New York City and surrounding counties in the metro have brought the virus under control. Still, the virus has taken a profound toll on the New York economy, retailers, and New Yorkers themselves.
Retailers are facing unprecedented hardships in New York. Governor Cuomo's executive order, "New York State on PAUSE," closed all nonessential businesses, including restaurants and retailers, for months and dramatically changed the metro's retail landscape. A wave of local restaurants and retailers has announced closures. These companies operate on razor-thin profit margins at the best of times, and the closure period made many businesses unsustainable. National retailers are also facing difficulties.
Neiman Marcus, J. Crew, JCPenney, and Century 21 have declared bankruptcy and many other tenants across retailer types. These bankruptcies will put a significant amount of space back on the market, and net absorption should remain negative until late 2021. This will put pressure on occupancies, with vacancies expected to increase by around 100 basis points by the end of next year.
New York is in a supply wave, with more than 4.6 million SF delivered last year, including several high-profile developments: The Shops & Restaurants at Hudson Yards, Essex Crossing, and Nordstrom at 217 West 57th Street. Significant preleasing kept vacancy in check, though with declining retail fundamentals, new space is likely to have difficulty in lease-up.
The most expensive retail rents across the country are in the New York metro, particularly in Manhattan's prime locations. Rent growth should be negative over the next 12 months for the first time since 2010. Landlords will be forced to reduce rents to attract tenants, as retail drivers and consumer spending slows.
Investment volume has been robust in recent years, though a sharp reversal of this trend has begun. With no transactions greater than $20 million, 20Q2 had the lowest quarterly investment volume seen in a decade.
Before the pandemic, New York was the country's prime retail market, and despite news of struggling retailers and bankruptcies across the country, New York retail fundamentals were well positioned given its unmatched density and concentration of workers, residents, and tourists. The COVID-19 impact on New York has yet to be fully determined, and though recovery is on the horizon, the timeline is unclear.
Leasing activity and forecast
Leasing has decelerated sharply. New York is contending with record high unemployment, and many residents have shifted to a work-from-home lifestyle or are choosing to relocate to the suburbs or outside the region entirely. Retailers have monitored this closley. In 19Q2 more than 1,300 retail leases closed across the NYC metro, totaling nearly 3.9 million SF. In 20Q2, only around 380 deals were recorded, totaling just over 1.5 million SF. Nonetheless, there have been a few notable commitments since the outbreak began. In August, Bed Bath & Beyond renewed their 82,000 SF lease at 620 Avenue of the Americas in Chelsea, even as the home goods retailer closes other locations around the country, on a 10-year term. Canadian fashion label Aritzia leased 28,600 SF at 100 Crosby St. in SoHo, on a 20-year term. The space was formerly occupied by Dean & DeLuca from 1977 until 2019.
Rent forecast
Out of the 20 most expensive submarkets across the country, 19 in are in Manhattan. Times Square has the highest average rent in New York, at $260/SF. Rents here are driven up by ultra-high prices in the Bowtie area, the intersection of Broadway and Seventh Avenue, where asking rents can often reach over $1,000/SF. Yes $1,000/SF. Taco Bell Cantina leased 3,250 SF at 1501 Broadway in January 2020, with a reported effective rent of nearly $800/SF. (Ill save you the math, they are paying $216k a month). Though this eye popping figure is one of the most expensive deals recorded in the past 12 months, it is a significant discount from the asking rent on the space, which was $1,500/SF. Fifth Avenue in the Plaza District and Madison Avenue in the Upper East Side are other prominent shopping corridors that have seen rents of $1,000/SF or more in recent years.
Per the graph below, we should expect to see NYC turn out to be one of the hardest-hit markets followed by unprecedented YOY gain in '22 and '23.
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