NYC’s retail rise, an overview

Introducing The Installment: Retail, running Fridays in 2020

By Adam Pincus

There are seven blocks between Saks Fifth Avenue and Bergdorf Goodman, on Fifth Avenue, one of the most desired shopping stretches on the planet. Each city block is 200 feet, so considering both sides of the street, it’s 2,800 linear feet. Of that, 500 feet is owned by churches and a club, and then there are office building entrances, so just 2,200 feet of retail frontage remains. Nearly 300 feet of that is owned by tenants, so there’s really just 1,900 feet available for a retailer to compete for.

That’s how major New York City retail property owner Jeff Sutton thinks about and pitches space. There is global demand, limited supply.

But something extraordinary happened on the ground floor of those seven blocks from 50th Street to 57th Street over the past 30 years. While the price of office space above rose by a factor of two or three to about $120 per foot, the retail rental rate rose by a factor of eight into the range of $4,000 per foot.

The industry noticed that creeping value discrepancy. Versions of the delta between office and retail were replicated throughout Manhattan and extended into the outer boroughs. Retail geography expanded into new corners of the city. Ultimately, prices got too high for tenants to bear, and recently prices have retreated, in some cases by 50 percent.

Still, the causes of retail’s rise remain hotly debated. Investors seek to replicate those gains, tenants look to protect their exposure and elected officials try to mollify squeezed stores and inconvenienced voters.

There are those who point to aggressive investors like Jeff Sutton, Joe Sitt or Vornado Realty Trust. Others cite the boom in tourism that saw visitors to the city triple to more than 60 million over 30 years. And others say growth-driven global brands bid up the rents. And of course there were the brokers.

Understanding the rise in retail values requires a look at the forces at work in the economy of New York City retail. This week’s chapter of The Installment: Retail is an overview of those forces.

OWNERSHIP

To own serious retail property in New York City is to be part of an elite club, and much of the club is interconnected. There is a pecking order. At the top is Jeff Sutton, president of Wharton Properties. Forbes pegs his net worth at $4.1 billion, with his fortune made in retail real estate, nearly all of it in New York City. He got serious about buying buildings in the outer boroughs in the early 1990s, then transitioned into Manhattan and ultimately made a series of large bets in Fifth Avenue, Times Square and Soho.

Blackstone Group president Jonathan Gray, who in 2002 was a senior managing director at the investment giant, directed the firm to partner with Sutton in Sutton’s first major institutional deal, buying 609 Fifth Avenue for $65 million that year. The building became home to a multi-story American Girl location and quickly doubled in value.

Gray said in a phone interview that Sutton’s deep experience in the retail trade provided a distinct advantage.

“He’s so focused on the business —  he knows the space and the tenants — and so he’s playing a chess match at a different level than his opponents,” Gray said.

Sutton is recognized as being one factor in the escalation in rents in major shopping districts, such as Fifth Avenue, 34th Street and Times Square.

The increase was often done through the asymmetric knowledge any owner — or broker — gains through any confidential bidding process. This is not particular to Sutton and is not particular to retail, but in an opaque market like store leasing it provides a huge advantage for future deals.

That’s because for each space brought to market, the business goals and weak points of potential tenants are revealed. So the tenant who lost out because it refused to pay $2,500 per foot in rent might be more willing to pay $3,000 per foot, to win the next time, in a rising market.

There are other major New York City retail owners who own assets worth billions, include Stanley Chera’s Crown Acquisitions, Joe Sitt’s Thor Equities, Bobby Cayre’s Aurora Capital Associates and Alex Adjmi. All those owners, incidentally, are part of the tight-knit Syrian Jewish community of Brooklyn. There are also significant institutional owners like SL Green Realty, Vornado, Acadia Realty Trust and Brookfield Property Partners.

Those are top owners today, but it was far different in the 1990s.

“We’ve seen the business change quite a bit in the last 25 years or so,” said Peter Braus, a managing principal at Lee & Associates NYC, who got his start at New Spectrum Realty Services, a once-dominant brokerage founded in 1987 that later merged with Newmark Knight Frank.

