Rents Are Too Damn High: NYC Retail Vacancies Soar As Commercial Rents Start To Rollover

Tyler Durden's picture

Cushman & Wakefield recently released their 3Q 2016 New York City retail rental update and it's pretty much universally bad news for commercial real estate owners in Manhattan.  Retail rental rates declined YoY in 9 out of the 11 Manhattan submarkets tracked by Cushman while vacancy rates soared to over 20% in several markets with the "Lower Fifth Avenue" corridor registering the highest vacancy rate in the city at 29.3%.

During the third quarter, asking retail rents for direct and sublease space decreased from one year ago in nine of the 11 Manhattan retail submarkets that are tracked statistically by Cushman & Wakefield. Lower Manhattan’s financial district and the Upper Fifth Avenue corridor (49th-60th Streets) were the two submarkets that had asking rental upticks year-over-year, closing at $418 and $3,213 per square foot (PSF), respectively.

 

Similarly to the second quarter, both the Times Square bowtie and the Herald Square/West 34th Street corridor’s availability rates remained unchanged, closing at 22.2% and 22.4%. The Lower Fifth Avenue corridor (42nd-49th Streets) kept its hold on the highest availability rate for the sixth consecutive quarter, closing the third quarter at 29.3% followed next by the Meatpacking district at 23.4%. Lower Manhattan registered the highest year-over-year asking rental rate increase at 4.8%, while its availability rate remained stable at 10.2% compared with the second quarter. The Upper Fifth Avenue shopping area, 49th-60th Streets, continues to command the highest asking rental rate both locally and globally at $3,213 PSF for direct and sublease space and $2,982 PSF for direct space only.

NYC Retail Rent

 

Ironically, commercial real estate owners on 5th Avenue's most posh stretch, between 49th - 60th streets, continued to push rents to all time highs despite vacancy rates soaring over 50% from 10.1% in 4Q 2015 to 15.9% in 3Q 2016.

NYC Retail Rent

 

But the expensive real estate on 5th Avenue isn't the only area where retailers are balking at rental rates.  Vacancies are soaring in most Manhattan submarkets, including Madison Avenue...

NYC Retail Rent

 

...and Third Avenue as well.

NYC Retail Rent

 

Meanwhile, as Cushman points out, the correction in NYC commercial rents is likely just getting started as they warn that "it may be some time before velocity picks up and available retail space is absorbed faster than it becomes available on the market."

Rising availability rates on a year-over-year basis in almost every major statistical retail submarket in Manhattan has created uncertainty in the market, while new stores become available daily, adding new supply.  Further compounding this uncertainty is sluggish leasing demand from retailers, whose overall margins compressed by pressure from e-commerce retailers such as Amazon.com. Asking rents have just started to decline in all of these submarkets, and it may be some time before velocity picks up and available retail space is absorbed faster than it becomes available on the market.

Frankly, we're shocked that retailers would balk at the opportunity to secure 1,500 square feet of retail space on 5th Avenue for a mere $400,000 per month...that seems like such a bargain.

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Looney's picture

 

Even the Soup Nazi can’t afford the rent anymore and is forced to make his “Just-Add-Hot-Water-Instant-Soup” on the sidewalk.   ;-)

Looney

Raymond K Hessel's picture

Fifth Avenue is a loss leader retail market. Companies are on Fifth Ave for the marketing not for the sales. Every store that opens onto Fifth Avenue operates as a loss, as do the stores along 34th Street between Fifth and Sixth

BaBaBouy's picture

"1,500 square feet of retail space on 5th Avenue for a mere $400,000 per month..."

Thats 318 OZS of GOLD per Month ~~~

BaBaBouy's picture

"Even the Soup Nazi can’t afford the rent anymore"

Or he can charge $30. a Cup... You take Out!

Looney's picture

No soup for YOU, BaBaBouy!   ;-)

Looney

BaBaBouy's picture

OK, make it $60. a Cup ...

