outerwear company Filson to London.

“What you must look at when you’re looking throughout Europe, or Asia or South America is products that are transferrable to other markets,” Virginia Pittarelli, a principal of Crown Retail Services whose clients have included Sephora and Godiva, told Commercial Observer late last year.“That’s really the key.”

Source: commercial

Barneys Shuttering Upper West Side Store After More Than a Decade

Barneys New York is closing its Upper West Side store store on Feb. 18, a company spokeswoman confirmed to Commercial Observer.

“Barneys New York has enjoyed serving the community on the Upper West Side for over a decade. We sincerely appreciate the loyalty of our customers, and we look forward to continuing to serve them at our Madison, Downtown and Brooklyn locations,” the spokeswoman emailed.

West Side Rag first reported the news on Feb. 2 based on information provided by a manager.

The roughly 10,000-square-foot clothing store, which is on the ground and lower levels at 2151 Broadway between West 75th and West 76th Streets, opened in 2004, according to retail broker Faith Hope Consolo of Douglas Elliman Real Estate, who represented the landlord in the original lease negotiations with Barneys. The space underwent a renovation in July 2013, which included rebranding it from a Co-op store—selling lower-price fashion—to a Barneys New York. (The company has converted Co-ops stores to Barneys New York shops.) The lease is slated to expire at the end of 2023, according to CoStar Group.

Once it shutters, there will be two remaining Barneys stores in Manhattan: one at 660 Madison Avenue between East 60th and East 61st Streets and one at 101 Seventh Avenue between West 16th and West 17th Streets.

“This is a big loss for the Upper West Side,” Consolo said. The deal was unique at the time as most retailers were focused on Columbus Avenue, but Barneys took a Broadway space.

Broker John Brod, a partner at ABS Partners Real Estate, said the news is of no surprise.

“Customers can go on line at Bonobos, UNTUCKit, Allbirds, Amazon, Suitsupply and manufacturers’ own online e-commerce store to purchase the same merchandise so the need for Barneys to have a brick-and-mortar presence has past,” Brod emailed. “Specifically, Barneys is a multi-brand retailer and as such the need for a second store in a secondary market becomes redundant in today’s retail and shopping environment. The issues are further challenged by the general state of retail in this area—note that Sephora has opted to downsize from their 2162 Broadway location—they passed on their right to renew. Moreover, Anthropology who was negotiating to replace Sephora here after many months of negotiation, decided not to proceed. Additionally Eastern Mountain Sports vacated this area [at 2152 Broadway] as well. The fact is there is a very limited demand for large flagships in both primary and secondary markets. Clearly the Upper West Side is a secondary market.”

The market and neighborhood combined to hurt Barneys.

“Barneys closing is a reflection of the current market,” said SCG Retail Partner David Firestein. “With that said, they were never right for the neighborhood, in the mid 70s. A better fit would have been closer to Lincoln Center, near Century 21.”

And the popularity of online food shopping has impacted the area, including Barneys.

“That stretch of Broadway has always been local, and much of its traffic from shoppers that live or work outside the market area was based on the food anchors—Citerella, Fairway and Zabars—all on the west side of Broadway in a seven-block stretch,” said Robin Abrams, a vice president at Eastern Consolidated. “Once it became possible to get fresh produce and a wide array of prepared foods at the various Whole Foods [stores], Fairway’s other locations and a variety of other competitors, the pedestrian traffic on Broadway diminished. Now the retailers on Broadway must be strong to cater to local traffic, and even stronger if they are to pull from a broader customer base.”

Source: commercial

Rent Asunder: City Council Tears Up Tax Bills on Thousands of Small Business Leases

Vacant storefronts have become a persistent Manhattan eyesore in recent years, as ever more window dressings and restaurant menus have given way to “for rent” signs. Blame sky-high rents, a shift away from brick-and-mortar shopping habits or decades-long leases with locked-in rents that leave landlords desperate to secure top-dollar deals today: All contribute to a veritable minefield for mom-and-pop businesses.

