High retail vacancies could impact some residential real estate markets

Over the past year, at least some cities across North American have reported sharp increases in retail vacancies. Not surprisingly, online retail is largely to blame for the current rise in retail vacancies, but while all locations are impacted, some markets—namely those in the nation’s most high-density areas—appear to be particularly hard hit. To make matters worse, in these areas, empty storefronts aren’t simply a commercial real estate concern. Especially in hard-hit locations like Manhattan where a high percentage of retail spaces are housed in residential buildings, there is now growing concern that as retail vacancy rates surge, residential real estate may also suffer.

Regional differences mark the current retail vacancy landscape

At least some analysts suggest that nationwide, retail vacancy rates are no cause for alarm. Barbara Byrne Denham, a senior economist at Reis, for example, reports that in the fourth quarter of 2017 and first quarter of 2018, retail vacancies actually held steady at 10 percent nationwide. When one narrows in on specific regions, however, the retail vacancy picture is much more complex.

According to Cushman and Wakefield, over the past year, nearly all retail corridors in Manhattan have decreased rents in an effort to attract tenants. Luxury markets, including those along Madison and Upper Fifth Avenue and in SoHo, have been especially hard hit. As Cushman and Wakefield report, in the second quarter of 2018, SoHo rents dropped for the sixth consecutive quarter to $418 per square foot, which represents a 12.6 percent decrease from the Q2 in 2017. More striking, however, are Manhattan’s current vacancy rates. At the close of 2018’s second quarter, all major retail corridors in Manhattan reported higher vacancies than they did at the close of 2017’s second quarter (the only exception was Flatiron-Union Square, which saw no change over the past year). SoHo, the Meatpacking District, and Herald Square/West 34th Street led the way with vacancy rates ranging from 24.5 to 32.8 percent respectively.

Somewhat surprising, San Francisco and Seattle, which are home to many of the tech companies that have driven retail from the street to screen over the past two decades, have not suffered to the same extent. In their Mid-Year 2018 West Coast Retail Report, Kidder Matthews reported retail vacancy rates of only 3.1 percent in Seattle and 2.5 percent in San Francisco. But it is important to bear in mind that the Kidder Matthews data only offers insight into the city at large and not specific neighborhoods.

So, why has New York City seen a much larger spike in retail vacancies that the nation as a whole and its west coast counterparts? There are two factors that likely account for the current retail real estate crisis in New York City. First, 54.4 percent of New York City households don’t own a car and even those households with a vehicle don’t necessarily use it to regularly pick up groceries or other goods. This means that in many respects, even prior to the rise of online shopping, many New Yorkers were already living in a delivery culture. When online shopping appeared, it just made their life easier. Second, unlike many other Americans who worry about their online retail packages being stolen off the front porch, a high percentage of New Yorkers also happen to live in buildings with doormen or security guards who, among other duties, are there to accept packages throughout the day. But this also gets to the heart of the dilemma now facing a growing number of New York City buildings.

Co-ops and condos could suffer if retail spaces remain empty

While there was once a time when co-ops could only rent out retail spaces at a severely discounted rate, in the 1990s, the landscape changed and increasingly, storefront retail became a cash cow for co-ops. In most cases, storefront tenants simply reduce the monthly fees being paid by tenants but at its best, at least some co-ops have been able to eliminate their feeds altogether. In 2015, the New York Times reported that one West Village co-op, 99 Bank Street, had managed to reduce its co-op fees, which were once over $800, down to a mere $20 per month thanks to renting out its street-level retail spaces at an optimal monthly rent.  

Back in 2015, 99 Bank Street wasn’t the only co-op reaping the rewards of retail leasing arrangements. At the time, 451 Broome Street, a 12-story block-long co-op in SoHo was benefiting enough from its retail leasing opportunities to eliminate fees. At the time, a four-bedroom in the building was listed at $3.95 million with a monthly maintenance fee of zero. In late 2017, the building still appeared to be listing units for sale with no taxes and no maintenance fees, but not all SoHo co-ops are weathering the shifting retail shift as well as 451 Broome.

In 2017-2018, property taxes at a much smaller co-op located nearby at 165-167 Spring Street were estimated to be $456,010. While by no means the highest property taxes in SoHo, the co-op is only home to 11 units. For over a decade, the co-op heavily relied on Emporio Armani, which leased its street-front space, to offset its taxes. In 2017, however, the retailer pulled out, leaving the co-op’s small number of residents to find a new tenant to defray their annual tax bill. But staggering high co-op fees aren’t the only concern as retail vacancy rates soar in some urban areas.

While many Americans live apart and drive to local stores and restaurants, in high-density urban neighborhoods, being able to walk to the nearest grocery store, pharmacy or café is essential. This is why downtown real estate values are impacted by walk scores. If retail vacancies remain high over time, there is also a legitimate reason to worry that over time, addresses with high walk scores may see their walk scores plummet and subsequently, also see a notable slip in values.

Lead image via Wiki Commons