Come to New York and See Your Future

Come to New York and see your future. It sounds like a catchy slogan. Better yet, come to New York and see what Amazon is doing to commercial real estate. 

First, they came for the malls. Online shopping, increasing inexorably year after year, significantly damaged malls. Why go to a mall when you have a better selection, considerably cheaper online.

Run down the list of major retailers that have closed down all or many of their stores over the past few years. It’s a daunting list:

JC Penney, Sears, Kmart, Macy’s, Toys R Us, The Limited, American Apparel, BCBG, Payless Shoes, J Crew, Banana Republic and Gap 

How many of these companies anchored malls?

Cities have lost clothing and appliance stores, to see them replaced by coffee shops and gyms:

We’re told that although sportswear and appliance stores don’t appeal much to millennials, their places are being taken up by fancy coffee places, “fast-casual” eateries serving the same green salads, and gyms and spas. “Experiential” retail — a term that can mean almost anything — will also help plug the gaps.

But munching spots and health clubs can’t come close to filling spaces that sportswear, houseware and bookstores are leaving behind. Remember when New York City was filled with bookstores, when you could browse all the latest titles? Those days are gone.

The situation in New York is dire.. We have reported on the emptiness of Madison Avenue. Among America’s most expensive retail locations, it now suffers a significant number of empty storefronts. Walk up or down Madison Avenue these days and you will not feel that you are visiting a retail mecca.

The same is true of upper Third Avenue and Broadway in Midtown. Steve Cuozzo tells the story for the New York Post:

If you want to see the future of storefront retailing, walk nine blocks along Broadway from 57th to 48th Street and count the stores.

The total number comes to precisely one — a tiny shop to buy drones.

That’s right: On a nine-block stretch of what’s arguably the world’s most famous avenue, steps south of the bustling Time Warner Center and the planned new Nordstrom department store, lies a shopping wasteland.

Yes, there are bank branches, restaurants, fast-food outlets, theaters, Duane Reades, a vitamin shop and a few tourist-targeted “discount” stores. But mainly there are oodles of empty spaces covered with signs touting SUPERB CORNER RETAIL OPPORTUNITY.

The same crisis blights the rest of Manhattan. The people invested in storefront retailing — real-estate developers, landlords and retail companies themselves — tell us not to worry. It’s a “transitional” situation that will right itself over time. Authoritative-sounding surveys by real-estate and retail companies claim that Manhattan’s overall vacancy is only just 10 percent.

True enough, there’s a Duane Reade on every other block. And the city is still chockablock with restaurants and bank branches, that is, with places that offer something that you can't purchase from a warehouse in Kentucky. And  yet, online banking is fast making your local branch obsolete. What happens when the bank branches that occupy a significant amount of commercial real estate in midtown Manhattan become redundant?

Happily enough, and strangely indeed, real estate developers, the kind who build tall residential and commercial towers, and who expect to be renting out the ground floors at exorbitant rents, are optimistic. Some are lowering the asking rents, but many are hanging tough. It’s as though they are whistling past the graveyard. Under normal circumstances a developer would adjust the price of space to find a tenant. Now, many developers have chosen to hunker down and to wait out the storm. If we were reading market psychology, we would conclude that the worst is yet to come.

Retailers can afford to pay $250 a sq. ft. So developers are asking $400 a sq. ft. Cuozzo notes that on Times Square and Fifth Avenue they are asking— and not often getting— up to $2000 a sq. ft.

And yet. As Cuozzo notes, Amazon and other online retailers  only account for 9% of retail shopping. Does anyone doubt that the number is far more likely to expand than contract? Most manufacturers now sell via their websites. Whatever you can get in a store you can get on the site. The difference is: the sites have a far greater selection. And they save you a trip to the store… where you will find limited stock.

People are losing the habit of going to shop in a store. They are gaining the habit of looking first at Amazon or Ebay or even their favorite purveyor… online.

So, are the days of brick and mortar over? Consider this, the New York Times reported that H & M, a major cut price retailer is now sitting on $4.3 billion in unsold merchandise. How many new stores do you think it is going to be opening?

Of course, online shopping is not the only culprit. Cuozzo notes that private equity firms took over retail chains and saddled them with excessive levels of debt. Dare we mention the astronomically high taxes New Yorkers pay, the fallout for New York taspayers from tax reform and the massive social welfare apparatus that the state can no longer really afford. Before you know it, New York is going to look like San Francisco.

Come to New York and see your future!