However, small-business owners have a shot in the arm coming their way this July when a years-long legislative effort to lower their costs is set to reach the finish line: A revenue-code reform will ease the commercial rent tax, a consistent fly in the soup of a broad cohort of prime Manhattan tenants.

The niche revenue measure, which applies only in Manhattan, to businesses south of 96th Street that earn at least $5 million per year, currently falls on all firms that accrue rents of at least $250,000 annually. (That’s just over $20,000 per month.) The effective tax rate is 3.9 percent, or about $20,000 on a firm that pays $500,000 in rent annually.

Now, City Council Intro 799-B, legislation inked by Mayor Bill de Blasio in December 2017, promises relief, at least to firms at the lower end of the current bracket. The bill raises the minimum rent threshold to $500,000 for fiscal year 2019, a change the mayor’s office said will entirely eliminate the tax for 1,800 small businesses in the city and significantly reduce the outlay for 900 more.

The measure, championed by a city councilmember who has since left office, Dan Garodnick, has won broad political and business-community support. The Manhattan Chamber of Commerce and the Real Estate Board of New York each issued a ringing endorsement of the move, as did a grab bag of lawmakers ranging from incoming City Council Speaker Corey Johnson to his predecessor, Melissa Mark-Viverito, as well as Jerrold Nadler, who represents much of Manhattan and Brooklyn in the House of Representatives.

“With these reforms to the commercial rent tax, the New York City Council is helping breathe new life into local businesses and increase jobs,” Johnson said in an email to Commercial Observer. Johnson’s constituent territory, District 3, encompasses west Soho and Greenwich Village, neighborhoods that have prominently suffered from the blight of higher vacancies.

garodnick Rent Asunder: City Council Tears Up Tax Bills on Thousands of Small Business Leases
Daniel Garodnick. Illustration: Kaitlyn Flannagan

None were more eager to celebrate the legislation’s passage than Garodnick, however, whose victory in shepherding the legislation to de Blasio’s desk at the 11th hour before his term-limit mandated departure last month represented something of a victory lap for the longtime councilmember from Manhattan’s East Side.

“We have a tax here that has the effect of throwing cold water on local economic activity,” said Garodnick, who has lain low since leaving office to spend more time with his family. “We needed to find ways for the city to stop stepping on the necks of small businesses, and this was one.”

Praise for the measure has rained down from industry players as well.

“I think that this is a definite benefit for a sweet spot of people that have smaller and midsize businesses,” said Tom Corrie, the director of accounting firm Friedman LLP’s state and local tax group. “[Those businesses] provide a lot of employment.”

A persistent problem with the tax, several insiders said, had been that a fair number of commercial renters did not even realize they were responsible for it when they signed their leases—although that problem may not alleviate with the new reform.

“Many tenants are not aware when they calculate their costs that there is a requirement to pay commercial rent tax,” Robin Abrams, the vice chairman of Eastern Consolidated’s retail brokerage, said via email. “They often are not represented by brokers who might educate them about this expense and are likely not knowledgeable about these kinds of additional expenses. [Then], they are hit with these costs once committed to the space.”

Corrie provided an illustrative story.

“I just completed an audit where I had a longtime family business that would have fallen within the context of this new change,” Corrie said. “Unfortunately, their previous accounting firm did not advise them correctly. Now, they got caught for an eight-year audit, which cost them a lot of money.”

By removing the tax burden on the smallest businesses it had applied to, Corrie said, the new measure will decrease the likelihood of mistakes by unsophisticated companies.

The accountant also lamented that the rent tax’s incidence falls on a group he sees as an economic engine in the city.

“These folks are not getting wealthy. They’re providing employment for 20 or 30 individuals each,” Corrie said of small business owners.

That logic mirrors the de Blasio administration’s thinking on the subject. Small businesses employ millions of New Yorkers, and nearly half of the companies are owned by immigrants, a spokeswoman for the city’s Small Business Services department said in an email to explain the administration’s emphasis on supporting the sector. Responding to questions about the overall business climate, the spokeswoman pointed out that in addition to the new tax break, the city has tried to lessen the regulatory burden on firms.

