Real Estate – in New York and Beyond

Retailers and developers from around the country are preparing to attend the International Council of Shopping Centers’ New York deal-making convention in New York City on Dec. 6 and Dec. 7. Chain Store Age talked with Ivan L. Friedman, president and CEO of New York City-based retail real estate advisory firm RCS Real Estate Advisors, about what the industry has in store for the New York show and beyond.

As retailers prepare to attend the New York deal-making show in early December, how would you describe the current state of retail?
Retailers are now resigned to a new paradigm. Their gross margins are up and they have better control of their inventories and other costs. As a result, payroll and other SG&A expenses are down, so we’re seeing retailers that are profitable once again. But sales trends are still very much uncertain as we work against the big 2009 sales declines. In terms of real estate, we’re seeing very limited, more selective expansions by retailers, as well as controlled capital expenditures. Ultimately, retailers are still sitting on their cash. 

Is New York a viable retail expansion market? What other markets should retailers be considering for their expansions?
Investment and overall opportunity in New York City are great. The ability to do a lot of business here is also great; there are plenty of available locations. But, rents are starting to creep up again and I would tell you that expansions in the city are not for the faint of heart. New York City and the five boroughs, when it comes to street locations, are still very expensive on a dollar per square foot basis. So, if a retailer is looking to open a store in Manhattan, Times Square or 14th Street, for example, that retailer is going to likely pay rents in excess of several hundred dollars to, in some cases, over a thousand dollars per square foot. We’re also starting to see landlords increase rents on currently occupied spaces where some tenants are not able to sustain the increases, so we’re likely to see additional space come on the market as a result.

Retailers should remain focused on the demographics of particular markets they’re interested in and choose locations that make sense for them on an individual basis. Some markets, demographically, won’t make sense and, of course, there are still a few markets that are suffering economically and therefore should be avoided.
 
As you look ahead to 2011, should portfolio optimization still be a priority for your retail clients?
Retailers should always be looking at store-level profitability. There’s always going to be a bottom 10%-20% of a retailer’s stores that are underperforming. So retailers should always be focused on optimizing their portfolios and improving that bottom 10%-20%. A number of retailers have outsourced their real estate departments to third-party providers to do this for them and are seeing some great results. 

What other priorities should retailers have in 2011?

Retailers have to continue to control expenses and look at their rents as a percentage of sales, especially as landlords try to put rent increases in place. Retailers need to be cautious, making sure their rents do not become disproportionately high compared to current sales trends.