BuddyEffed's picture

Blame the high rent on QE.
Parent companies don't really need the rent at a fair price?
Many properties likely on or effectively on the FEDs books?

LowerSlowerDelaware_LSD's picture
LowerSlowerDelaware_LSD (not verified) BuddyEffed Oct 26, 2016 4:12 PM

Keep buying everything from Amazon.  Shut the local stores all down...

Bush Baby's picture

@$30/cup he'd have to sel 13,333 cups to make the rent

Never One Roach's picture

Several years ago myt friend up there in his high dollar job bought a tiny place. The parking spot in the garage alone cost him $285,000! I thought he was crazy at the time but now that same garage space goes for $485,000.

 

wtf?!

Douglas D. Zaster's picture

I believe the proper response is:

(((WTF?!?)))

MaxMax's picture

I think the author has something confused.  Commercial lease costs are usually quoted as the annual cost - not monthly cost.  I believe the monthy rental would be $33,333 - still a big number.

Also, there can be many other charges like Common Array Maintenance (CAM), utilities, taxes, additional costs like snow plowing, trash collection.  Rentable square feet is what your rent is based on and may include a portion of common areas versus Useable square feet which is space for the tenants exclusive use.  Sometimes tenant is responsible for things like the roof - which can be very expensive if it needs to be replaced.

safe as milk's picture

no, my friend, i believe he meant $400k per month.

MaxMax's picture

A lease rate is stated as $10.00/SF. What does this mean?

This is the yearly lease cost per square foot.  Example 1000Sf space quoted at $10.00/SF = yearly rental rate of $10,000 which is a monthly rate of $833.33.

 

What is Rentable square feet?

This is the total square feet used to calculate the rental rate and may include an apportionment of the lobby, hallways, and other areas in the building available to and used by all the building tenants.  This is oftentimes expressed as a multiplying factor of the Useable SF. Example: Rentable SF = Useable SF x X.XX%.  The multiplying factor is building specific with wide variations in actual numbers. ?Typical ? multipliers would be 1.15 to 1.20.

 

What is Useable square feet?

This is the total square feet within the walls of the space being leased. The actual space available for the Tenants exclusive use.

 

What are CAMcharges?

This stands for Common Area Maintenance charges and is the cost for items such as snowplowing, grass cutting, parking lot maintenance, common area lighting, etc.   These charges are based on actual expenses and are apportioned among the Tenants. CAM charges are quoted as $X.XX/SF and are based on rentable square Footage. Typically these charges are paid monthly based on estimated costs for the year. At the end of the year, actual CAM charges are tallied and either a credit or debit is passed on to the Tenants.

 

What does NNN mean as quoted in a lease rate?

The NNN refers to additional actual expense items that are apportioned among all the Tenants.  Typically included in NNN are CAM, building insurance, property taxes. This is referred to in most leases as Additional Rent. A cautionary note:  ALWAYS ask what is included in the rental rate quoted and what additional items are you responsible for.  NNN is defined differently by different landlords. Typically utility costs are NOT included in NNN expenses and are therefore a separate additional cost to the tenant.

 

What does Gross Rent include?

Typically a Gross Rent means the landlord is responsible for paying all the expenses outlined above as NNN expenses.  The Tenant only pays the Gross Rental rate.  The Tenant?s utilities may or may not be included in this gross rental rate.  ALWAYS ASK!

 

Are Utility costs included in the rent? And how are they calculated?

In smaller spaces, the utility costs may not be separately metered and therefore are apportioned among the users. This may be a rent adder or included in the base rent.  In larger spaces, the utilities are often separately metered and thus are paid by the Tenant in addition to any other rental amounts paid.

CorporateCongress's picture

He's right that it's quoted per year, his math is just off.

3200 per square feet per year works out to 4,800,000 per year for 1500. That is 400k per month.

1033eruth's picture

I'm pretty sure that's a gross exaggeration.  There is NO business that can sell enough in 1500 sq ft to afford 400K per month.  

