The Death of Retail: What does it mean for landlords and residential owners

Every year, millions of tourists flock to NYC and are greeted by an endless barrage of retail establishments vying for their money.

Ask any New Yorker the farthest they’d walk to go to a Duane Reade, a deli, a grocery store, a restaurant, or their favorite coffee shop and you will hear a resounding chorus of 5 blocks.

Manhattan is a city that as much as it is hailed as a pedestrian oasis has 241 Starbucks. On average, there is a Starbucks every 5.6 blocks while 20% of Manhattan is within only 520 ft of a location. You cannot walk 3 blocks without a bank or 2 blocks without a restaurant or bar.

New York is a city defined, perhaps more so than any other city in the world by its retail real estate.

The famed stretch along 5th avenue, which until recently was the most expensive retail real estate corridor in the world at an eye-popping price of $3,047 per square foot. The brownstones of Soho with their brick fa?ade and their gutted and renovated interiors. The UES, the Time Warner Center, the redevelopment of the World Trade Center with Brookfield Place and the Oculus. The crème de la crème that is Hudson Yards.

Having stayed in the city throughout this pandemic, I have noticed firsthand how the energy of New York is directly related to the hustling and bustling of the people within it. The smell of the bakery as you walk by. The honk of a horn… or twenty. The dodging of opening storefront doors and customers coming and going.

Walking along Columbus Avenue on the Upper West Side where store after store were closed created an eerie and unfamiliar feeling. The prevalence of boarded-up storefronts in recent weeks has only exacerbated this feeling of a city that is faintly recognizable.

As NYC nears Phase 2 of reopening, I cannot help but wonder how many of these stores will be closed for good. How long will it take to replace them? What will the city look like in the meantime? How much will retail rents come down?

Most importantly, what will it mean for landlords and residential owners?

The Figures For Landlords

• Citywide, 66% of commercial tenants have not paid rent in June
• According to Vornado Realty Trust, 80% of their retail tenants have not paid rent in June
• According to CHIP, 25% of residential tenants have not paid rent in June
• 40% of landlords said they will struggle to pay their property taxes, and nearly 6% will not be able to make any property taxes on July 1

On top of these numbers, on May 26th Mayor Bill de Blasio signed into law an ordinance voiding personal guarantee clauses in commercial leases, allowing tenants to walk away from commercial leases unscathed. Leaving landlords holding the bag while property tax payments have not been postponed.

Landlords will be unable to refinance or sell at a number that makes any sense to them as no one will know how to underwrite retail real estate – will it be marked down 20%, 50%, 100%?

What will the future of NYC’s retail landscape look like as a result of this?

• A reduction of rent

Even before the pandemic, retail was facing a reckoning as rents were down in 12 of Manhattan’s 20 major retail corridors. Landlords will need to drastically cut retail rents or risk sitting vacant for years on end.

• More competition for national brands

The pandemic will accelerate another trend, the big business takeover. From 2008 – 2018 New York City added a new Dunkin Donuts franchise approximately every 12 Days.

Most small retailers- hair salons, cafes, flower shops, and gyms have less than one month’s cash on hand. A survey of several thousand small businesses found that just 30% of them expect to survive a lockdown that lasts four months. For those not counting, we just passed month 3.

The city will be even more saturated with chains and mom and pop stores which make every neighborhood unique will vanquish at lightning speed. The fight for these national brands between landlords will drive concessions higher and prices lower.

• More flexible lease terms (pop up stores)

This has been yet another trend that has grown in popularity with the past 5 years. As landlords have been unwilling to reduce rent, they have turned to short term leases and pop up stores to help keep income flowing without diminishing the integrity of their rent. Expect to see this become the new norm, but again at a much-reduced rent.

• Rent stabilized building with retail components

Any landlords that bought rent-stabilized buildings at sky-high valuations thinking they could raise rents through improvements and renovations before the new rent stabilization laws that were passed last year are now in increasingly dire straits with the loss of retail income as well. Expect many of these owners to default or look to exit at a major loss.

• Empty storefronts

There will be a plethora of vacant retail properties until the market has time to adjust to the new normal and landlords and tenants are on the same page with regards to pricing. How long this will take is anyone’s guess, but expect storefronts to sit empty for 1-2 years.

Residential Owners

• Possibility of raised maintenance

Coops that have a retail space they lease out for income could be particularly hit hard. Many of these buildings rely on this income to finance the costs of their buildings and help keep maintenance charges at bay. Any loss of this income or a severe reduction of this income for a sustained period will create a tremendous amount of strain on the building’s finances.

• Possible reduction in services and city funding

Just from the decline of sales in commercial and residential properties in NYC, the cities tax revenue declined to $78.5 million in April from $217.5 million in March.

Consider property taxes that many landlords will not be able to pay. Sales and hotel tax, as well as tourist revenue that the city has been missing out on and the unprecedented number of unemployed people receiving benefits from the state and the city budget, forecasts a $9 billion shortfall over the next year.

What this means with regards to essential city service and funding remains to be seen, but is something that will certainly affect all of New York City’s residents.

New York will be entering Phase 2 soon and with it, we can be hopeful that the worst is behind us, but the destruction of many businesses and livelihoods will be glaringly apparent every walk down the street.