Total fines assessed against small businesses have declined 40 percent since 2014, she said, adding that the de Blasio administration has held thousands of free consultations with enterprises to help them avoid incurring costly violations.

Indeed, the reduced tax burden could help promote a more transparent relationship between businesses and the city because businesses sometimes cheated to avoid the rent tax. Some conniving tenants who were aware of the tax had dreamed up inventive schemes to avoid paying up, brokers said.

“We had one guy who asked if we could write him a separate lease, [each] for his store and his basement,” said Rafe Evans of brokerage Walker Malloy & Company, explaining that splitting the space into two separate contracts would have been a dubiously legal end run around paying a commercial rent tax bill. “That was a few years back, and we declined to get involved in shenanigans like that.”

“Tenants don’t want to know [about a tax violation],” the broker added. “There’s some willful blindness.”

Of course, the most seething ire against the tax comes from tenants themselves.

“I think it’s insane,” said Brian Kelly, a client of Evans who leases space for the Japanese restaurant, Kobeyaki, he owns on the Upper East Side. (Kelly declined to name his restaurant for this article.) “Taxing people on paying high rents. It seems kind of crazy to me.”

When Kelly signed a lease on East 86th Street in 2014, Evans said, the rent was in the mid-$20,000s, putting the restaurant squarely in the category of businesses that see their rent tax entirely disappear under 799-B.

The new tax policy would bring immense relief, the restaurant owner said.

“It’s a very big deal,” Kelly said. “I’m very happy they decided to do away with [the tax]. It’s one tiny step by the city of New York to become a friendlier place to do business.”

“We had been looking to get outside the city,” Kelly added.

Between relentless rising rents and mounting transit headaches, looking outside the Big Apple for growth has become an increasingly tempting proposition for businesses and developers of late. With decidedly positive harbingers for the city’s business climate harder to come by, many stakeholders seemed downright bemused by how broadly palatable the tax cut has been.

Indeed, conversations with landlords, politicians, special interest groups and business owners failed to uncover a single constituency that looked askance at the development.

At worst, at least one broker was merely indifferent.

markviverito Rent Asunder: City Council Tears Up Tax Bills on Thousands of Small Business Leases
Melissa Mark-Viverito

“I don’t think [the commercial rent tax] has an impact on anybody anymore,” said Stephen Siegel, the chairman of global brokerage at CBRE. “It’s all part of the expense package. When we do a financial analysis, everything is considered, and as far as the tenant is concerned, if anything is a problem, it’s rising rents.”

“I don’t even think people think about [the commercial rent tax],” he added. (Siegel has personally invested in a number of New York City restaurants, including Sarabeth’s, the Knickerbocker Bar & Grill and P.J. Clarke’s.)

Even if that’s the case, with the city’s climate for small businesses under increased scrutiny from politicians and other commenters, it’s perhaps unsurprising that a deep coalition of politicians was moved to act.

Sal Albanese, who challenged de Blasio in the Democratic mayoral primary last year, emphasized his support of the Small Business Jobs Survival Act during his campaign, a measure that would force landlords to sign more tenant-friendly leases. Although that bill would lead to deeper structural reforms for business owners than the rent-tax change, the current cut represents a broad group of politicians’ acknowledgement of small firms’ struggles to stay in Manhattan.

And Jeremiah Moss, a writer who for years has chronicled small-business closures in Manhattan on a popular but melancholy blog, has argued prominently that city policies are stacked against the beloved restaurants and stores whose shutterings he bemoans. His 2017 book on the subject, Vanishing New York, was widely reviewed in local and national outlets.

But Siegel, for his part, argued that any concerns about small-business viability in New York are decidedly overblown.

“I think there’s a good climate for anything in Manhattan,” Siegel said. “There’s not better labor anywhere in the country, and more and more people want to live in urban areas.

“Is it more expensive than Podunk, Iowa? True,” he added. “But [for people who are] looking to grow their businesses—the access in New York City to people and banking—there’s no better place in the world.”

Source: commercial

Video: Pop Damn! How Pop-Ups Are a Year-Long Phenomenon

It’s not just for the holiday season. Love ’em or hate ’em, pop-ups are here to stay. Retail Details looks at why they’re advantageous for tenants and landlords. We check in with Los Angeles’ jewelry retailer Vrai & Oro as they build out a space that they got on Mott Street via Appear Here.

