Manhattan Landlords Cut Deals to Stave Off Vacant Storefronts

(Bloomberg) -- Just four years ago, the new owner of 115 Mercer St., a low-slung building in the heart of Manhattan’s Soho shopping district, managed to swiftly replace its tenants and lure retailers willing to shell out record rents. Now, that same landlord has to fight to get one of them to stay.

The Kooples, a French clothing seller, is threatening to vacate its space six years ahead of schedule if it can’t get landlord Thor Equities to cut the rent. With brick-and-mortar stores suffering from a retail industry shakeout, the company says it isn’t making enough money at the property and wants to focus on the web.

The scene unfolding on the cobblestones of one of New York’s trendiest shopping areas shows the increasingly fraught negotiations between tenants and landlords as vacancies soar and retail rents plunge. Similar scenarios are playing out along Madison Avenue to the north and along other thoroughfares in the city that have long been a draw for those shopping for designer clothing and other luxury goods. Property owners are confronting demands once unheard of in Manhattan, from rent reductions to short-term leases. 

After a drought in 2017, more deals are getting done as landlords begin to accept the new reality, according to Patrick Smith, a vice chairman of the retail brokerage at Jones Lang LaSalle Inc.

“Landlords are adjusting the way they do business to market conditions,” Smith said. “It’s healthy. It certainly has stimulated activity.”

Retail landlords throughout the U.S. are facing a contracting universe of tenants as merchants cut back on brick-and-mortar locations and shopping shifts online. A record 11,000 stores may shutter in 2018, according to brokerage Cushman & Wakefield Inc.

Valuable Properties

In Manhattan, home to some of the most valuable retail real estate in the world, a sharp rise in rents following the recession exacerbated the problem, with property owners clinging to unrealistic income expectations. Today, the glut of empty space is taking a toll, pushing landlords to make concessions to plug holes.

Some are signing shorter-term leases to draw tenants that may be reluctant to make long-term commitments. In Soho, Hermes is negotiating a deal at 63 Greene St. that gives the retailer the option to leave after one year, while a few blocks over at 375 West Broadway, Gucci signed a lease that allows it to vacate the space if sales don’t meet expectations after two years, according to people familiar with the deals, who asked not to be identified because terms are private.

Historically, a typical lease term in New York was between 10 and 15 years.

Representatives for Gucci and Hermes didn’t respond to emails seeking comment.

Gucci, Cartier

“Landlords, more today than in the past, are coming around to the retailer’s mentality,” said Steve Soutendijk, an executive director at Cushman. Both sides are making calculations on store sales “and how much can they pay in rent. If a store is unprofitable for them, it doesn’t make sense to keep it open.”

Downtown landlords aren’t the only ones caving. On a tony corridor of Madison Avenue on the Upper East Side, an 18,000-square-foot (1,670-square meter) stretch of luxury retail is facing vacancies. Landlord Vornado Realty Trust doesn’t expect tenants including Gucci and Cartier to sign long-term renewals to leases that expire in September given market conditions, according to mortgage documents tied to the property. It’s offering short-term agreements at lower rates to keep the space occupied, the documents show. As of last month, no deals had been struck.

Vornado, which recently paid off its mortgage at the property, declined to comment.

“Landlords have to be open-minded,” said Robert Cohen, a vice chairman at retail brokerage RKF.

Cohn Investment

At 115 Mercer, Thor is facing a drop in income or the task of filling empty space as rents tumble. The landlord purchased the building in 2013. Gary Cohn, the former Goldman Sachs Group Inc. president who now serves as President Donald Trump’s top economics adviser, invested alongside Thor in the property. The Kooples came into the building in 2014. For a French retailer looking to expand in the U.S., it was a prime location: a bustling area for tourists and shoppers, just a block from Apple Inc.’s first New York City location and Keith McNally’s renowned Balthazar bistro.

The Kooples agreed to pay $650 per square foot for its space, which was part of a plan to open 40 stores in the U.S., according to documents tied to the $37 million mortgage on the property. Retail rents in the area have since plunged, dropping 17 percent in the past year to an average of $440 a square foot, the largest decline in all of Manhattan, according to Cushman data.

Late last year, the Kooples notified Thor that it planned to terminate its lease in May, according to the loan documents. The company now operates five U.S. locations, and is focusing on e-commerce, said Elodie Barbe, a spokeswoman.

‘Much Higher’

“We were expecting much higher income” at the property, Barbe said in an interview. “We are under discussions with the landlord to see what is possible.”

A Thor spokesman declined to comment.

It’s not easy to walk away from a lease obligation. Tenants typically are contractually bound to continue making rent payments even if they opt to close a location to cut the cost of running a store. In January, a court forced Starbucks Corp. to keep 77 faltering Teavana stores open after mall giant Simon Property Group Inc. fought back against the chain’s attempt to close them.

Property owners with outstanding mortgages face a more difficult task when it comes to offering sweeteners, said Richard Hodos, a vice chairman at brokerage CBRE Group Inc. They may not be able to put in a tenant that’s paying less than what they had budgeted for when they took out a loan, he said.

“Landlords that have a lot of debt are hamstrung in some ways,” Hodos said.

So far, low borrowing costs have helped cushion the blow for retail landlords by making it easier to refinance debt and make loan payments. That could be about to change as interest rates climb.

Property owners are conferring with lenders behind the scenes, buying time to find elusive tenants when the income from their buildings falls short, according to Jones Lang LaSalle’s Smith.

Most lenders “play ball with the owner to get the space leased,” Smith said. “When you have a market where the conditions are uncertain, the idea of taking a property back is not the best scenario.”

To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net.

To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net, Kara Wetzel

©2018 Bloomberg L.P.