Ending Insanity on Madison Avenue

By Christopher DeCrosta, (top right photo) Vice President of Madison Retail Group, Chicago.

CHICAGO, IL--USA Today’s article about Madison Avenue vacancies is more than five years in the making.

The vacancy rate on Madison Avenue is certainly among the highest and most noticeable in the city, but it does not come as much of a surprise to those familiar with this market.

Rents over the past 5 years have grown at an alarming rate. Other than Fifth Avenue, Madison was the first retail strip in New York to break the $1,000 per square foot barrier.

Once it did, it quickly became $1500 per square foot and until the recent downturn asking rents exceeded $2,000 per square foot.

The fact that space did not sit on the market for very long emboldened landlords to continue to charge such astronomical rents. International luxury brands or jewelry retailers quickly snatched up the space and in many cases the high rent numbers were absorbed in part by their large marketing budgets.

Years ago, Madison Avenue was the only destination for luxury shopping in Manhattan. Much of the rest of Manhattan has changed while the Madison rents skyrocketed.

Neighborhoods like SoHo and The Meatpacking District became viable alternatives for high-end retail. Retailers like Moschino, who only require one Manhattan location, opted to move to West 14th Street for a fraction of the cost that would have been required to renew on Madison.

These newer neighborhoods offer brands the ability to appeal to a younger, hipper crowd – one that might reject Madison Avenue’s perceived stodginess.

The real victims of the Madison Avenue collapse have been the smaller and local brands.

Forced to renew at rents 3-4 times what they had been historically paying, many tenants have found themselves underwater and unable to stay afloat. There is a positive side of all this turmoil, however.

Once rents correct and stabilize at a lower number, it will allow these smaller retailers to return to the market.

Not only will this relief be good for the retailers, it will add diversity and charm to Madison Avenue and once again make it one of the world’s most unique shopping destinations.

Contact: Kurt Ivey, kurt.ivey@madisonmarquette.com

The Liquidation Store Dilemma

CHICAGO, IL-Joan Woods, (top right photo) Regional Director, Specialty Leasing, MadisonMarquette, says BusinessWeek recently tackled the complex world of merchandise liquidation and suggested that liquidators are overwhelmed with the amount of product moving through the system.

One byproduct of this swelled pipeline is that some liquidators are in talks to bring merchandise back to the “scene of the crime” and create specialty liquidation events in vacant space at malls and other traditional retail destinations.

Liquidators like Liquid Event Sales and AMS Liquidators (Disney Character Warehouse Liquidators) are in talks to lease space recently vacated by big boxes in order to sell off excess inventory from their ever growing list of clients.

From a center owner’s perspective, these opportunities can generate substantial cash flow while the leasing process runs its course. However, it is important to consider several factors before proceeding:

-Will liquidation stores be selling merchandise that existing retailers are selling at full price? If so, restrictions need to be put on what types of merchandise can be sold.

-Does a liquidation concept harm the upscale look and feel of the center? If so, partner with a liquidator who understands how to design a temporary store that doesn’t look temporary. Despite the stereotype, there are some very sophisticated new concepts out there.

-Hosting liquidation stores should never come at the expense of traditional leasing efforts.

Liquidation services are at an all-time high because of the dismal holiday season. Retailers have responded by scaling back their inventory and no one should expect these temporary tenants to transition to long-term leases or be a viable part of a merchandising mix moving forward.

Contact: Kurt Ivey, kurt.ivey@madisonmarquette.com

Some Retail Sellers Reconsidering Prices (Finally)

WASHINGTON, DC--Kurt Ivey, (top left photo) Senior Vice President, Marketing, MadisonMarquette, posted the following analysis on his Places Magazine blog. The analysis was written by MadisonMarquette investment associate Kinnery Ardeshna, (top right photo).

Retail property sales volumes hit a 6-year low in July, according to Real Capital Analytic’s recently released August retail report.

Between financing issues and general uncertainty in the market, no one should be surprised by that news. However, we are starting to see some flexibility from sellers depending on their situation.

Two brokers recently came back to me on two separate deals saying that the seller would now consider prices lower than what we had originally offered or had priced the deal at just a few months ago.

Many brokers are also telling me that they have no idea where pricing will come in on any deal, so we need to take their price range and capitalization rate expectations with a grain of salt.

That is a remarkable change in posture from several months ago and a strong sign that perhaps volumes may pick up a little as sellers become more realistic about changes in the market.

While September could be an active month with more deals coming to market, it will be interesting to see how many deals actually close. Even if seller expectations are more realistic, supply will only further outpace demand since many investors are still likely to sit on the sidelines.

Smaller deals will also likely continue to dominate while larger regional mall and lifestyle center deals will come to market only if desperate sellers are willing to take price reductions — obviously, a great opportunity for buyers.

CONTACT: Kurt Ivey, Senior Vice President, Marketing, MadisonMarquette, kurt.ivey@madisonmarquette.com