Lululemon in talks to fill Sephora's Fifth Avenue vacancy

[NEW YORK] Lululemon Athletica Inc is in advanced talks for a one-year lease at a store on Manhattan's Fifth Avenue, helping to fill space in an area that has recently been plagued by retail vacancies, according to three people with knowledge of the matter.

The active-wear maker is taking 8,000 square feet (743 square meters) at 597 Fifth Ave, across the street from Rockefeller Center at East 48th Street, said the people, who asked not to identified because they weren't authorized to speak publicly. The space was vacated in March by Sephora, which has moved to another location on the east side of Fifth Avenue.

Representatives for Lululemon and landlord Thor Equities declined to comment.

Midtown Manhattan has seen retail occupancies plunge as merchants balk at record-high rents. On Fifth Avenue from 49th and 59th streets - the world's most expensive shopping corridor and just a block north of the store Lululemon is said to be zeroing in on - rents averaged US$3,324 a square foot, down 2 per cent from a year earlier, according to a report released Monday by the Real Estate Board of New York.

Landlords in Manhattan had overestimated tenants' willingness to pay premium prices, according to Gregory Kraut, managing partner at developer K Property Group.

"People were pointing to outliers on Fifth Avenue as the norm," said Mr Kraut, a co-founder of brokerage Avison Young's New York office. "If someone was pricing their space at US$2,000 a square foot, the next person says, well, this should be worth US$3,000 a square foot. What happened was a confluence of events, where there started to be a lot of spaces popping up, and there weren't a lot of tenants who could afford to pay that dollar amount." Fifth Avenue from 42nd to 49th streets had average rents of US$1,185 a square foot in the first quarter, down 4 per cent from a year earlier, according to brokerage Cushman & Wakefield Inc. The availability rate in the area was 32.8 per cent, compared with 17.4 per cent for the stretch from 49th to 60th streets.

Thor Equities has a US$105 million loan on 597 Fifth Ave. that's part of a multiproperty commercial mortgage-backed security originated by UBS Group AG. The loan is watchlisted, according to data compiled by Bloomberg, meaning it's been identified by analysts as a potential credit risk.

The Beaux Arts-style tower, also known as the Scribner's Building after the publisher that once occupied it, was completed in 1913. It was designated a city landmark in 1982. Thor, whose president is Joseph Sitt, acquired the 79,000-square-foot property in 2011 for US$108.5 million, according to a person with knowledge of the deal. A refinancing in 2014 valued the building at US$140 million.

A short-term lease to Lululemon is potentially a shrewd move for both sides, Mr Kraut said.

"Retailers want to see they're not catching a falling knife," he said. As for the landlord, "it's always better to lease something with somebody in it."

BLOOMBERG