How to Make it in New York A Guide to Retail Real Estate in Manhattan By Virginia Pittarelli and Stephen Stephanou T here is an energy and excitement in New York City like no place else in the world. With over 8 million residents and 44 million tourists annually, it is easy to understand why so many retailers crave the proverbial piece of the Big Apple. For some of the world's premiere consumer brands and retail concepts like Hermes, Gucci and Prada, Manhattan locations are trophy properties—a powerful demonstration of financial success and achievement. For luxury brands, there is no place else in the world more important to be. In recent years retail real estate demand has escalated beyond anyone's expectation. Rents have risen 100% each year in many areas of the city. There is simply no desirable space available for the hundreds of retailers seeking new locations. For those looking to enter the market, it is a daunting challenge that requires patience and careful due diligence. Not for the Faint of Heart Retail concepts seeking to enter or expand in the New York market should not expect the country's uncertain economy to change the rules of the game. There has yet to be a real pullback in demand and while rents may not continue to rise exponentially, there is little chance that they will decline or even stagnate anytime soon. The weak dollar has really helped insulate New York from drops in US consumer spending. Foreign tourism is up and many of Europe's middle class are coming to the United States for the first time. The relative strength of foreign currency had made shopping in New York very affordable for these transatlantic tourists. Foreign investment has also flooded into New York's retail community. A number of US-based retail concepts such as Barneys and Theory have been bought out by foreign investors. Overseas retail concepts such as UNIQLO and Mango are also entering the US market at unprecedented rates—often choosing New York as their first port of call. The institutional investors—domestic and international—that control most of the city's retail real estate are also more likely to allow space to go vacant than lower rental rates in the event of a downturn. It is simply more financially prudent for them to allow vacant space to sit on the market than it is to lower rents and have to devalue their asset portfolio. Manhattan has also run out of "emerging" neighborhoods where retailers could find reasonable deals in exchange for locating in an untested area. Major national chains are now ubiquitous in areas that were dormant neighborhoods not too long ago such as the Meatpacking District, Flatiron and SoHo. Retailers seeking deals must look outside Manhattan to neighborhoods like Brooklyn and Queens. If the economic slowdown is to hit New York, it will be felt more acutely in these emerging areas. Take a Long-Term Approach Identifying desirable sites in New York is possible despite the challenging environment. However, retailers must take a long-term view of their objectives. It can take five years to find the right space—especially for large format concepts. The long lead times often tempt retailers into settling for a space rather than the right space. This temptation is strong but very dangerous because of the high stakes involved. Not only is the cost of opening a storefront in Manhattan much greater than anywhere else, but the fallout from failure in such a high profile market is potentially ruinous. Retailers must also be careful not to rely too heavily upon traditional demographic data—often from the US Census. The density and subtleties of New York are not well served by these measures and do not fit neatly into retailer formulas that are more appropriate for other urban or suburban markets. A real understanding of the flavor of the neighborhoods is absolutely essential and can only come from an insider's perspective. Large format retailers also must be flexible in their store design if they want to have the best locations. Target has been very successful in adapting its traditional store designs to the constraints of urban real estate. Whole Foods Market has also been successful. Both of these retailers recognized multi-level designs can be successful and that parking challenges can be overcome by the density of New York populations. Finally, retailers must be vigilant and connect into the local real estate community. Many of the most promising locations are identified and realized long before they reach the market. These off-market transactions place anyone without local relationships at a major disadvantage. Virginia Pittarelli and Stephen Stephanou are Principals of Madison Retail Group and can be reached at (212) 255-2900. P Manhattan Retail Rents Virginia Pittarelli Principal and COO, Madison Retail Group, New York Virginia is Chief Operating Officer and Principal for MRG, New York. She has over 20 years experience in the real estate industry representing a number of national and international retailers. She is a graduate of Brooklyn College and is a licensed New York Real Estate Broker. She is a member of the Stores Committee Real Estate Board of New York, Inc., The Association of Real Estate Women and ICSC. Stephen Stephanou Principal, Madison Retail Group, New York Stephen is a Principal of Madison Retail Group based in New York with extensive experience in tenant and landlord representation, retail real estate development and contract negotiations for owners, developers and retailers across the country. He is an active member of ICSC and the Stores Committee of the Real Estate Board of New York. Stephen graduated with honors from the University of California at Los Angeles and received his JD from Loyola University of Los Angeles, where he was a member of the Law Review.