“Ownership at that time was mostly mom-and-pop, with some multi-generational owners, like the Dursts, the Roses and the Resnicks, and a few large institutional owners like Vornado, and with banks and foreign governments also represented. Now, many more of the city’s properties are owned institutionally, often by private equity, pension funds and REITs,” Braus said.

TENANTS

Requirements to expand the number and size of stores into urban streetscapes was a major factor in driving rent growth, first in the 1980s and 1990s but also in more recent years.

“All of the national tenants ‘found’ street retail after years of mall expansion. They finally realized that although the rent costs were higher, the sales volumes were as well,” said Robin Abrams, who spent many years with Lansco, and now is a vice chairman with Compass.

The national tenants also drove home the value of the credit tenant, and landlords preferred them.

“The retail business changed dramatically, came from mom-and-pop [tenants] leasing stores, to landlords not wanting mom-and-pop stores. They wanted stores with credit,” Patrick Breslin, an executive managing director with Colliers International, said.

Tenants also embraced the idea that their very expensive city leases were valuable not only to generate sales but also for marketing purposes. That was not a new idea, and in fact The New York Times reported in an article from the 1980s that tenants were signing leases on Madison Avenue with marketing in lieu of profitability in mind. But it became more valuable, especially on Fifth Avenue and Times Square, where global television events like the dropping of the New Year’s Eve ball are broadcast the world over.

Another major change to tenancy is more recent. Typically, a tenant would only get a couple months free rent, just time to build out the space themselves, then the rent would start when the tenant moved in.

But over the last four or five years landlords have begun to make significant tenant improvement payments and extend free rent periods. This allows them to keep rental rates relatively higher, which is valuable for a sale or refinance. Landlords will give tenants in some cases millions of dollars for building out their space.

Another recent change is the impact of private equity on retailers. Funds have, “loaded up many of the brands they’ve taken over with debt in order to over-expand, and, inevitably, once they’ve opened too many stores, reduced the cost structure by lowering quality and customer service, they can’t sustain the brand any longer,” Braus said.

BROKERAGE

“There were not that many brokers that focused on retail leasing in the 80’s, and most landlords had in-house reps that we dealt direct with, versus outsourced leasing agents/brokers,” Abrams said.

Breslin, for example, did his first New York City retail deal in the late 1980s representing Sunglasses Hut in Bay Ridge Brooklyn, while he was working for CB Richard Ellis, now CBRE.

After getting his sea legs with the eyewear store, and other brands such as Talbots and Payless Shoes, he got his first big exclusive in the early 1990s with AT&T wireless, which was a rolling out hundreds of stores from the 17 it had at the time.

Approving a new AT&T lease and location was simpler then. On the tenant side, “the decision-making process was two people,” Breslin said, taking perhaps six to eight weeks. Today, that process could easily takes six to eight months, he said.

The firm credited with being the first to focus on retail was Garrick-Aug Associates, founded in 1974. A few years later, in 1982, Jeff Winick founded Winick Realty Group and then in 1987 New Spectrum Realty was launched. Before those took the lead, there were general commercial firms that handled store leasing, such as Lansco, Cross & Brown and Huberth & Peters. Lansco with Alan Victor remained a top player in retail for decades.

With the exception of Winick, none of those firms are leaders in retail now, and most don’t exist. They were replaced by one-time start up companies like Ripco Real Estate, started in 1991, Robert K. Futterman & Associates, founded in 1998 (and sold in 2018 to Newmark Knight Frank), and more recently Kassin Sabbagh Realty. In addition, the global brokerages such as Newmark, CBRE, Cushman & Wakefield and JLL, as well as local independent offices for national firms, such as Lee & Associates NYC and Compass, all are active today in New York City.

There were “credit tenants doing multiple long-term deals and less brokers competing for the business. No wonder it felt so much easier back then!” said Abrams in an email.

To read all the articles in the series The Installment: Retail, please click here.

Correction: An earlier version of this article incorrectly calculated the total linear feet that could be rented between 57th and 50th streets as 1,500 linear feet. The number was revised to 1,900 linear feet.