Manhattan’s Quiet Christmas Signals Mounting Pain for Retail

(Bloomberg) -- Manhattan’s shopping districts are bracing for a long winter ahead.

Nine months into the pandemic, tourists and office workers are still staying home. Many New Yorkers have fled as the coronavirus rages on. Hundreds of stores and restaurants have shuttered and others are on the brink of closing for good, absent any quick financial relief.

With Christmas and New Year’s Eve around the corner, the city’s emptiness is especially stark. Fifth Avenue, usually crammed with eager shoppers during the holidays, is eerily quiet. Broadway theaters remain dark, and daily visitor traffic in nearby Times Square is down 70% from last December, according to the Times Square Alliance.

“It looks pretty ugly here for the next couple quarters,” said Tom Mullaney, who handles lease and debt restructuring at Jones Lang LaSalle Inc. “I’m concerned that many of the smaller, undercapitalized businesses don’t have the liquidity they’ll need to get through the next three to nine months.”

The final blow for many merchants could come soon. Mayor Bill de Blasio has told residents to prepare for a second shutdown of all but essential businesses soon after Christmas to slow a resurgence of the virus. Indoor dining at the city’s restaurants has already been banned.

Manhattan’s retail industry was under pressure long before Covid-19 hit, hampered by the growth of e-commerce and shrinking demand for space. Now, there are even more challenges across the city -- from Madison Avenue and Fifth Avenue to SoHo. In total, more than 250 ground-floor stores were available for rent in the third quarter, the most in data going back to 2015, according to brokerage CBRE Group Inc. With vacancies mounting, asking rents dropped for a 12th straight quarter.

Brokers say that demand for space has ticked up as landlords adjust rents.

“There are deals to be done but they’re deals to be done at a certain price,” said Michael Hirschfeld, vice chairman at JLL.

The pandemic has accelerated years of change into just months. Major chains from Neiman Marcus to Modell’s Sporting Goods have filed for bankruptcy, leaving swaths of empty stores. From March 1 to Sept. 11, almost 6,000 New York City businesses closed, more than 4,000 of those for good, according to Yelp, the website of user reviews.

The pandemic could permanently shutter as many as a third of the city’s 230,000 small businesses that populate commercial corridors, according to the Partnership for New York City.

Growing Delinquencies

Signs of financial distress are increasing. Retailers whose revenue has dwindled or disappeared are unable to continue paying rent, leaving landlords with insufficient income to meet mortgage obligations.

The delinquency rate for loans backed by Manhattan retail properties reached 14.6% in November, with roughly $570 million worth of mortgages requesting Covid-related financial relief so far, according to data firm Trepp.

While delinquencies have improved from an all-time high of 16.8% in August, the distress is concerning because Manhattan retail properties are collateral for $5 billion worth of loans in commercial mortgage-backed securities, Trepp said in a report this month.

“For many landlords and lenders, this year had been a Band-Aid period of ‘Do whatever you can to get to the other side,’ but that only lasts so long,” said Vik Uppal, chief executive officer of property investment firm Terra Capital Partners. “We’re still in early days when it comes to the distress in New York City retail and even real estate, more broadly.”

Shrinking valuations are compounding the problem. Manhattan retail properties with new appraisals since July saw an average 53% drop in value from when they were initially securitized, according to Trepp.

Rent Drop

To draw in tenants, landlords are increasingly willing to give breaks on rent and other concessions, such as footing the bill for improvements.

Average asking rents in Manhattan’s main retail corridors dropped to $659 a square foot in the third quarter, almost 13% less than a year earlier, CBRE data show. Retail brokers say landlords’ expectations for pricing have dropped about 20% to 25% since the pandemic started.

“It’s just about getting deals done and filling space,” said Steven Soutendijk, a managing director at brokerage Cushman & Wakefield. “We’ve seen steady increases in concessions to retail tenants, drops in asking rents, and that’s just accelerating that phenomenon.”

Upbeat vaccine news has given the industry reason for optimism, though the shots are unlikely to get widely distributed in the next crucial few months. Social-distancing measures and travel restrictions will likely be kept in place for some time.

“Tourism is not like flipping a light switch -- it’ll be a slow and steady trickle back to the levels we were at,” said Soutendijk. “It’s going to be a long period before we get back to a landlord’s market.”

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