A great disparity has emerged in Manhattan’s retail market: its residential corridors have emerged strengthened after the coronavirus pandemic’s gut punch with rising rents and activity, but its traditional business corridors have yet to get up off the mat.
Bisnow/Mark F. Bonner
The new Target store at East 86th Street and Lexington Avenue on Manhattan’s Upper East Side.
While retailers hope the end of the U.S. travel ban Nov. 9 and accelerating office returns will bring about a recovery for Manhattan’s prime commercial districts early next year, the new world created by the health crisis could have a prolonged effect on retail corridors that rely heavily on foot traffic from office workers.
“I think overall, they’ll be somewhat less demand than we had. Then again, the number of businesses that are out there and fully operational is well below [what it was before], so I think these things will come back in proportion to one another,” CBRE Senior Director of Research and Analysis Nicole LaRusso told Bisnow in an interview. “Our expectation is most office workers will be working in the office most of the time — three to four days a week on average — but that also is less than what we had before.”
The Upper East Side and Upper West Side saw retail rents increase last quarter compared to the previous three months and the year prior, but rents continued to drop in traditional retail goliaths like Herald Square and Times Square, according to data from CBRE.
Twelve leases were signed on the Upper East Side between July and September, with average asking rent in the area reaching $220 per SF, a 19% increase from the quarter prior. On the Upper West Side, the 10 leases signed had an average asking rent of $246 per SF, a 7.3% increase from the end of June, per CBRE.
But in Herald Square, rents plummeted 12% last quarter to $440 per SF and rents in Times Square declined 5.7%. The areas that saw the greatest declines in rent saw foot traffic decline “precipitously,” said Sulin Carling, principal at HR&A Advisors, which has been tracking this data through an analysis of anonymized cellphone data from Safegraph.
“Whereas in the residential neighborhoods, in Manhattan, in the outer boroughs over the course of even late 2020, [there has been] a real rebound in foot traffic to pre-pandemic levels, in some cases even higher, presumably because people are working from home,” Carling said.
Tourists and daytime workers historically make up a huge chunk of New York’s shoppers: In 2019, tourism and Midtown office workers combined made up 56% of annual visitors to shops along Fifth Avenue, the city’s premier retail corridor, according to HR&A Advisors.
Bisnow/Mark F. Bonner
Whole Foods on 87th Street and Third Avenue
Though office occupancy in the New York area is slowly creeping up, it is still at about 32% as of Oct. 20, according to Kastle Systems, five points below the average of the 10 largest cities in America. Many companies are still waiting to roll out their permanent return to office plans, but only 13% of companies said they would have their employees in the office full time post-pandemic, according to a recent Ernst & Young survey.
Meanwhile, demand for office space is a moving target. Wednesday morning, CBRE released a study showing that office leasing activity — measured in tenants in market, leases and sublease listings — picked up in September, but tech leasing platform VTS’ Office Demand Index — which measures demand in the seven biggest markets around the country — dropped 15 points between August and September.
While the lower numbers of tourists and office workers as a result of the pandemic is holding back Manhattan retail’s recovery, its decline started well before the health crisis. Fifth Avenue rents declined by 25% between June 2018 and June 2020 as online shopping took increasing bites out of the viability of the world’s priciest retail spaces.
But the bright spots farther north are happening not as a result of the fashion epicenter migrating, rather a general shift in consumer behavior that favors retail spaces near home is also boosting leasing in residential neighborhoods, said Compass Vice Chair Robin Abrams, the brokerage’s head of retail strategies.
“We had a lot of neighborhood businesses that were thriving because people were working from home and were staying in their neighborhoods and on their streets, staying local,” Abrams said. “There were certainly a lot of food service, medical and wellness [users] that were in the market absorbing space and wanted to be where people were living and active.”
Food and beverage tenants made up the bulk of leases citywide last quarter, per CBRE, while health and wellness clinics setting up shop in storefronts across the city have been growing.
New health-related businesses have expanded rapidly since the pandemic, including veterinary startup Bond Vet, which landed a $170M investment from Warburg Pincus earlier this month after expanding in residential neighborhoods throughout the city over the past year, including Murray Hill, the East Village and the Upper East Side.
This type of residential-first recovery has been seen on a national scale over the course of the pandemic, said Matthew Krell, managing director at real estate advisory firm Alvarez & Marsal Property Solutions.
“Space has flown off the shelves because that’s the same thing that happened all over the country,” Krell said. “It all came from a place of tenants wanting to be as close to their customers as possible. Where do they live? Let’s get stores as close to where they’re going to be as [is] possible, because people aren’t going to the office.”
Carling said central business district landlords should prepare for long-term changes caused by the shifted nature of work, and she thinks this is an opportunity to rethink the use of these spaces in the future.
“This leads to a whole other conversation about what do we do with those ground-floor spaces if they’re not gonna be retail, as well as what do we do with upper floor spaces that maybe there’s less demand for office,” she said. “If we can find new uses, then we can maybe build back up the customer base.”