Is This A Ghost Town Or A Major City?

An EcoChi Vital Abstract

This article was posted on July 21, 2019 by Suzanne Kapner and Esther Fung, The Wall Street Journal.

Don’t blame all the vacant stores on e-commerce. Sky-high rents are squeezing retailers, too. Although commercial retail rents are down from recent peaks, they haven’t fallen as fast as sales at struggling chains. The rents remain higher than prerecession levels in many prime shopping areas such as Manhattan, Los Angeles and Dallas. In a high-profile example of this tug of war, Barneys New York Inc. has hired restructuring advisers and is considering several options, including a possible bankruptcy filing, as a way to renegotiate its rent. “We’ve cut rents by 30% and are offering all sorts of concessions, but we still have vacant space,” said William Friedland, a principal with Friedland Properties, which owns commercial real estate in Manhattan. “For these landlords, maintaining the valuation on their properties is more important than collecting an immediate rental stream,” said Richard Johnson, a partner in Odyssey Retail Advisors, a consulting firm that works with retailers and landlords. “It’s a waiting game, and many landlords would rather wait it out, hoping the market improves.” Commercial rents in San Francisco are up 53% from a decade ago, and in Miami they are 46% higher, according to CBRE. Even in smaller cities, such as Nashville and San Jose, Calif., rents are up by nearly one-third. In Manhattan, the average annual rent more than doubled from the beginning of 2010 to the end of 2014, peaking at $1,111 a square foot, according to CBRE, as Inc. and other e-commerce players were changing traditional shopping habits. Some chains wound up paying as much as 30% of their sales in rent, double the historic norm, industry executives said. What followed was a record number of retail bankruptcies and store closures as the shift to online shopping depressed store traffic, which made the higher rents even harder to absorb. “It’s a huge challenge to negotiate renewals,” said Alyssa Gates, director of U.S. real estate for cosmetics retailer Lush, speaking about the country as a whole, not just Manhattan. “Landlords aren’t willing to go backwards in terms of rent. They are hoping the business comes back.” Don Ghermezian, president of the American Dream retail and entertainment complex in East Rutherford, N.J., said landlords are making a mistake if they raise rents without figuring out a way to draw more traffic to stores. Barneys has signed a lease for the new center and will offer cryotherapy as well as a boutique that sells cannabis-related products. Barneys, which is much smaller than rivals Saks Fifth Avenue and Neiman Marcus, operates 13 department stores and nine warehouse stores. Industry executives say in its spat with its Madison Avenue landlord, Ashkenazy Acquisition Corp., both sides have much to lose. According to people familiar with the situation, for Barneys, finding new space would be expensive and time-consuming and the flagship store does about $300 million in annual sales. Likewise, Ashkenazy would have trouble filling the space with a single tenant.

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