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Wall Street Journal / Biz - Money

Manhattan Retail Landlords Slash Rents to Lure Tenants

New York is no longer immune to the forces battering the U.S. retail sector.

By

Keiko Morris

Commercial real estate owners usually cut rents only after exhausting a menu of other options, from months of free rent to tenant allowances for construction and remodeling.

Retail landlords in Manhattan are trying all of the above.

Average asking rents for ground-floor retail space fell more than 13% to $711 a square foot in the third quarter from the same quarter a year earlier, according to CBRE Group Inc., and were down 30% from their peak of $1,020 a square foot in the fourth quarter of 2014.

The gap between asking rents and the actual rent in the final lease deal has been widening. During the market’s highs, the average actual, or taking, rent ranged from 96% to 98% of the asking rent and in some cases closed at or above it, according to a CBRE index. In the third quarter, the average taking rent was 82% of the asking price.

Landlords also offered more concessions and embraced shorter-term deals, according to CBRE.

“There’s a lot more negotiation going on between landlords and tenants,” said Nicole LaRusso, director of research and analysis for CBRE.

New York is no longer immune to the forces battering the U.S. retail sector. While retail rents in Manhattan soared after the last decade’s recession, the momentum petered out as online shopping took a heavier toll on big national merchants.

Through Nov. 3 this year, U.S. retailers announced 6,636 store closures nationwide, according to a report from Fung Global Retail & Technology, a research and consulting firm.

The number of Manhattan retail deals being completed has fallen significantly from levels three years ago and isn’t at a point that would be considered healthy flow of transactions, said David LaPierre, vice chairman at CBRE. In some deals, tenants have been able to negotiate more flexible terms, including the ability to terminate leases early if sales aren’t meeting expectations.

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Short-term deals—those less than three years—also are increasing. They made up about 20% of all Manhattan retail lease transactions in the third quarter, compared with less than 5% in the same period last year, according to CBRE.

Landlords generally prefer longer-term leases. But some property owners figure short-term deals will provide immediate cash flow, Mr. LaPierre said. The deals also work for building owners who believe the downward curve is a blip and the market will return to where it was and get stronger, he said.

The downdraft has been so swift that some brokers believe the market might be approaching a bottom. “While our professionals would say there is still room for rents to come down, we are starting to see the light at the end of the tunnel on that,” Ms. LaRusso said.

“We are not at equilibrium yet,” Mr. LaPierre said. He later added, “If there is continued landlord deal flexibility we may indeed be closer to that light.”

Write to Keiko Morris at Keiko.Morris@wsj.com

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