New York suffered a 7.7% decrease in asking retail rent in 2020, which was the second-largest drop in the country behind San Francisco, according to Marcus & Millichap.
While the pandemic sapped demand, supply is growing.
In 2020, 907,000 square feet of retail space was completed. M&M says that construction is limited in Manhattan. But it is more active in the surrounding boroughs, especially in South Brooklyn and Northeast Queens. It expects 1,733,000 square feet to be completed as the pace of delivery nearly doubles what arrived in 2020. The average amount of square feet of what opened over the past decade was 1.5 million square feet, by comparison.
New York has one of the tightest vacancy rates in the country among major markets. Still, new supply should push vacancies by 1.2 million this year, bringing the vacancy rate to 4.5%. M&M says vacancy is 100 basis points above the pre-pandemic level but below rates recorded in 2007. Overall, vacancy increased 60 basis points in 2020, driven by a 90-basis point increase in multi-tenant properties.
Retailers will be paring back expansion plans in the wake of COVID, which could extend lease-up periods. Also, many stores, like many Sears locations, have closed.
“Longer lease-up periods paired with new supply and some store closures are putting pressure on occupancy and are likely to impact rental rates in some retail segments,” according to M&M.
While the pace of rent drops should moderate, New York asking rents will continue to feel pressure in 2021, according to M&M. It says the influx of available floor plans will drive the overall average rent down to $54.90 per square foot this year.
While sales of retail properties dropped at the height of the pandemic in the second quarter, they improved afterward. Overall, 2020 posted a 25% decrease in transactions. With uncertainty around rent growth and turnover, sales prices dropped 4% to $552 per square foot.
The good news is the job situation is improving, which could ultimately feed retail growth. M&M expects 180,000 jobs to be created in New York. By the end of the year, it is expected to be within 10% of the pre-pandemic level by the end of 2021.
M&M predicts that relaxed health restrictions will drive greater foot traffic in The Big Apple, especially at restaurants. Right now, they are operating at 50% indoor dining capacity after that was prohibited as recently as December.
Annette Healey, executive vice president, CBRE, says some of the “big beauty players” are establishing more neighborhood stores in New York to move closer to customers. Whether it’s a three-month experiment of a pop-up store or something else, retailers want to move closer to customers. She says landlords are increasingly amenable to these strategies.
Still, there will be a use for a flagship store. “I do think we’re going to see much more of this sort of flagship in a daytime population environment where hopefully tourists will eventually come back,” Healey said on CBRE’s “The Weekly Take” podcast.