Prime Retail Space Getting More Pricey

Discussion
May 27, 2010

By George Anderson

The cost to rent prime space in some of the most prestigious
retail districts in the U.S. is going up and that’s a good thing, according
to the head of leasing in North America for the CB Richard Ellis Group.

Anthony
Buono, executive managing director for retail services at the broker, said
rents in places such as Rodeo Drive in Beverly Hills, Michigan Avenue in Chicago
and Fifth Avenue in New York are up as much as 15 percent since the end of
last year. Those increases are having a ripple effect and helping to bolster
rents in secondary markets such as Miami and Seattle. Eventually, he told Bloomberg
News
, that will spread to retail space in the suburbs.

“We’re starting to see some stabilization,” he said. “It’s
the beginning of a slow march.”

A survey of retailers by CB Richard Ellis
found that 92 percent are looking to add stores next year. Leasing activity
through the end of April was 15 percent to 20 percent higher than the same
period in 2009, according to Mr. Buono. Lower rents helped explained some of
the increased activity as vacancies were created by chains closing large numbers
of stores.

Robert Taubman, chairman and chief executive officer of Taubman Centers
Inc., told Bloomberg, “There is the sense that demand is improving
quickly.”

Discussion Questions: In the big scheme of things, are higher
rents for space a positive, negative or neutral sign for the retailing business?
Do you see retailers taking a different approach to negotiating leases than
perhaps they have in the past?

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8 Comments on "Prime Retail Space Getting More Pricey"


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Roger Saunders
Guest
10 years 11 months ago

Is the Thames River moist?

Yes, retailers will diligently and thoughtfully consider rents as part of their strategies. They have to. Real estate continues to be driven by local market and supply/demand conditions. There is a serious overhang of commercial real estate across the country. That’s why the author points to a long, slow process to recovery.

Retailers and landlords are quite likely to become very creative in leasehold arrangements, but don’t look for rents to rise +15% across the board.

Anne Howe
Guest
10 years 11 months ago

I’m not a retailer, but if I were, I’d be asking my real estate group to keep a close eye on the Conference Board’s present situation economic index trends (most closely related to retail spending) as well as the employment indices with under employment factored in (affects an indication to save more and spend less. In addition, I’d be a student of major cultural generational shifts in consumer sentiment. Boomers and even many GenXer’s are still recovering lost wealth, while Millennials are taking to heart lessons learned from parents who took a major hit, adjusting their spending to avoid repeating the mistakes of “over leveraging” and “over consumption.”

All these factors should be considered against the growth plans for the retail business, and should be a part of every conversation about the cost of leases over the next few years.

Gene Hoffman
Guest
Gene Hoffman
10 years 11 months ago

Landlords get value for their assets (space) in the front end via leases while retailers have to earn their rewards via on-going sales/operations. With the economy showing some bird-like improvements, going after good available real estate with a higher cost is part of the strategic game of retailing. But so too is negotiating hard for the lowest possible rent.

Negotiation skills are an important part of such events and were never more important. So, to retailers I say, sharpen up your negotiation skills.

Doug Stephens
Guest
Doug Stephens
10 years 11 months ago

I’m in agreement with Anne Howe.

There are a whole bunch of reasons why retail rent should NOT be escalating right now. Unemployment is (still) high. Wages are stagnant. Boomers are retrenching for retirement. X is a smaller pay-challenged generation. And the list goes on….

Anytime the price of something begins to defy very apparent trends and indicators, I worry.

Having said that, the article is a little unclear with respect to what these numbers and trends are relative to. If you’re down by 100 points in a football game, a field goal isn’t exactly cause for celebration.

Ed Rosenbaum
Guest
10 years 11 months ago

Retailers have become much better and stronger negotiators since the market dropped. There is still enough prime space available in strong areas that will allow them to continue negotiating as hard as they can. Landlords are anxious to get dormant space leased, certainly for a profit. But the margins will be tighter this time.

Gene Detroyer
Guest
10 years 11 months ago
As I walk Madison Avenue in New York City, I continue to see new stores and new empty spaces. At the height of the crises, there were easily 1 to 2 vacancies on each block between 57th street and 72nd Street. Last week, there were easily 1 to 2 vacancies per block on the same section. The difference was that they were different vacancies. A further examination suggests that what I am seeing is a game of musical chairs. Very high-end retailers moving from one location to another. I do not suspect that they are moving so they can increase their rent by 15%. More likely they are moving because they can make a much, much better deal. That better deal is so good that it covers the penalties for breaking the previous lease, if necessary, and re-building a store interior. One must be careful when using published rental rates as measures. A friend recently offered $3,250 per month for a two year lease (residential). The apartment, vacant for almost a year previously rented for… Read more »
Bill Emerson
Guest
Bill Emerson
10 years 11 months ago

There will always be “A” locations that will command higher rents from retailers catering to the very well-off. The reality remains, however, that America is extremely over-stored and eCommerce continues to grow at 8-10%/year. The realtors are whistling past the graveyard if they think that rents are going to go up across the board. They cite that most retailers are planning on opening new locations this year. Terrific. How many Hollywood Videos are opening? Oh, that’s right, they’re closing 4700 stores.

Give me a break.

Craig Sundstrom
Guest
10 years 11 months ago

I pretty much have to go along with Bill on this one: I see no reason to extrapolate an (alleged) increase in a few luxury markets–which by definition have limited space–into some nationwide ripple; and not to single out the individuals quoted, but isn’t it the ultimate in self-serving remarks to have a broker telling us rents will soon be going up everywhere? It seems now’s the perfect time to lock yourself into a long-term lease at higher rates…how convenient!

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