Source: commercial

Retail Details: Live From MAPIC

What’s the problem with retail? What are retailers doing to help themselves in this cruddy climate? Are international retailers interested in the U.S.?

Those were the questions on our mind when Commercial Observer traveled to the south of France, last month, to attend the MAPIC conference on retail.

We sat with some of the best brokers in the business and asked their thoughts — here’s what they had to say.

Source: commercial

Street Retail Looks to Malls in Figuring Out Ways to Cope With Big Rents

While malls and shopping centers are looking for ways to save themselves from crushing retail headwinds, at least one group thinks they’ve got something to learn from them: street retail.

The guys with the shops on the sidewalk are taking a page out of their playbook when it comes to structuring deals.

Young retail companies, e-commerce brands and even some legacy retailers looking for a brick-and-mortar presence are asking for terms long found in shopping centers—low base plus a percentage rent (meaning the retailer pays the landlord a certain percent of every dollar in sales over a certain threshold).

“That shopping center formula has morphed onto certain streets—not all streets—around the country. [It] sometimes bridges a gap between what a landlord is looking to achieve with his overall rent and what the tenant feels they can pay with respect to what their sales projections are,” said tenant representative Virginia Pittarelli, a principal of Crown Retail Services (an affiliate of Crown Acquisitions).

These percentage-rent-plus-base deals allow retailers to test out the market with minimal risk by not being locked into a guaranteed rent and give landlords an activated space along with some income. Such deals are being done across the retail spectrum and around New York City for leases as long as 10 years.

Typically in base-plus-percentage-rent deals, the landlord gives a 20 to 50 percent discount to market gross rent, plus a percentage of sales between 8 and 12 percent, according to Christopher Conlon, the executive vice president and chief operating officer of real estate investment trust Acadia Realty Trust.

Robin Abrams, a vice chairman of retail at Eastern Consolidated, explained the percentage-rent formula as follows: If the rent is $500,000 per year and the tenant agrees to a percentage rent of 8 percent above a natural breakpoint (where the base rent equals the percentage rent), the calculation is $500,000 divided by 8 percent with that 8 percent equaling the natural breakpoint above which the tenant pays. So a tenant would pay 8 percent of sales in excess of $6.3 million annually. As the rent increases over the term, the natural breakpoint increases.

“Sometimes the landlord requires an unnatural breakpoint,” she added, “and might say to the tenant that he wanted a million [dollars] in rent, and he won’t wait till sales are $6.3 million but wants the percentage rent over sales of $5 million, or whatever minimum sales figure landlord and tenant agree.”

Abrams and her team are submitting an offer for a restaurant space in an “unchartered neighborhood” where the asking rent is $1.4 million per year. The offer includes a base rent of less than half of the asking rent along with a percentage rent at lower than the natural breakpoint.

These deal structures aren’t confined to less trafficked and less high-profile areas of the city.

Lee Block, an executive vice president at Winick Realty Group, said that while he hasn’t closed any deals that incorporate a percentage-rent component, “we’re considering it on a handful of spaces that we represent.” That was the message conveyed by many brokers and landlords with whom Commercial Observer spoke.

The reason? A surplus of space and a changing retail climate.

Jared Epstein, a vice president and principal at real estate developer Aurora Capital Associates, said his company is negotiating a few deals in Soho with a “slightly reduced base rent and feature a percentage rent above a natural breakpoint, which we believe will enable the landlord, our entity, to attain market rent and likely exceed market rent so long as the store does the volume that we believe it will.”

And that is because of the high vacancy rate in Soho, Epstein said.

“In general,” Epstein said, “in any deal that features a percent rent in lieu of an amount of fixed rent, the landlord hopes to set a low break point and a large enough percent above that, which will make it probable that the landlord will achieve the total base rent it hoped to achieve. The landlord has to believe the retailer will do the business to get the landlord back to its base rent. Sophisticated landlords will offer the downside protection of a discounted base rent in this market but will also want to participate with the tenant on the upside as their business outperforms.”

