DECEMBER 2015 a JLL retail research point of view Manhattan leasing activity down but not out It s a safe bet that most of the 56.4 million visitors to New York City last year did some shopping. They come here for the city s unrivaled selection of goods in a metropolitan environment like no other. From a visitor s point of view, shopping destinations like Times Square, Fifth Avenue and SoHo are more vibrant than ever. But for those who track leasing activity in those areas, the numbers show something different. While retail rents remain exceptionally high, leasing velocity in terms of both number of deals and total square feet appears to be slowing. This report examines that trend and offers one explanation of its cause, and how it may soon change. Further, it looks at the types of retailers that are leasing, the share of foreign versus domestic retailers and recent shifts in asking rents. Retailers by Type Manhattan, NY The data in this report comes from retail leases signed from January 2013 through November 2015 in Times Square, Plaza District, Upper East Side, Midtown, Penn Plaza/Herald Square, SoHo, Upper East Side and Meatpacking District. Trust our retailntelligence. JLL Retail Research 1
Tenants wait on sidelines Market watchers in these key retail trade areas have reported a recent slowing in the velocity of leasing activity. Lease deals are not getting done, they say, as many tenants wait on the sidelines in the hopes that rents might drop. Our lease data bears this out; both the number of leases and the total square feet leased has fallen. If the mismatch between owner and occupier rent expectations is the cause of slower activity, when might the situation change? A Slowing Retail Lease Velocity Square Feet 800,000 120 700,000 600,000 500,000 400,000 60 300,000 200,000 100,000 - - 2013 2014 2015 Sum of Total SF Number of leases 100 80 40 20 Leases Interest rate growth offers hope for leasing volume A mismatch between the rents owners are willing to accept and what some retailers are willing to spend may have led to our current situation of lower leasing volume. But many believe that this is a short-term situation. Some owners, operating in an environment of low interest rates, may currently be holding out for higher rents. As we move into 2016, the likelihood of increased interest rates can only grow. When the Fed does choose to escalate its target interest rate, many owners may come under added pressure to lease out space in order to generate income. At that point, investors may be more motivated to negotiate on rents which would lead to an overall rise in volume. King clothing continues to dominate Apparel retailers have continued to lead activity. Apparel and footwear retailers combined made up a whopping 72 percent of the square feet leased since 2013. Top five retailer categories ranked by total square feet leased. Other major categories include Men s Apparel, Electronics and Jewelry. Trust our retailntelligence. JLL Retail Research 2
Mass clothing merchants like Old Navy/Gap and Foot Locker each executed large leases in 2015. Times Square saw the biggest apparel leasing activity this year. Midtown was where Victoria s Secret took approximately 63,780 square feet. In SoHo, several smaller apparel leases totaled 21,055 square feet in 2015. But despite this activity, overall apparel leasing activity is on the decline. In 2013, when H&M and Urban Outfitters alone leased a combined 130,000 square feet on Broadway, we saw over half a million square feet of space taken by apparel retailers. In comparison, 2015 leasing volume for apparel retailers was a little more than a third of that number. The total number of apparel leases dropped from 50 in 2013 to 11 in 2015. Women's Apparel Men's Apparel Jewelry 5% 5% Electronics 5% Family Apparel 30% Footwear 2015 Leases by Retail Type Beauty Accessories 25% In 2014, foreign retail was king; In 2015, not so much Many foreign retailers choose New York as a beachhead in their strategy to conquer the United States. It sometimes seems that new foreign entrants come in waves. In 2015, we have seen leases from the likes of Hunter Boots in SoHo, Sephora in both Midtown and Penn Plaza/Herald Square and Swatch in Times Square. But the overall trend of foreign entrants appears to be on the decline. In 2013, 46 percent of leased square feet came from foreign retailers. In 2015, that number had dropped to 21 percent. 2013 2014 2015 Foreign 46% Domestic 54% Foreign 65% Domestic 35% Foreign 21% Domestic 79% Percentage of square feet leased by foreign and domestic retailers through November 2015 in Times Square, Plaza District, Upper East Side, Midtown, Penn Plaza/Herald Square, SoHo, Upper East Side and Meatpacking District. In all but Times Square, there has been a significant amount of foreign leasing activity. Percentage of square feet leased by foreign and domestic retailers from January 2013 through November 2015. Trust our retailntelligence. JLL Retail Research 3
