Boards Scramble As Retail Rents Continue to Dive

Co-op and condo boards with commercial space in their buildings have watched in dismay in recent years as these once-prized assets have become a liability – thanks to the rise of online shopping and artificially high commercial rents. The result was a relentless rise in vacant retail space. 

The bad news just got worse. Citing a “natural correction” in Manhattan retail leasing, the Real Estate Board of New York’s (REBNY) fall 2017 report reveals that average asking rents for available ground-floor retail spaces fell in 13 of Manhattan’s top 17 shopping corridors, when compared with fall 2016. 

According to REBNY’s Manhattan Retail Report Advisory Group, deals are still getting done through shorter-term leases and more flexible terms on uses and asking rents for ground-floor retail spaces. Also, as we report in the December issue of Habitat, some boards are dealing with the uncertainty of the city’s retail market by entering into 99-year leases on their commercial spaces with investor groups, which provide a healthy upfront payment to the board, set annual payments, and a share of future income from the retail space. Others caution that such long-term security risks leaving potential profits on the table.

REBNY’s Advisory Group says that rent adjustments offer a chance for quality retailers to explore markets that were previously too expensive. Other retail brokers in the Advisory Group add that this is an environment for price discovery in a market that is still learning about the effects of online retailing. 

“When demand is low for traditional spaces and long-term leases, an owner can experiment with tenants who are trying new ideas in presenting their retail concepts, brands, and products,” says Brian Klimas, vice president for research at REBNY. “Should these ideas eventually become the norm in retailing, our Advisory Group members note that the owner will be in an early and advantageous position to provide the right space solutions for retail tenants.”

In other words, boards that once resisted renting to gyms, bars, restaurants or other problematic businesses may have to think twice.