For most deals to get done, then, landlords need to be flexible.

“In the last 12 to 24 months I think owners that can be more creative with percentage deals are doing it,” said Jeffrey Roseman, a founding partner of Newmark Knight Frank’s retail division. “Not every owner has the ability to do it because they may have certain restrictions from their bank or they may have paid too much for the property. [But] it’s a new creative way to get deals done.”

True, landlords need to be open to different deal structures, Conlon said. While Acadia hasn’t done deals for a low base plus percentage rent, it is “considering them now,” he said, adding that Acadia would only do them for short-term deals, or those less than three years.

Not all landlords, though, are biting.

gettyimages 520141660 Street Retail Looks to Malls in Figuring Out Ways to Cope With Big Rents
SOHO STRUCTURES: In today’s market, landlords across the city, including in Soho (above) are considering retail leases with a small base plus a percentage rent rather than just a gross rent. Photo: Getty

Triangle Assets doesn’t plan to do any percentage-rent-involved deals, according to Benjamin Stavrach, the director of leasing and property management at the company.

“New tenants have talked to us about percentage-rent deals, and we have held back,” Stavrach said. “It’s a different business model. It’s not something we want to get our hands dirty with. [And] as a landlord I don’t have to give it.”

With percentage-rent deals, he noted, a landlord has to “trust” the tenant will be successful and is honest with its sales records. “You are almost investing in the tenant,” he said.

Instead, to get deals done, Triangle Assets—with its 83,000 square feet of street retail space—may lower the rent in a gross-rent deal.

Michael Brais, a food-and-beverage retail broker with Douglas Elliman Commercial, who is leasing up the F&B component at the BFC Partners-led Empire Outlets outdoor shopping center on Staten Island, said he is working a lot with the percentage-rent structure.

Indeed, at Empire Outlets, the F&B component totals 50,000 square feet, of which 5,000 square feet remains available. Almost all the deals were negotiated with a combination of base plus a percentage rent, and the same goes for the majority of Brookfield Property Partners’ retail agreements.

That structure can be a win-win for both sides of a deal, some brokers said.

“It is fairly established, particularly in shopping centers with base and percentage rent,” Brais said. “Lower base helps the operator hedge against lower sales and helps the landlord participate in the upside.”

Malls and shopping centers historically have implemented the percentage-rent formula as a “hedge against inflation,” Conlon said. Without such clauses, rent increases are typically a “modest 1 to 2 percent annually or 10 percent every five years.”

Thomas Dobrowski, an executive managing director with Newmark Knight Frank based in New York City, handles regional mall investment sales nationally. He said the formula started to become more popular after the 2009 recession, “when dozens of malls were foreclosed on by lenders and special servicers. To placate tenants and keep them at these properties that were distressed and transitioning, percent-rent deals, along with short-term leases, became more common and enabled new owners of these malls to keep many national tenants that would have closed open and operating. The trend continues today and is becoming more common at stabilized properties as well.”   

This model is good for tenants in a market where rents are outrageously high, but it’s good for landlords when the tenant does gangbusters business. In this market, it is more beneficial for the tenant. 

“The tenants have the upper hand these days,” Dobrowski said. “These national retailers have a lot more leverage than they did in the past, and they are exercising whatever rights they have or proposing structures that are benefitting them.”

One of the things holding landlords back from doing too many percentage-only deals, which are very common in enclosed malls, is they can make the real estate difficult for lenders to underwrite. The underwriters “don’t like to see zeros anywhere,” Brais said.

While Conlon doesn’t think inclusion of percentage-rent will become the new “norm for deal-making,” Brais said he expects percentage-rent deals to “become more prevalent” because of the difficulty of getting spaces rented.

For now at least, deal terms are changing.

“Across the board, all streets, all landlords are being creative because we have an abundance of available space in the market,” Pittarelli said. “And the best for any type of market like this is to fill those spaces and if you can fill those spaces by being creative and working with a credit-worthy, great-image-quality retailer, why wouldn’t you?”

