Luxury Fueled A Strong But Uneven 2023 For NYC Retail

The year 2023 will be remembered as a painful one for much of commercial real estate, but that can't be said for owners of New York City retail space.

Rents have gone up consistently throughout the year, and despite the pullback of some chain retailers, more pockets of the city are seeing strong demand and limited availability as consumer confidence is spurring retailer confidence.

The heat in neighborhoods including SoHo, Flatiron and Union Square is only set to grow, Compass Vice Chairman Robin Abrams said.

“SoHo is on fire. Nolita is very strong,” she said, adding that some of the demand is spilling beyond those corridors into nearby areas like Lower Manhattan’s Lafayette Street. “Elizabeth and Prince and Spring continue to be heavily trafficked, and there’s little availability with new deals having been made.”

Demand in Manhattan’s prime retail corridors is likely to stay high, even as rents tick up early next year, experts said. While some new construction and anticipations of softening demand amid high prices could dent demand in certain neighborhoods, they said, years of rental rate declines dating back to before the pandemic make it unlikely rents go down in 2024.

Asking rents in Manhattan were $663 per SF in the third quarter, up 7.8% from the start of the year, according to CBRE.

SoHo has been the city's most active retail corridor. Rents on Broadway in the neighborhood are up by nearly 50% year-over-year, and Prince Street asking rents are up 80% year-over-year. Banana Republic, Abercrombie & Fitch and Brandy Melville have all signed deals for large spaces in the neighborhood.

The competition is pushing some retailers out of the area, Abrams said. Two weeks ago, she toured SoHo with a client looking for space, only for the client to realize later that prices were beyond what they could pay.

“There's more absorption of space and more competition from tenants in the market,” she said. “The rental pricing has gone up substantially, so we're just starting to see pushback.”

After a full day touring SoHo, Abrams went back out with her client a few hours later in search of other options.

“We literally regrouped and in the evening, in the dark, went up to the Upper East Side and looked at that as an alternative,” she said. “Even there, some of the rents are starting to increase dramatically.”

Outside of SoHo, increases haven't been quite as dramatic, and some are questioning how much higher they can go in light of many retail companies' struggles this year with shrinking margins.

“One of the biggest challenges, I think, is that at the moment, a lot of retail landlords do not technically want to raise asking rents too much,” said Hiro Imaizumi, CBRE’s head of retail research. “One of the major issues for tenants entering the market at the moment is the capital expenditures of high costs of construction.”

As a result, he said, landlords are trying to create flexibility with pricing, not necessarily by lowering asking rents but by offering concession packages to encourage move-ins. 

Asking rents are likely to stay high in the corridors with the lowest availabilities, like SoHo and Flatiron, Imaizumi said. But developers are also pushing deeper into areas like Williamsburg and luring luxury tenants.

“We saw areas like in Williamsburg, such as North Sixth Street instead of Bedford Avenue, introduce new retail properties,” he said.

Luxury and designer tenant move-ins to the neighborhood, like Chanel and Hermès, may mean asking rents in nearby spaces jump, he said.

As luxury brands expand in the city, many lower-cost retailers have pulled back. The number of chain stores in the city declined by 3.1% from 2022 to 2023, according to the Center for an Urban Future’s annual chain store report.

This year was the second worst for chain retailers across the five boroughs since 2008, second only to 2020, the report found.

Many of those closures were driven by changes in consumer patterns. Mobile providers were the category with the most closures, with T-Mobile, Metro by T-Mobile, AT&T and Verizon Wireless shuttering a combined 115 stores.

Pharmacy chains were next, shrinking in the five boroughs as well as nationally. Rite Aid cut its NYC footprint by more than half, CUF’s report found, while Duane Reade and CVS also closed a handful of stores each.

Other retailers that reduced their presence in NYC included names such as Mattress Firm, Party City and The Children’s Place, as well as apparel retailers like Guess, American Eagle Outfitters and Foot Locker. The chain stores closing likely just don’t offer significant enough bargains to consumers, Imaizumi said.

“One of the things from my perspective that we've been sort of seeing in New York City is something we call the barbell effect,” he said, explaining that shoppers in NYC either want luxury or discounts on essentials at stores like Target and Dollar Tree. “I think a lot of retailers [that] fall in between those have lost a significant amount of demand.”

By contrast, the chain with the most new stores in the five boroughs, according to the CUF report, was Five Below, which opened 21 locations in 2023. 

The stores that did close, including the 13 Bed Bath & Beyond locations in the city, don't figure to give landlords headaches, Imaizumi said. Pharmacies have high ceilings, a design feature in high demand for retailers looking to build out flagship or experiential stores, and are typically larger spaces in a city where space is often scarce. 

Also playing to landlords' advantage next year is the relative lack of space coming online. Essex Crossing, a long-awaited mixed-use development on the Lower East Side with 350K SF of amenity and retail space, is expected to complete next year. But it is the only significant retail development in the borough, meaning competition for Manhattan retail will remain high.

Brooklyn’s retail scene, however, may see competition concentrated in specific corridors while others struggle to lease space, Abrams said. As much as 600K SF of retail space was under construction across the borough this summer, according to Marcus & Millichap report, adding options for potential tenants.

And while markets like Williamsburg are experiencing a wave of demand, other areas — like Downtown Brooklyn, where T.J. Maxx and Nordstrom Rack shuttered this year — could find it harder to lease space.

“As Downtown Brooklyn has continued to grow with new construction — and Williamsburg, certainly, and even Dumbo — as there's more and more availability, I think things that are going to be considered more local are going to be harder to lease,” Abrams said, adding that she expects some of the space to be taken by restaurants and service-oriented retailers.

“All the other tenants are going to what they consider to be the cooler, hipper, higher-profile areas,” she said. “But that's always happened. Even in Manhattan.”