Northeast Real Estate Business

NOV-DEC 2015

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

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56 • November/December 2015 • Northeast Real Estate Business www.REBusinessOnline.com there. It goes up to the CEO level, and it's just amazing how quick they are that gets turned to say, 'Yeah, but this is really put into our marketing bud- get.' Stephanou: Another development of note: The American Dream project in New Jersey. There are several anchors — Lord & Taylor and Saks Fifth Av- enue just announced they're going to do stores there. Part of the project is driven by the tourist dollar; the euro is not in the position that it had been against the dollar a few years back, so the tourist numbers in New York City are supposed to be 58 million in 2015. The dollars being spent by those tourists are less on apparel and conventional retail — they are being spent on accommodations, food, en- tertainment, etc. Even the chairman of Macy's announced a few months back that they were feeling the impact at their fagship store on 34th Street of fewer tourist dollars being spent, so that clearly is affecting SoHo and I'm sure it's impacting a lot of Fifth Av- enue fagships. Graiser: If you look on a national lev- el, it's just remarkable. You're going to start hearing from the specialty retail- er minus double digits — minus 12, minus 14 percent — we're starting to see that. There's a real problem. If you talk to some landlords, it's somewhat of a bubble compared to New York. New York kind of stands on it's own, but if you look nationally, landlords are comparing this to January, Febru- ary and March of 2009 when they got inundated with calls from all of these retailers with problems. That does im- pact the stores here in New York City because they have to cut somewhere, so if they're losing a lot of money here, they're going to have to do something. Stephanou: The other part of that is if a tenant has been in a location for a long time. Maybe they are on their frst fve-year option or their second fve-year option, but the rents have now escalated so signifcantly since then. The companies are now say- ing, 'these were proftable stores, but we're not going to be able to afford to stay here.' It's a double whammy. They are losing what had been a very proftable store that was contributing to the bottom line. Katz: Especially if you drill it down to neighborhood retail. Some larger na- tional retailers on the upper west side cannot pay $5 million in a neighbor- hood location. Breslin: They're pushing rents on the Upper East Side to $400 to $450, and I don't know many retailers on the Up- per East Side that can pay $450 before they make a penny. NREB: Because of the rise in rents, are these deals taking longer to complete? Breslin: It's not the rise in rent; it's the rise in the prices that these real estate developers and speculators are pay- ing; that's the whole problem in SoHo. These buyers, who are late to the mar- ket, have come in and overpaid. I have a property where our owner is in there for 11 years on a 1031 exchange in SoHo. His cost basis is very low and then a national kitchenware tenant with the same footprint is right across the street from us, and they need $1.6 million more than I need in rent to make a deal. That's a problem for the same-sized space. NREB: What's driving rents up, is it the demand from other categories like restaurants? Breslin: It's the landlords driving the numbers. Menkin: In the city, there's always been a game that goes down in ev- ery negotiation — and I think New York City is perhaps the pinnacle of it — where you see who blinks frst. You had asked for us to come up with one word to describe the condition of the market, so I chose 'disconnect.' There's just a great disparity between asking rents and achievable and sus- tainable rents and the issue has to do with how long that is going to con- tinue. Pat [Breslin] made a comment before that that's when we start to fear a burst. Personally, I'm not sure we're going to see a burst, but I taught real estate at NYU, and at one point I came across a chart that showed the bell curve of the evolution of retail, and it broke it into four stages. The stage I believe we're in right now is hyper supply where you have increasing va- cancy, moderate to high construction, low absorption, and moderate to low employment growth and medium to low rental rate growth. As unnerv- ing as that may be, in the curve, the next quadrant is recession. The deals are taking longer, they're harder to source in the frst place because of the reluctance in the market in gen- eral, but clearly the deals are getting microscopic tweezers out, and savvy retailers that have credit are going to push the envelope to the max. Either the landlord gets realistic or in cer- tain instances they can't because of the overpayment to begin with. Rent projections that tie into fnancing are going to knock them out of the box. Graiser: I feel like a lot of it is being driven by the fact that so many prop- erties have traded over the last couple of years and at such high numbers. French: That's part of the problem, and even the sites that come on the market are expensive. You've got 3 million square feet of new develop- ment in New York City, 2 million of it • Apartment Rentals & Management • Commercial Brokerage • Consulting Services • Business Brokerage & Evaluation • Excess Asset Disposition • Exclusive Representation • Investment Sales • Land Assemblage & Acquisition • Project Development • Property Management • Real Estate Consulting • Receivership Services • Retail Site Selection • Student Housing Investment Sales & Rentals • Tax Credit Programs & Economic Incentives Advisory Services Now Booking ICSC Dealmaking Appointments Sutton Real Estate Company, LLC 525 Plum Street, Suite 100, Syracuse, NY 13204 Phone 315.218.1131 • Mobile 315.447.8668 Bfeinberg@suttoncos.com • www.suttoncos.com 82 YEARS OF SUCCESS AND COUNTING… The Sutton Companies, founded in 1933, has consistently maintained its reputation as one of the most successful commercial real estate frms covering markets across the Upstate New York region. We are a full service company focused on our diverse base of local, regional and national clients. If you're a retailer or property owner seeking representation, then start doing your deals with Sutton Real Estate Company. When it comes to retail real estate, we have you in our sites! 80 plus years of experience and expertise in these areas of specializations: Creekwalk Commons, Syracuse, NY 5,000 SF of Desirable Retail "Where rents are high, sales may or may not justify the rents that the landlords are expecting and tenants are very cautious," says Stephen Stephanou, Crown Retail Services. Listening on is Nina Kampler, Kampler Advisory Group LLC. "In the city, there's always been a game that goes down in every negotiation, where you see who blinks frst," says Victor Menkin.

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