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Experts downplay ‘overblown’ effect of online retail on stores

When it comes to retail, the times they are a changin’.

That’s what real estate executives are saying as the number of vacancies and average retail rents in New York City experience dramatic shifts.

At a panel discussing the future of retail at New York Law School yesterday (Tuesday), moderator Gerald Korngold, a professor at the school, started the discussion with a rundown of retail stats.

In the fourth quarter of 2016, Madison Avenue rents were down 12 percent compared to the same time period the year before, and availability was at 14.4 percent, up from 10 percent the year before, he said. Annual average retail rents are $1,100 p/s/f, down from a high in 2016 of $1,800 p/s/f.

Major retailers and big box stores like Macy’s, Best Buy, JC Penney, Sports Authority, and Staples have shuttered stores in the last year, while traditional malls have seen major slumps, with many closing.

However, Peter Schwartz, senior executive vice president and general counsel (U.S.) of Westfield Corporation, the firm that is in charge of leasing the retail at the World Trade Center transit hub, said he thinks the fears about the state of the retail market have been somewhat overblown.

“Clearly there are challenges out there for retailers and landlords, but the press obviously loves a good story, and a good story is about store closures and dead malls. And whether that’s reality or not is a totally different question,” said Schwartz. “To say it’s a time of change is really what it is.”

Schwartz said his company is seeing an uptick in retail traffic, and pointed out that the big-name companies that have closed stores still have a majority of their stores open and doing well. While Macy’s has closed 68 of its locations, it still has over 600 stores open, and while JC Penney made news when it closed 168 of its stores, they still have more than 1,400 locations operating.

“It’s a changing environment, there’s a lot going on with department stores and the mall side of the business,” he said. “For us, these stores closing, it’s an opportunity. Taking out a dead store — they’re only closing stores that aren’t doing  well — creates an opportunity for us. We think it’s a great environment.”

Bill Bond, principal at development firm Vanbarton Group, said online retail isn’t the only factor causing major shifts in the market —  too much square footage has been built over the last several years while online retail is still only eight percent of all total retail sales.

“To blame that too much is incorrect,” said Bond of online retail.

But when it comes to street retail in NYC, retailers are feeling the heat. Susan Kurland, co-head and executive vice president of the global real estate services group at Savills Studley, believes the high number of vacancies she’s seeing is also a result of high rents.

“We see where they’re not being filled and a number of it has to do not just with the store closings but what rent is,” said Kurlan. “I think that when Fifth Avenue reached $5,000 a foot, there’s just so much a tenant can pay. You want to have a branding experience, true, but when the rent was $3,000 a foot you still had a branding experience on the avenue.”

She sees the structure of retail in general changing, and if retailers want to be successful, they should change with them.

“Because the online shopping is an issue, bricks and mortar isn’t going away, but the successful retailers are going to have to understand and learn how to integrate the two of those to be successful,” she said.

Kurland pointed to companies that started online and have now opened up brick and mortar stores in a way that complements their business, like clothing retailer Bonobos and even Amazon, which is set to open several retail stores.

“It’s not all an ugly situation, it’s a changing market, not only from a real estate price perspective, but the structure of retail itself is changing,” said Kurland.

And one that is changing in large part to the shopping habits of young people, who increasingly turn to online shopping and are less likely to shop at traditional department stores, said Kurland.

“There are some retailers that will have six flagship-size stores in Manhattan and you have to ask the question, why? Especially if you use the internet appropriately, those two things combined should make the need to have possibly one flagship store and then smaller stores carrying a part of the concept in the city. But to employ the debt of six flagship stores in Manhattan at multi-million dollars a store, it just doesn’t make sense, particularly because you have the internet,” she said.

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