Source: commercial

MAPIC 2017: Retail Headwinds Can’t Cloud the Vibe in Sunny Cannes

At this year’s MAPIC in Cannes, France, there was a mix of concern as well as optimism.

Fred Posniak of Empire State Realty Trust told Commercial Observer that there was “no doom-and-gloom” vibe at the international retail property trade show—and if attendance at MAPIC was any indication, things aren’t so bad. This year’s attendance was up 100 people to roughly 8,500 participants from 2016, according to MAPIC Director Nathalie Depetro. Like last year, attendees hailed from 260 countries around the world.

In New York City specifically, deals are starting up again after a dry spell, as evidenced by the recent transactions involving Levi’s, which is moving its Times Square store to a new 17,250-square-foot location at 1535 Broadway, and Vans, which agreed to take 8,573 square feet for its second Manhattan location at 530 Fifth Avenue.

“I think there is momentum,” said Lee Block of Winick Realty Group.

Still, in order to get deals done, tenant rep Virginia Pittarelli of Crown Retail Services said that “for the right kinds of tenants across the board, all landlords are being creative because of the abundance of space.” That means more tenant improvement allowances and less traditionally structured terms, such as lower base rents plus percentage rents (as in percentage of retailers’ sales).

And landlords have also been more open to doing pop-up deals, according to Cushman & Wakefield‘s David Gorelick.

But there is no arguing that there are issues facing retailers in the U.S., with department stores cited as a serious case in point.

“I see department stores going in a downward spiral,” said Salvatore Ferrigno of Newmark Knight Frank. As many have noted, “the writing is on the wall” for department stores and they “have to evolve,” said C&W’s Gene Spieglman.

The same applies to individual retail brands. Brookfield Property PartnersMark Kostic said it is “important for each store to be relevant,” while Robin Abrams of Eastern Consolidated advised that retailers need to key in on their vibe and brand, among other things.

But the retail situation isn’t as grim internationally, according to one market watchdog. While the U.S. is experiencing a “collapse [in] retail activity,” the downturn is “less dramatic” in other countries,  said Mohamed Haouache, the founder of online short-term retail leasing platform Storefront.

Source: commercial

TheRealReal to Open First-Ever Brick-and-Mortar Consignment Store (With Cafe) in Soho

Source: commercial

State of the Market Report: A Q&A With Eastern Consolidated’s Peter Hauspurg

A full-service commercial real estate firm established in 1981, Eastern Consolidated offers real estate investors an integrated platform of investment sales, retail leasing, and capital advisory services. Among the company’s most recent transactions, Eastern Consolidated arranged the sale of a prime residential development assemblage for close to $100 million, and arranged the sale of four contiguous multifamily buildings on the Upper East Side for $52 million–demonstrating the firm’s knack for making impactful deals in one of the world’s most trend-setting cities. We spoke with Chairman and CEO Peter Hauspurg for a market overview of the current investment sales and retail leasing and financing environment.

Commercial Observer: Give us an overview of what you’re seeing in the investment sales marketplace.

Peter Hauspurg: Although year-over-year multifamily volume has declined citywide, the multifamily sector is still achieving strong pricing, cap rates are still historically low (around 3 percent), and financing is plentiful, with significant demand both from residents who want and need housing, and investors looking to capitalize on this demand. New York City’s economy grew at a 2.3 percent clip in the first quarter, resulting in 33,000 new jobs, an unemployment rate of 4.3 percent, and an influx of people looking for opportunities and housing. As a result, multifamily properties continue to be fantastic investments.

Manhattan office properties are continuing to attract foreign investors. Most recently in May, a Chinese conglomerate HNA Group closed on 245 Park Avenue for $2.21 billion. On the development side, large scale office projects–such as those in Lower Manhattan, the Hudson Yards District, and 1 Vanderbilt–are moving ahead and changing the landscape of the city.

What pricing are you seeing for land sales in Manhattan?

