As part of our Main Streets Across the World 30th anniversary celebration, Garrick Brown, Cushman & Wakefield’s Vice President of Retail Research in the Americas, takes a close look at trends in the US retail market, with a focus on New York City.
He argues that the current well-documented challenges are largely confined to the mid-market apparel sector and while underlying economic fundamentals are actually improving, with personal needs, service, experiential and value-oriented concepts reaping the benefits, that the real gauge of North American High Street real estate market performance is exposure to commodity apparel brands.
When it comes to global high street retail districts, Upper Fifth Avenue in New York’s Manhattan has consistently ranked first among the world’s top markets in terms of asking rents – with other key New York submarkets not far behind.
Very few places on earth offer the same levels of density/foot traffic, as well as the critical drivers of tourism and wealth demographics (the factors driving the performance of every global high street) that translate into sales per square foot that surpass even the highest performing trophy malls around the globe.
In this rarified air, Manhattan competes only with Causeway Bay in Hong Kong, Avenue des Champs Élysées in Paris, Tokyo’s Ginza district, London’s New Bond Street, Milan’s Via Montenapoleone and a handful of other trade areas in the Americas, Europe, Asia, Australia and the Middle East.
Garrick on the changing nature of Main Streets in North America:
And so, against this backdrop, recent New York headlines about rising vacancy levels and ‘high rent blight’ have brought concern among industry watchers. While it is true that virtually every submarket in Manhattan now has an availability rate of 20% or more and that asking rents in key high street markets have fallen by roughly 30% over the last two years, it is critical to note that this is due to a combination of factors – and has been driven largely by trends that have had only limited impact on the luxury sector.
Firstly, it is critical to note that within virtually every Manhattan submarket, asking rates climbed in the 9% to 13% range every year between 2010 and 2015. Rents were frothy and growing at an unsustainable pace, especially considering the gathering perfect storm beginning to play out against key retail categories, particularly those that were mid-priced, commodity-driven and exposed to greater online competition.
Secondly, most of the space that has been given back to New York landlords has come from mid-price commodity apparel brands, for which Manhattan flagships have traditionally been viewed as ‘must haves’, both as embassies of their respective brands and as critical components for rollouts of global retailers expanding in the US. This has been the case historically, despite the fact that the economics of such locations for lower price brands often did not align with market rents – to the point where many retailers subsidized local rents not just from capital expenditure budgets, but also from marketing budgets.
Retail contraction in the United States, particularly for apparel brands, now largely resembles a barbell shape. Value-oriented clothing stores have never been in a more aggressive growth posture, while upscale and luxury brands are either holding their own or posting modest growth.
The challenge for many of New York’s high street markets has been both cyclical and structural. Firstly, cyclical in the sense that rents were already due for a reset. Structural change meanwhile has meant that many mid-price retailers have been dealing with the challenge of an over-retailed marketplace and the accelerated market share of newCommerce within key categories, in addition to changing spending patterns on the back of the rise of discounting and the increasing focus of Millennial consumers on value and experience.
It is critical to note these challenges, because New York City’s retail markets, due to their sheer size, also had the largest concentration in the Americas of many of these mid-priced brands (particularly in the apparel category) that are now facing challenges.
It is for these reasons that contraction here stands in stark contrast to that of Beverly Hill’s Rodeo Drive, Toronto’s Bloor Street or Miami’s Lincoln Road trade area, where the tenant mix is dominated by the luxury sector. Vacancies in these locations have remained very low and rents are either holding their own or growing.
Exposure to mid-price apparel players is the key to understanding high street performance in North America. Rising vacancy and subsequent rental declines on Chicago’s North Michigan Avenue, San Francisco’s Union Square (also facing the emergence of the new, neighboring Mid-Market district) and Washington DC’s Penn Quarter are all attributable to this same trend, to varying degrees, based upon their exposure to mid-priced apparel retailers.
This is not to say that there aren’t plenty of concepts willing to step into those voids. Virtually all these shopping districts still offer travel tourism, unmatchable density and income demographics and foot traffic that no other retail real estate on earth can touch. However, discounters, off-price apparel, restaurants, food halls, health clubs/niche fitness, medical retail users, entertainment/experiential concepts and even dollar stores (elevated U.S. dollar store chain Five Below recently inked a deal on Manhattan’s Upper Fifth Avenue) typically have not had rent structures that can support what past brands have been able to pay on the most expensive high streets.
Nonetheless, high street retail locations remain an essential part of branding; whether from expanding clicks-to-bricks brands such as Untuckit, Warby Parker and Casper (along with a few dozen others) that are making the jump from online only to being multi-channel. High streets are also critical to expanding global brands landing in the United States or Canada for the first time as part of their brand rollout. The difference is that we are seeing more Asian brands opt for West Coast-based strategies first (thanks to greater levels of Asian tourism, stronger local Asian demographics and less expensive pricing).
However, it would be a mistake to read into the current challenges of some New York’s high street districts as being indicative of all North American high street districts, much less the luxury sector.
It would also be a mistake to read into those current New York-driven negative headlines as being a permanent trend.
While we are seeing plenty of landlords refer to what they call ‘place holder tenants’ (short term, lower lease rate deals and pop-up locations, for now), it is critical to remember that many of the Big Apple’s trade areas are facing greater challenges in commanding the rents of a few years ago, simply because these markets got ahead of themselves in pricing prior to the escalation of the structural challenges now playing out in the retail space. Those structural challenges are far from over, but the underlying space fundamentals of tourism, high income demographics and unparalleled foot traffic have actually only improved.
Other Main Streets Across the World 2018 opinion pieces:
Vice President, Americas Head of Retail Research
Telephone: +1 916 329 1558