Smells like BS to me.   

Government needs you to pay taxes's picture

That isnt water you add.  It's piss.  Homeless manpiss.

Arnold's picture

A Roach Coach takes up two parking spaces and costs about twenty an hour.

http://www.nyc.gov/html/dot/html/motorist/parking-rates.shtml

 

A Tiffany's Coach would really drop those margins.

doctor10's picture

well...there ya go...that's he last o th "good collateral" left out there

SteveNYC's picture

A number of stores and restaurants which have been decades-plus long staples have closed the past ~ 2 years. Same reason. They got out first, smart. Look for this trend to continue.

AC_Doctor's picture

Real Estate is about to take another gigantic 2007/2008 shit.

Mtnrunnr's picture

Doubt it. There's no place else to put money. Hard asset, maintains some value, can't disappear. It will only drop after something else hits the fan and money supply actually vanishes. Maybe some debt somewhere. Or derivatives.

Omen IV's picture

ultimately if the cash flow cant be returned for the risk involvedthe asset value will decline - unless a location that cannot be duplicated - which for retail sales is increasingly impossible with the Internet availability. Retail is about super immediate gratification- if you can wait 24 hours for almost anything  the price cut is more than 30% margin

MachoMan's picture

ultimately if the cash flow cant be returned for the risk involvedthe asset value will decline - unless a location that cannot be duplicated - which for retail sales is increasingly impossible with the Internet availability. Retail is about super immediate gratification- if you can wait 24 hours for almost anything  the price cut is more than 30% margin

Not really, Mtnunnr is correct.  Value is purely relative.  Cash flow is irrelevant unless and until there is an alternative investment that yields better for the same risk.  Wake me up when interest rates increase.

K_BX's picture

prices are set at the margin. just wait for things to unwind when people start retiring. Only crazies buy real estate in NY now...

Countrybunkererd's picture

more boomers have died and the kids are trying to sell.  then add to that the snowflake generation is living in parents basements you get a bust.  a BIG bust. add to this healthcare, no jobs, and increased taxes of every sort this is what you get... interesting times.  But i am a country boy, so i guess i don't count because i am an irredeemable deplorable.

GunnerySgtHartman's picture

And the Chinese, with their enormous real estate investments in the priciest US markets, will be left holding the bag - just like the Japanese did when they bought at the top of the market in the late 1980s and sold for huge losses a few years later.

Darn, I hate that for them.  /sarc

sinbad2's picture

But if they bought with cash, they can just wait it out. Americans borrow, because they have no money, but for people with cash, every crash is an opportunity.

The Duke of New York A No.1's picture

It looks like even Chubby Checkers (Michael Moore) has switched to a Trump vote ...

https://www.youtube.com/watch?v=4lMp_363B2c

ChemtrailPilot's picture

Maybe the NY Fed can start leasing excess retail space to keep rents from falling. Surely that will stimulate the economy by some backwards Byzantine logic trap.

Countrybunkererd's picture

as long as it is via the big banks... you know, the vig and all that.

vegas's picture

I still haven't figured out why anybody in their right mind would want a retail store, of any kind, in NYC; exorbitant taxes, corrupt unions & political bosses, and labor costs [if you can find decent labor] for what you get elsewhere a total fucking joke. Who needs this shit?

 

www.traderzoogold.blogspot.com

Squid Viscous's picture

umm...jew banker and lawyer wives with alot of money to burn?

and idiot tourists, look i bought this in New York!!

PrivetHedge's picture

Literal servitude to the Khazara - hmmmm - no thanks!

Countrybunkererd's picture

do you really think the average person (NFL and all things big 10/ SEC and such) really even think about this or even know about it?

I get blank stares when i talk about not shopping at smallfart and scams.

SQUIDHELMET's picture

People will pull $5 million a year out of a 15 foot section of wallspace in some cases there -- it's a balancing act but for certain items it makes sense. How the bodegas and similar spots stay open has always mystified me. 

