Scaling Down Retail Space

As Large Retailers Close, Brokers Split Spaces for Smaller Shops and Restaurants

Before online shopping became popular and when big-box retailing was all the rage, Manhattan retail owners would spend big bucks to buy out smaller tenants and assemble large spaces for companies like Borders, Circuit City and Barnes & Noble BKS -3.36% .

Now landlords are starting to do the unthinkable: split those spaces up for smaller tenants.

Manhattan retailers are facing the same intensified pressures from Internet retailers and a slow recovery that are causing big box stores to close and shrink throughout the country. Only here, landlords are better positioned than their suburban counterparts to deal with the weakening demand by returning the space from whence it came.

Manhattan has lost at least 13 stores including Borders, Circuit City, Barnes & Noble and Filene’s Basement in recent years.

When CompUSA vacated a large space at Fifth Avenue and 37th Street in summer 2008, George Constantin, of Heritage Realty Services, at first hoped for a large tenant to replace it. He even had a deal with a T.J.Maxx for the space in the spring of 2010, but the discount department store pulled back.

Ultimately, Mr. Constantin split the space into multiple pieces, leasing part of it to a drugstore and part to CrossFit, a Reebok affiliate, with one spot still left. “In the end we were actually able to achieve higher rents” by splitting the space up, Mr. Constantin says.

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Or take the massive former Borders at Penn Station, which measures about 24,000 square feet, just steps from Madison Square Garden. Vornado is now trying to move a bank into the space and divide up the bank’s former space into multiple restaurants, according to brokers familiar with the space.

A spokeswoman for Vornado declined to comment.

Similarly, at Time Warner Center the landlord, Related Cos., divided the space into two sections, leasing one to C. Wonder, a perky women’s apparel company. The other space has been leased to another clothing retailer, H&M,HM-B.SK +1.95% according to multiple brokers.

“Finding a 25,000-square-foot single-use tenant in this landscape is more difficult than it would have been 10 years ago,” says R. Webber Hudson, executive vice president of Related Urban. Instead, the company focused on luring fashion retailers, offering them smaller-sized spaces.

Related says the announcement of a new clothing retailer to fill the space will be made in a matter of days, but declined to comment on whether H&M is the tenant.

Other former Borders locations have suffered a similar dissection, including one in Kips Bay, which will be partially filled by a smaller-than-usual Staples, according to a person familiar with the matter.

Indeed, even Staples is trying in some cases to shed its big-box image, according to the person familiar with the matter. A newly opened Staples at 39th Street and Fifth Avenue features a winding glass staircase, embossed columns and several smiling sales people that greet customers. The merchandise on the first floor is limited and high-end—Moleskine notebooks, Martha Stewart stationery and electronics.

A spokeswoman for the company declined to comment.

Brokers say filling large blocks of space is difficult in today’s environment, where they’ve seen some clients cut their ideal space requirement in half since the recession.

“There is no bookstore today to replace that and there’s no big-box electronics,” says Karen Bellantoni, an executive vice president of Robert K. Futterman. “I’m not seeing the bigger 20,000 to 25,000 square foot requirements since 2008.”

Brokers say the shrinking appetite for space is due in part to rising Manhattan rents—say $20 million a year for a 25,000-square-foot store on lower Fifth Avenue—which some learned the hard way during the recession can be financially suicidal.

“Everybody in some way shape or format is reducing their footprint,” says Gene Spiegelman, an executive vice president at Cushman & Wakefield. But he adds: “I still think we’re quite far away from the eradication of brick-and-mortar retail.”

One of his clients, CB2, a cheaper sister store of Crate and Barrel, has squeezed into significantly smaller spaces than the typical furniture store, in part by embracing an online component.

[via WSJ]

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