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Manhattan Landlords Cut Deals to Stave Off Vacant Storefronts

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Just four years ago, the new owner of 115 Mercer St., a low-slung building in the heart of Manhattan’s Soho shopping district, managed to swiftly replace its tenants and lure retailers willing to shell out record rents. Now, that same landlord has to fight to get one of them to stay.

The Kooples, a French clothing seller, is threatening to vacate its space six years ahead of schedule if it can’t get landlord Thor Equities to cut the rent. With brick-and-mortar stores suffering from a retail industry shakeout, the company says it isn’t making enough money at the property and wants to focus on the web.

The scene unfolding on the cobblestones of one of New York’s trendiest shopping areas shows the increasingly fraught negotiations between tenants and landlords as vacancies soar and retail rents plunge. Similar scenarios are playing out along Madison Avenue to the north and along other thoroughfares in the city that have long been a draw for those shopping for designer clothing and other luxury goods. Property owners are confronting demands once unheard of in Manhattan, from rent reductions to short-term leases.

After a drought in 2017, more deals are getting done as landlords begin to accept the new reality, according to Patrick Smith, a vice chairman of the retail brokerage at Jones Lang LaSalle Inc.

“Landlords are adjusting the way they do business to market conditions,” Smith said. “It’s healthy. It certainly has stimulated activity.”

Retail landlords throughout the United States are facing a contracting universe of tenants as merchants cut back on brick-and-mortar locations and shopping shifts online. A record 11,000 stores may shutter in 2018, according to brokerage Cushman & Wakefield Inc.

That reality could affect the investment portfolios of life insurers, pension funds and other retail and institutional investors with exposure to commercial real estate.

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In Manhattan, home to some of the most valuable retail real estate in the world, a sharp rise in rents following the recession exacerbated the problem, with property owners clinging to unrealistic income expectations. Today, the glut of empty space is taking a toll, pushing landlords to make concessions to plug holes.

(Related: Insurers Continue Faring Well With Commercial Real Estate Loans)

Some are signing shorter-term leases to draw tenants that may be reluctant to make long-term commitments. In Soho, Hermes is negotiating a deal at 63 Greene St. that gives the retailer the option to leave after one year, while a few blocks over at 375 West Broadway, Gucci signed a lease that allows it to vacate the space if sales don’t meet expectations after two years, according to people familiar with the deals, who asked not to be identified because terms are private.

Historically, a typical lease term in New York was between 10 and 15 years.

Representatives for Gucci and Hermes didn’t respond to emails seeking comment.

Gucci, Cartier

“Landlords, more today than in the past, are coming around to the retailer’s mentality,” said Steve Soutendijk, an executive director at Cushman. Both sides are making calculations on store sales “and how much can they pay in rent. If a store is unprofitable for them, it doesn’t make sense to keep it open.”