Mtnrunnr's picture

I never thought I'd want to be a farmer, but I worked my ass of in college for 4 years, then spent 4 years near minimum wage. Still not making great money. I could have bought a few acres in Kansas, bought some seeds and started an organic farm and gotten out ahead. No rent, no health insurance, no cell service, no cable. Who needs it.

CJgipper's picture

Buckle up.  Invest in lead, food, and seeds.  I think you're going to get your chance.

wow thats crazy's picture

$3,212 Per Square foot! Wow thats Crazy.

Fuck that, For $10 a month I will goto GoDaddy and make my online store, Bitches!

Loki Libertarian's picture

The world would be a better place if New York and California slid in to the ocean....

To Hell In A Handbasket's picture

Like all cities gutted by a rentier class, gouging rents, the very groups including the inventive's, artisans, nightclub promoters, bars, eateries, trendy shops/boutiques, small businesses etc etc, that made it a desirable city, will be driven out due to extortionate rents and relocate somewhere else, where the same cycle will repeat itself. Let New York consume itself and become lifeless, just like Central London is slowly becoming.

£10 million pound homes used for 4 months of the year, where a landlord with retail space for sale on the same street, has a choice of redeveloping into flat, or to charge ground-rents commensurate with what he could achieve it it was an apartment. You don't need to be Einstein to work out what's going to happen and where this will end. Greed and self destruction always wins out. 

Never One Roach's picture

Is Central London owned 90% by Arabs yet?

SF and suburbs of LA is about 80% Chinese & Iranian.

ElHombreDeLosCielos's picture

The actor Alec Baldwin recently stated that "In the pyramid of decision-making in New York City politics, rich people come first, unions second, and rank-and-file New Yorkers come dead last....  Manhattan is like Beverly Hills. And the soul of New York has moved to Brooklyn, where everything new and exciting seems to be."  http://www.vulture.com/2014/02/alec-baldwin-good-bye-public-life.html?mi...

 

safe as milk's picture

i live in tribeca which is basically a bedroom community for the hedge fund crowd. a busy pizza parlor on greenwich st. closed last year and the owner complained that his space (about $300 sq. ft.) had doubled to over $60k per month. the asking rents are just crazy and the landlords let properties sit idle rather than lower the rent. some of the spaces have been vacant for 2 or 3 years! there's a ridiculously high number of empty storefronts down here now:

http://tribecacitizen.com/2016/08/22/ghost-town-the-growing-number-of-va...

 

 

Omen IV's picture

there are some tax credits associated with the vacany i understand - but the retail for food of any kind is disappearing - my thought is that they wat to starve out rent controlled / rent stabliized tenants by shorting cheap food  supply and other services - food markets  below 59 street have been closing and extreme high end have been opening for food - once Manhattan is all people above $100,000 + the nature of the place will completely cease to exist

Brooklyn will be the place to be for the next 20 years until that is fucked up as well

SQUIDHELMET's picture

Brooklyn has been fucked for 10 years and is the least affordable municipality to rent in the United States relative to median income.

People are pushing further out into Queens and far southern BK at this point, along with Washington Heights. 

Countrybunkererd's picture

brooklyn will be the place to be for the next 20 years?  THAT is a logic... ahhhh nevermind.  If you think the city is good IN ANY WAY at this point you cannot be helped.

Countrybunkererd's picture

they paid off the property years ago and if they get a sucker for a month or two they pay the taxes and then some... good luck on working that out.  Figure at 60K a month they could pay off a 1.5 million property in just over 2 years.  WHO is the next sucker, if nobody is the answer GET OUT OF THERE!

Douglas D. Zaster's picture

I live in a smallish town in mid-Ohio and pay $600 for a 4 bedroom, 1/8 acre house. That includes utilities. I drive 20 minutes to work and can get away from the dusky skinned, crime inclined citizens in the other city I work in! Neighbors are cool, have guns, drink beer, watch sports and tool around together. And we all know if the shit goes down, we will watch each others backs.