Retail Is Pillar of Strength In Cracking Economy

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Bankruptcies have plagued the retail sector this year, with a number of prominent stores in New York closing, including the Sharper Image, Bombay Co., Steve & Barry’s, Comp USA, Linens ‘N Things, Fortunoff, and Bennigan’s. Last month, Starbucks Coffee Co. announced it plans to close 600 stores nationwide, 11 of them in New York City.

Despite all this negativity, retail experts are bullish: “Yes, the economy is going to be experiencing challenges, and other economic factors demonstrate signs of a coming struggle,” the senior director and principal at Eastern Consolidated, Alan Miller, said. “However, there are some positive signs in the retail sector that show the strength of the industry.”

The meatpacking district has seen the greatest increase in retail rents and sales, Mr. Miller said. “With the economy showing signs of cracking and the real estate marketplace entering a tough period over the next couple of years, it is absolutely astounding to witness the retail transactions that have been taking place in the past several years in the meatpacking district, and the deals that continue apace,” he said. “Where store rents were well below $100 a square foot less than five years ago in this West Village/West Chelsea submarket, the rents along West 14th Street and the surrounding blocks in this vibrant Manhattan neighborhood are now eye-popping.”

The historical character of the landmarked neighborhood, which includes many former industrial buildings, has attracted “national as well as international retailers … driving up rents to unheard of levels,” Mr. Miller said.

In July, Helaba Bank provided a $90 million loan for the 62,100-square-foot Apple store — the third in Manhattan — situated at 401 W. 14th St. The property, which is owned by a joint venture of Taconic Investment Partners and ING Clarion, was built in 1927 and previously served as the home of Western Beef. When Taconic and ING acquired the site in 2005, they built a 9,000-square-foot penthouse and completely renovated the base of the building.

The four-story, Class A property is now 100% leased to Apple Inc., Hugo Boss Retail Inc., Moschino, and Tudor Investment Corp. The anchor tenant, Apple, leases a portion of the ground floor and the entire second and third floors, as well as the rooftop billboard.

“The Apple store that Taconic Investment Partners brought to their highly visible corner property and opened in the past year has continued to fuel the trend of major recognizable brands such as Hugo Boss and Moschino arriving in this particular neighborhood,” Mr. Miller added.

Another example of the vibrancy of the meatpacking district is the recent sale of a site at Washington and West 13th streets. According to Mr. Miller, James Ortenzio sold this corner two-story property, which sits on a 10,000-square-foot plot of land, for $45 million, or nearly $900 a buildable square foot. It has the potential to house a 50,000-square-foot commercial and retail development.

It isn’t just in the meatpacking district where investors are showing interest in owning retail sites. Last month, a joint venture of the Kushner Cos. sold a 51% interest in the retail portion of the 41-story office building at 666 Fifth Ave. The purchaser, a joint venture of the Carlyle Group and Crown Acquisition, paid about $525 million for the 90,000-square-foot retail portion, or $5,833 a square foot. According to CoStar, the sale ranks as the highest price per square foot paid for commercial property in New York City for this year.

This month, the Paramount Group purchased a 50% interest in the five-story, 16,200-square-foot commercial building situated at 718 Fifth Ave., also known as 2 W. 52nd St. The building is the home of the Harry Winston jewelry store; the sellers were Ronald and Bruce Winston, sons of the late Harry Winston. Paramount paid $62 million, valuing the property at $7,654 a square foot.

There are two reasons why New York City has been able to maintain a stable retail market in the midst of this economic upheaval, the executive director of retail services at Cushman & Wakefield, Gene Spiegelman, said. “Manhattan has displayed extraordinary resiliency due to its connection with the international community — visitors have been a key driver of the Manhattan retail market for several years, and the ratio of retail space per capita in New York City is approximately one-third of the national average,” he said. New York City has an inventory of approximately eight square feet per capita, compared to the national average of nearly 26 square feet per capita. Thus, demand simply outstrips supply on a consistent basis, especially for retail space in the best locations, Mr. Spiegelman said.

“Retail is the economic engine of the real estate sector that is still firing on all cylinders,” the principal at CPEX Real Estate, Timothy King, said. “This is true throughout all the boroughs and marketplaces of New York City,” he said, adding that “population growth is one factor fueling the engine.”

Mr. King added: “Rezoning has resulted in the opportunity to take former manufacturing space and create retail strip centers and ‘big box’ stores that have long tried to enter our marketplace. The same rezoning initiatives have created thousands of units of new housing and all these new residents need a place to shop.”

Industry leaders say they believe that local retailers will continue to thrive. Adelaide Polsinelli of Marcus & Millichap said, “The retailers who will survive this market are those who are creative and forward thinking. One of the latest trends is retailers combining their stores with a complimentary merchant. Similar to what Barnes & Noble did with Starbucks, an increasing number of retailers are pairing up with a suitable use and sharing the space and expenses. One example is ice cream retailer Cold Stone Creamery partnering with Original Soup Man.”

A prominent sales broker who asked not to be identified said: “For the most part, landlords are positive and open minded to doing deals at a slightly more flexible rent but at the long-term advantage of not being vacant.”

A senior director at Cushman & Wakefield, Joanne Podell, said rents are rising on Fifth Avenue above 42nd Street, and further south, and that “with the changes that are being contemplated at the Lord & Taylor site, we are seeing record rent deals with substantial tenants.”

Ms. Podell added: “Broadway in SoHo is continuing to command increasingly higher rents. Maybe it is ‘Top Shop’ or ‘Madewell,’ but what in the past was not traditionally considered prime, now, anything below Broome Street can command rents in excess of $500 per square foot. If the retail location is on important cross streets, such as Prince and Spring streets, rents may be similar to shops along Madison Avenue.”

Mr. Miller said: “SoHo continues to improve and is an area where international demand and recognition continues to grow as deals are still getting done at benchmark pricing levels.”

In July, Vornado Realty Trust purchased 148 and 150 Spring St. from Cape Advisors. The four-story buildings, with 12,400 total square feet, sold for $21.5 million, or $1,733 a square foot.

As the summer draws to a close, many industry leaders are looking at their cloudy crystal balls and questioning what effects the combination of the credit crisis, inflation, loss of jobs, and stock market woes will have on the state of retail. Mr. Spiegelman of Cushman & Wakefield says he wonders whether the rise in the strength of the dollar will benefit certain segments of the national economy while at the same time making it more expensive for tourists to travel to New York. These tourists have helped our retailers and restaurants grow over the past few years. Even amid lots of questions on the horizon and few answers, though, demand for retail throughout the city remains buoyant today and in the near term.

Mr. Stoler, a contributing editor to The New York Sun, is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at

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