PH: Manhattan land prices have fallen 25 to 30 percent in the last year. As the market has shifted, we have had to be more creative to make deals. We just closed a 170,000-buildable-square-foot assemblage for a condo development on East 29th Street between Park Avenue South and Madison Avenue for close to $100 million, which averages to about $580 per buildable square foot. This deal started out as an assignment to sell one building with 50 feet of frontage and air rights that would allow a developer to build cantilevers over the neighboring buildings. Given the complexities of the parcel, market fluctuations, and location of the property, we saw the need—and an opportunity—to revise our strategy. We significantly expanded the original concept by engaging the two adjacent property owners on behalf of the buyer the Rockefeller Group. It required multiple rounds of negotiations—and renegotiations—but we were ultimately able to not just navigate but drive a complex, multi-party transaction that was contingent on the sale of all three buildings—including simultaneous contract signings and closings. This transaction was particularly complex, but it is indicative of the type of creative thinking, experience, patience, vision, institutional knowledge, and tenacity often required to transact land sales and development deals in the current environment.

Are developers still finding a market for condos?

Most definitely. Although land usually leads the rest of the market down, something unusual happened in the first quarter – the average condo unit price rose, year-over-year, citywide. Average condo prices increased by 19 percent to $1.9 million from $1.6 million, and the volume of sales increased 10 percent to 2,737 up from 2,488 the previous year.

What are you finding regarding deals in Brooklyn?

Land deals in Brooklyn have shown more strength than land deals in Manhattan. We just closed on condo development site with 40,000 buildable square feet in Bed Stuy for $285 per square foot. The borough has a resiliency we’ve never seen before.

What is your view of the new Affordable New York Housing Program?

At the end of 2015, when 421a expired, land sales for new rental developments in the city pretty much ground to a halt, because no one can afford to build when the city takes 30 percent of the taxes off the top – it just doesn’t pencil out. We hope that the Affordable New York Housing Program, which was approved in April to replace 421a, restores the creation of new affordable rental stock to its previous strong pace.

What about retail trends?

PH: Retail has been a tale of two markets. You have the high street retail – meaning Madison Avenue, 5th Avenue, and SoHo on Lower Broadway between Houston and Canal – where rents have ranged from $500 to over $2,000 per square foot, suddenly starting to show a tremendous softness in the last year. The softening rents can be explained for a few reasons. First, major retailers historically didn’t mind having a loss leader store on one of those key corridors because the high traffic visibility enhanced their brand around the world. That feeling is mostly gone. More importantly, you now have a number of retailers who, due to the challenge from e-retailing, might have had a 5,000-square-foot clothing store in SoHo, but have now downsized to 2,000 square feet, while keeping a 10,000- or 15,000-square-foot warehouse in Long Island City for $25 per square foot.

On the other hand, you have the neighborhood retail market, with a high volume of restaurants, coffee bars, and boutique concept offerings. New Yorkers have demonstrated an insatiable appetite for these kinds of dining and shopping experiences. Focusing on this niche, our retail leasing brokers arranged around 150 leases totaling 300,000 square feet of space in the last 12 months alone, at an average of under $200 per square foot, consistent with what you’re seeing in neighborhood stores.

What is the financing environment like today?

PH: Surprisingly, lending rates actually came down in the last quarter in spite of the Fed rate hikes. Spreads have narrowed, which means the banks are willing to take a lower amount over the LIBOR or Treasury rate. We recently arranged one multifamily financing deal with a life insurance company that was a 5-year interest-only loan at 3.3 percent.

What are you looking forward to in the next half of 2017?

PH: We continue to attract strong and talented brokers including Robin Abrams and her team who joined our Retail Leasing Division, bringing with them decades of experience representing international retailers such as The White Company of Britain, which just opened its first U.S. store in a space Robin arranged on 5th Avenue in the Flatiron District. We’re now uniquely positioned to execute retail leases on behalf of the complete range of landlords and tenants. Our Investment Sales brokers have continued to expand their reach beyond New York City and are scheduled to close on a 74,500-square-foot retail and office property in the heart of Boston, a market that has been attracting significant institutional investment in recent years. And our Capital Advisory Division is extremely active, having brokered in the last several months close to $600 million in financing for the acquisition, construction, and refinancing of multifamily properties, condo developments, and hotels.




Source: commercial