New market entrants pick Upper East Side, SoHo Where does a retailer go to land its first beachhead in New York? While deep-pocketed global retailers might choose to make a splash on Fifth Avenue or Times Square, our data suggests that for the vast majority of new or new-to-market retailers, the place to start is where rents are a little lower. For example, since 2013 a full fifty percent of the new retailers in our tracked trade areas chose to sign a lease in the Upper East Side. Retailers like Elie Saab, Isaia and Yves Salomon are among the new retailers in the Upper East Side, where they paid an estimated average $1,460 per-square-foot in ground floor rents. Of the remainder, nearly all of them opened in SoHo. Only two retailers (Furla and Lao Feng Xiang Diamond) chose Midtown to make their market entry and they paid for the privilege, with an estimated average ground floor rent of $2,217 per square foot. Of the three years in this study, 2014 was the big one for new retail entrants, with twelve new-to-market retailers settling in our tracked markets that year. Only three new entrant leases were signed in 2015 and only 4 in 2013. Over 70 percent were apparel or accessories retailers and 68 percent sold luxury goods. Flagships on the decline At a national level, many retailers are opening fewer locations and trying out smaller store sizes. But New Yorkers could be forgiven for not knowing about this trend. This is because retail flagship locations seem to so often find a home here. Flagships, which are generally larger than regular stores in a fleet and usually offer unique merchandise or other features, have seen a decline in leases in recent years. In 2013 we tracked 22 of them. This year, we counted only four. The most notable of which occurred in October, with Victoria s Secret taking 63,780 square feet at 640 Fifth Avenue. Still waiting for clicks-to-brick activity Many point to the likes of Athleta, Warby Parker and Bonobos when they say that the future of physical retail is online brands. Since 2013, we have tracked only 7,300 square feet of leasing activity that originated from native online sellers. That s well less than one percent. While this small percentage is partly due to the fact that web retailers often eschew big spaces in favor of showrooms, there just hasn t been much activity from the sector. Virtual retailers have been cautious in signing leases for space in the real world. Trust our retailntelligence. JLL Retail Research 4
Less luxury, deeper discount For the purposes of this study, we split retailers into four pricing categories: Luxury, High, Middle and Discount. The overall percentage of leased square feet taken by luxury retailers has been on the decline. In 2013, 40 percent was made up of luxury retailers. In 2015 that number had fallen to 10 percent. Meanwhile, the percent of middle and discount retailers jumped from 50 percent in 2013 to 89 percent this year. Discount Retailers by Price Point Manhattan, NY Middle 40% High Luxury 40% Luxury HIGH 1% High 18% Luxury 32% Discount 6% Middle 44% Middle 49% Discount 40% Percentage of square feet leased through November 2015 in Times Square, Plaza District, Upper East Side, Midtown, Penn Plaza/Herald Square, SoHo, Upper East Side and Meatpacking District. Fewer deals, but rents are still high While Manhattan rental rates are among the highest in the world, average asking rents in several key retail submarkets have seen slight declines. In Times Square for example, average ground floor asking rents have dropped from $2,502 per square foot in the end of 2014 to $2,214 in Q3 2015. On upper Fifth Avenue, where rents had previously been growing, average rents have fallen from $3,382 to $3,185 per square foot in the last quarter, a drop of 5.8 percent. Average Ground Floor Asking Rent ($ Per Square Foot Q3 2015) Upper Fifth Avenue Q3 2014; $2,810 Q3 2015; $3,185 Times Square Q3 2014; $2,481 Q3 2015; $2,214 Madison Avenue Q3 2014; $1,535 Q3 2015; $1,583 Lower Fifth Avenue Q3 2014; $1,102 Q3 2015; $1,161 Soho Q3 2014; $481 Q3 2015; $639 $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 Trust our retailntelligence. JLL Retail Research 5
Availability and rental rate trends Upper Fifth Avenue 49th Street - 60th Street Average Ground Floor Asking Rent: $3,382 PSF Average Ground Floor Size: 4,231 SF Highest Asking Rent: $3,800 PSF, 685 Fifth Ave Lowest Asking Rent: $1,500 PSF, 636 Fifth Ave Lower Fifth Avenue 42nd Street - 49th Street Average Ground Floor Asking Rent: $1,161 PSF Average Ground Floor Size: 5,042 SF Highest Asking Rent: $1,500 PSF, 535 Fifth Ave, 576 Fifth Ave Lowest Asking Rent: $750 PSF, 562 Fifth Avenue Madison Avenue 60th Street - 72nd Street Average Ground Floor Asking Rent: $1,583 PSF Average Ground Floor Size: 3,136 SF Highest Asking Rent: $2,500 PSF, 860 Madison Ave Lowest Asking Rent: $800 PSF, 780 Madison Ave Times Square Bowtie, between 42nd - 48th Street, Broadway & 7th Avenue Average Ground Floor Asking Rent: $2,214 PSF Average Ground Floor Size: 3,777 SF Highest Asking Rent: $3,000 PSF, 1550 Broadway Lowest Asking Rent: $1,340 PSF, 716 7th Ave Trust our retailntelligence. JLL Retail Research 6
Availability and rental rate trends (continued) SoHo From Broadway - W Broadway & W Houston - Broome Street Average Ground Floor Asking Rent: $639 PSF Average Ground Floor Size: 2,725 SF Highest Asking Rent: $1,584 PSF, 489 Broadway Lowest Asking Rent: $200 PSF, 83 Wooster St Prince Street Average Asking Rent: $960 Spring Street Average Asking Rent: $933 Broadway Average Asking Rent: $837 Greene Street Average Asking Rent: $472 Mercer Street Average Asking Rent: $535 Trust our retailntelligence. JLL Retail Research 7
Trust our retailntelligence. For more information, please contact: James D. Cook Keisha McDonnough David Wong Director of Retail Research Senior Analyst, Retail Research Research Analyst, New York jamesd.cook@am.jll.com keisha.mcdonnough@am.jll.com david.wong@am.jll.com About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more than 200 corporate offices, operates in 75 countries and has a global workforce of approximately 53,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.0 billion square feet, or 280.0 million square meters, and completed $99.0 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $50.0 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com. About JLL Research Jones Lang LaSalle s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial Real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. 2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof. jllretail.com