Retail Rents Falling From Manhattan To Los Angeles

retail/restaurant space for lease sign

COVID-19 and the digital-first trend are sending U.S. retail rents falling in many locales by percentages even greater than those seen in or after the 2007-08 Great Recession.

“These decreases are historic,” the Real Estate Board of New York wrote in a new report showing that average Manhattan retail asking rents fell in all of the island’s 17 retail corridors during autumn. The board added that eight of 17 retail corridors are “experiencing their lowest price per square foot averages in at least a decade.”

The worst results came from Lower Manhattan’s Broadway/Houston Street/Broome Street area, where average asking price per square foot tumbled 25 percent year on year. Even the Broadway/Battery Park area of Lower Manhattan, where retail rents held up the best, saw average retail asking prices per square foot lose 1 percent.

And those figures only refer to asking rents. “Taking” rents — what tenants actually agreed to — fell to even lower levels.

“While asking rents dropped significantly, taking rents are reported to be much lower, with some brokers citing average differences between asking and taking rents around 20 percent,” the Real Estate Board’s report found.

A Coast-To-Coast Phenomenon 

Such plunging rents come as COVID-19 forced more than 100,000 U.S. stores and restaurants to close either temporarily or permanently. Large chains like JCPenney, Lord & Taylor, Pier 1 and others are closing some or all of their stores following bankruptcy, while other chains like Macy’s are shuttering some locations even though the companies have avoided Chapter 11 so far.

Meanwhile, the National Restaurant Association estimates that more than 100,000 eateries have either closed permanently or at least long term due to the pandemic. That’s one out of every six.

On the West Coast, the Allen Matkins/UCLA Anderson Forecast California Commercial Real Estate Survey for 2020-2023 recently surveyed industry experts and found that “the current view is that retail properties will be generating significantly lower, if any, returns in 2023 compared to the middle of 2020.”

Study author Jerry Nickelsburg wrote that while retail “struggled” even during the pre-COVID economic expansion “the current recession tripled down on that struggle.”

“First, household loss of income and shelter-in-place policies reduced current demand for brick-and-mortar retail,” he wrote. “Second, the inability to physically frequent many retail establishments created a new set of online shoppers. Third, increases in the savings rate on the part of households in response to the recession portends less consumption.”

“To be sure, some activities will return, particularly personal services and experiential retail,” Nickelsburg wrote. “However, marginal properties will not find tenants willing to pay sufficient rent to keep the properties in the retail space.”

The study’s Retail Space Developer Sentiment Index, which runs from zero to 100 and counts readings above 50 as “optimistic,” fell to about 20 in San Francisco, the East Bay, Silicon Valley, Los Angeles, Orange County and San Diego as of June.

Nationwide, Moody’s Analytics estimated that effective retail rents would fall 11.1 percent for 2020 as a whole, “faring even worse than office properties.” That’s nearly twice the drop that retail rents saw following the 2008 Great Recession.

Some Good News

However, there’s a silver lining in all those clouds — lower rents and easier lease terms for those retailers who survive.

For instance, the Real Estate Board of New York’s Manhattan report noted that “increases in retail availabilities and feedback from both tenant and retail brokers indicate that we are in a tenant’s market.”

“Some property owners are willing to provide tenant improvements and concessions in addition to more creative deal-making, including shorter lease agreements and percent-of-sales rent offerings in the near-term,” the board wrote. “The current market provides ample opportunity for retailers seeking entrance to the Manhattan market and exemplifies landlords’ increased flexibility during these uncertain economic times.”