Where Tourists Go, Retail Rents Follow

NEW YORK CITY-Retailers in general have a sunnier outlook these days, with forecasts for the holiday season brighter than they were a year ago. But in high-traffic, tourist-friendly Manhattan corridors such as Times Square and Fifth Avenue, it’s not only storekeepers who are upbeat—so are their landlords, who have seen fit to increase rents. In the case of Times Square store space, asking rents are up 107% from a year ago to an average $1,700 per square foot for ground floor locations, according to the Real Estate Board of New York’s biannual retail report, released Monday.

“Asking rents that are lower than they were during the high point in our economy a few years ago are giving retailers the opportunity to locate in corridors that they wouldn’t otherwise be able to break into and many seem to be taking advantage of this,” REBNY president Steven Spinola says in a release. “As a result of these opportunities in premiere retail areas, the retail space market has become competitive again and average rents are rising. This is the trend that we hope will eventually spread into other city neighborhoods.”

A closer look at the neighborhood-by-neighborhood numbers, though, shows that while the average retail rent rose 4% over the past six months, some corridors have seen declines. Soho, for example, is among the busier tourist destinations outside of the bright lights of Times Square and the glitter of Fifth Avenue, yet asking retail rents there have dipped 6% since the spring. Harlem, the Flatiron District, Herald Square and the East 86th Street corridor all showed declines as well during the same six-month period. “Vacancies persist and rents have remained flat in many smaller, local shopping areas” outside the high-draw tourist areas, the report says.

Within those tourist-y neighborhoods, though, the future looks bright. “The tourism and that component of the city’s economy certainly benefits retail in a way that it doesn’t help office,” Michael Slattery, SVP at REBNY and head of research, tells GlobeSt.com. “On the other hand, not tourism per se but the international nature of the city’s market” is a factor, and its positive effects are easier to ascertain in retail than in, say, office or residential sales. “There seems to be a steady and reliable source of tourism traffic.”

Concurring that rents have jumped more dramatically in high-demand shopping corridors than in key office markets, Slattery says it’s fair to conclude that retail landlords have been anticipating future demand when raising rents. “On the office side, it seems to be in the high-profile, very high-quality buildings that the rent has gone upwards,” he says. “That’s equally true of retail. Times Square has been one of those locations that continue to rise; it may be using a commercial analogy, but it’s a ‘trophy’ location. There seems to be a steady influx of demand, fewer stores available, and when deals are getting done, the logical thing to do is maybe ask a little more for the next deal.”

Slattery says it’s too soon to tell when this improvement will fan out into the general market: “In some ways it mirrors the improvement in the economy: moving in the right direction, but not moving fast enough,” he says. “With the lack of velocity, it’s hard to be too optimistic about it spreading rapidly. But it’s better than moving backwards or declining.”