In Manhattan’s prime retail districts, tourist traffic is down, rents are high, Trump is looming large and overstoring is about as bad as it is in Middle America. Something has got to give.

NEW YORK, United States — To fully grasp the dire state of New York City retail, just take a stroll down Bleecker Street in Manhattan’s brownstone-populated, film-set-ready West Village, where fans on “Sex and the City” bus tours once clustered on corners eating Magnolia Bakery cupcakes, clutching shopping bags filled with goodies from Marc Jacobs or Cynthia Rowley.

Magnolia managed to survive the bursting of the “cupcake bubble,” but its lines are shorter; the “Sex and the City” tours are less frequent. What’s more startling are the empty storefronts lining what was once a carnival of consumption. Marc Jacobs used to occupy four stores here, selling everything from handbags to nail polish. Now, only the book shop, Bookmarc, remains. Many retailers — including Maje, Sandro, James Perse and Club Monaco — remain up and running on Bleecker, although Mulberry, Brooks Brothers and Coach have closed their outposts in the area.

But the barren state of Bleecker Street is only one small part of New York’s retail downturn. Hop on the subway to 5th Avenue and 57th Street near Trump Tower and the streets are eerily quiet, with sales at Tiffany’s flagship across the way down 7 percent in the fourth quarter of its fiscal year. Meanwhile, Ralph Lauren recently announced that it would close its Polo store at 56th Street and 5th Avenue — just a block down from Trump — after signing a 16-year lease in 2014. (Rent cost more than $20 million a year).

“There is a lot of space, but not a lot of takers,” one New York City real estate broker said of 5th Avenue, once a shopping mecca for tourists. There’s a similar air downtown in Soho, where rents have skyrocketed and empty storefronts abound. Further west in the Meatpacking District, too, the situation is grim.

And yet, new retail projects keep emerging, targeting the city’s wealthy elite, who increasingly live and work downtown. Out of the three New York City zip codes that appear on real estate listings site Property Shark’s 2016 ranking of the most expensive zip codes in the country, two are in Tribeca and one is in Battery Park City, the same neighbourhood as Brookfield Place and now, Saks. The median selling price for a home in Battery Park City's 10282 zip code is $2.8 million. Tribeca’s 10007 clocks in at $3.4 million; nearby 10013 ranks highest in the city at $3.8 million.

“Manhattan is essentially two cities,” Mortimer Singer, chief executive of Marvin Traub Associates, a business development and strategy consultancy firm, said in 2016. “The stores need to be where the wealthy are living.” At the tip of Manhattan are Brookfield Place — a shopping mall that’s home to a new Saks Fifth Avenue and a bustling upscale food court — as well as Westfield World Trade Center, another mall which houses an Apple store, an H&M and a Victoria’s Secret.

Both are located near several major company headquarters — including Condé Nast — as well as prime residential housing in Battery Park City. In 2018, a 250,000-square-foot Neiman Marcus will open in the new west side development Hudson Yards, while Nordstrom’s new Midtown stores are set to launch in 2019.

Real estate insiders say Manhattan is as overstored — too many physical locations that result in decreased productivity at each location — as the rest of the United States, suggesting that, for most retailers, operating multiple locations — even in a place as densely populated as Manhattan — no longer makes sense. Especially if those locations are not serving locals, as an Apple store does, or else serving as convenient or necessary stop-offs for commuters.

Like anywhere else in the country, most Manhattan retailers are not offering shoppers a compelling reason to choose brick-and-mortar over e-commerce, where services like Amazon Prime and Net-a-Porter same-day delivery cater to hectic schedules and long commutes. (Retailers posted e-commerce sales from the New York metro area of more than $5 billion in 2014, and $330 billion nationwide.) “There’s way too much retail coming to Manhattan,” one broker said.

At the same time, retail store closings are happening at a breakneck pace across the US. Year-to-date retail store closings have already surpassed those of 2008 — with approximately 2,880 stores closed, up from 1,153 during the same period in 2016 — according to an April 2017 report from Credit Suisse, which estimates that there could be more than 8,640 closings in 2017. The historic peak — with data collected since 2000 — was 6,200 stores in 2008. Approximately 49 million square feet of retail has closed over the last year, with an estimated 147 million to close in the 2017 calendar year.

To bring store productivity in line with historical averages, more than 10 percent — nearly a billion square feet — of retail space in the US will need to be closed, be converted into other things (such as restaurants or housing) or be made much cheaper to rent, according to a report by real estate information company CoStar.

Rents are already on the decline in Manhattan, where the average asking rent decreased to $967 per square foot in 2016 from $1,008 in 2015, with 11 of the 16 retail corridors tracked by commercial real estate services group CBRE recording decreases. In the first quarter of 2017, average asking rents dropped 2.7 percent year-over-year and 20.8 percent since 2014 across all 16 corridors, averaging $850 per square foot.

But despite the softening, asking prices remain high, driven up by international investors. Downtown Broadway in Soho, for instance, saw rents increase 19.5 percent to average $419 per square foot in the first quarter. In the past, it made sense for fashion brands to overpay for a prime Manhattan location because these stores were seen as powerful marketing. Now, every location requires overpayment.

“The Kool-Aid turned out to be very poisonous,” says New York-based real estate entrepreneur Robin Zendell. “As one management head told me, ‘If retailers are paying more than $500 a square foot on Madison, they’re not making money.’” And for most retailers in this challenging market, even making store sales that pay for the $500 a square foot in rent is impossible.

In Manhattan, a lack of motivation for consumers to actually set foot in a physical store is exacerbated by a projected decline in tourism, which retailers here have relied on for years to make up for softening local demand. But a strong dollar — combined with anti-Trump sentiment and concern around the president’s proposed travel ban — are contributing to what the city of New York forecasts will be a drop in inbound international travel in 2017 to 12.4 million, with 300,000 fewer tourists expected to enter the city when compared to 2016, marking the first decrease since 2008.

Foreign tourists are especially important as they spend more money — one international tourist’s spending power equals that of four domestic tourists — which means the drop could result in a financial loss of $600 million in sales this year. Looking ahead, a border tax — advocated by the current administration — could make buying apparel and accessories prohibitively expensive for the foreigners who do visit the city, and compel US residents to travel abroad to buy high-priced goods.

While this all spells trouble for retailers and brands — especially those with plans to open new outposts in Manhattan in the near future — it is already affecting the city’s economy as a whole. Retail trade jobs declined by 35,000 in March 2017 from February 2017 and 89,000 since October 2016. (To be fair, October is when retailers begin to hire holiday help.)

What can retailers do to combat this? Some are becoming smarter about the leases they sign, negotiating two-to-three year stays instead of decades-long commitments. Others are working to increase productivity in their existing prime locations, such as Soho, which still sees a good mix of foot traffic, or the Upper East Side, which serves both a local market and tourists visiting museums. “Stores have to open less stores,” Zendell says.

With a smaller footprint, retailers will have to focus more on customer service. High-touch service drives foot traffic and helps to create a community feeling around the store. “Providing quality and service, or rewarding your most loyal customers during the post-purchase experience, remains important,” wrote McKinsey senior partner David Court in a recent report. “After all, as we have noted, 42 percent of purchases are still made by consumers who return to their incumbent brand and are responsive to repurchasing incentives.”

More than anything though, fashion companies mustn’t let the scale of their brands prevent an honest appraisal of the state of their businesses. Ralph Lauren may have had to face a spate of negative press linked to its store closure on 5th Avenue, but the move will help the company save $140 million in annualised expenses. And at this point, a 5th Avenue address isn’t what it used to be.

Source: businessoffashion.com