Never has The Clash’s 1982 hit song been quite so relevant as it is now for retailers in New York City.
As the country’s early epicenter of the COVID-19 outbreak, the tri-state area was one of the earliest to go into lockdown and one of the latest to reemerge from stay-at-home orders and business restrictions. The effect of those forced closures — plus other macroeconomic factors — have caused the retail market to tank, leaving many retailers to question what they should be doing now.
The Bad News
In late June, the city entered Phase Two of the state’s reopening plan, which allowed nonessential retailers to resume in-store operations. But for some of New York’s biggest department stores and specialty chains, the reopening came too late to stem their losses.
Numerous retailers have announced they are shutting down their outposts in 2020 as they grapple with the effects of the novel coronavirus, along with other difficulties. Among those closing their doors is Neiman Marcus, which filed for Chapter 11 bankruptcy in May and plans to exit its five-floor outpost at Manhattan’s Hudson Yards. Meanwhile, Kmart is permanently shuttering its Penn Station location; bankrupt JCPenney is closing down two high-profile stores, in the Manhattan Mall and in Kings Plaza in Brooklyn.
According to real estate firm CBRE, Manhattan hit a new peak for retail availability in the second quarter of this year, with 235 open spaces in its 16 prime retail corridors. The Downtown Broadway area has seen some of the highest numbers of new vacancies, including the departure of Modell’s Sporting Goods after the athletic retailer filed for bankruptcy this spring.
Joe Aquino, president of the JAACRES brokerage in New York, noted that the Big Apple has been particularly hard hit due to the decline in foot traffic from tourists and from office workers who are now conducting business remotely. That, on top of the three months where physical stores remained closed, generating little to no revenue from in-person sales.
And he doesn’t expect the situation to turn around soon. “It’s going to take a long time to recover from this,” said Aquino. “It’s not going to happen in a quarter or two — it’s going to take a few years.” He added that much depends on the arrival of a vaccine and people feeling comfortable traveling as they did in the past. “We have to get the people circulating again.”
Making It Work
In the meantime, how are retailers approaching their store strategies? Will high-priced hotspots like Manhattan continue to see a mass exodus if tourists and office workers don’t return soon?
Aquino said that at the moment, many retailers are staying put and are in the midst of negotiations over their spaces, trying to hammer out better terms. Companies like Gap Inc. and Ann Taylor’s parent company have been engaged in very public spats with property owners demanding payment on rent. And earlier this week, a Miami mall owner took steps to evict Saks Fifth Avenue due to “extensive arrearages.”
Aquino said most landlords are not offering much flexibility on rent right now and are still demanding pre-COVID-level rates. “The trouble is, rent is a derivative of sales. If there’s no sales, how do they pay rent?” he asked. “A lot of them have tight margins and some don’t have a lot of cash on hand.”
CBRE’s Q2 market report did find that Manhattan’s average asking rent fell 3.6% from Q1, to $688 per square foot, though the company credited much of that to lower-priced spaces becoming available rather than to market pressures pushing down rates.
But Aquino said some landlords are signaling that they’re open to negotiations, particularly the smaller mom-and-pop property owners.
And some companies are not just staying in New York, but doubling down. Recently, Target inked a new lease for a 55,000-square-foot space on Manhattan’s Upper East Side. And the Canada-based fashion boutique Aritzia signed on for a 30,000-square-foot location in the Nolita neighborhood, bringing its NYC door count to five.
Glimmers of Hope
Nevertheless, New York looks quite different these days, and likely will for months and years to come. When the pandemic hit, neighborhoods cleared out as residents fled the outbreak to stay at their vacation homes or with family outside the city. And by some reports, the departures are continuing as companies begin to make their current work-from-home situations more permanent.
“For the past few years we’ve seen so much conversation around urbanization,” said retail strategist Melissa Gonzalez, CEO of The Lionesque Group. “People were waiting longer to get their dream home and they wanted the convenience of urban life and being asset light. Now we’re seeing the complete opposite.”
She added, “If you’re not going to go to work five days a week ever again, it’s going to change how you approach your living situation with your office location. And that’s going to be one of the biggest hurdles that cities like New York are going to face.”
As a result, Gonzalez encourages retailers to begin to identify where their customers are now and redirect their resources there. For some companies, that might mean investing more in their e-commerce operations, particularly because some shoppers are still wary of in-person shopping amid the coronavirus.
But Gonzalez said there is still value in physical stores — when they’re in the right location.
Many of New York’s wealthiest decamped to the Hamptons during the coronavirus pandemic, and big retailers recognized the shift and followed them. Brands like Jimmy Choo, Paul Stuart and American Eagle opened pop-ups in the area. And Bergdorf Goodman pledged to provide same-day delivery from its Manhattan flagship to any Hamptons consumers who order before noon each day.
“Brands that showed up this summer for pop-ups in the Hamptons did tremendously well,” said Gonzalez, “because they went to where their consumers were.” She noted many operators reported that sales during their first week were equal to their entire July 2019 revenue. “You’ve got to be the right category in the right place,” she said.
Gonzalez predicted that some companies might take a chance on holiday pop-ups in new locations. But she advised taking a strategic tact with such moves: “How you approach those markets is different than how you approach in an urban environment. It’s going to just take a rethink.”