Manhattan storefronts struggling as office vacancies soar with remote working

New York

A BIG shift towards working from home is endangering hundreds of locally owned Manhattan storefronts that have been hanging on for life to return to the desolate streets of midtown and the financial district.

The fate of these stores and, by extension, the country's two largest business hubs will hinge in large part on how long landlords will keep offering the rent breaks that have kept many retailers afloat. Landlords themselves are under growing financial pressure as office vacancies soar and commuters and visitors stay away.

At risk is Manhattan's unique retail culture - the jewellers, barber shops, event spaces and bars - that has long brought vibrancy and familiarity to the street-level canyons of its skyscraper-filled office districts.

"Right now, we're suffering," said Gili Vaturi, who operates Torino Jewelers on Lexington Avenue. She said her sales are still so weak that she is not covering all of her costs even with a much-reduced rent deal with her landlord, GFP Real Estate, which owns dozens of Manhattan properties and has a large minority stake in the landmark Flatiron Building.

Even as the national economy snaps back, the mostly empty office buildings in Manhattan mean many storefronts have not yet seen a rebound. The stores are a crucial contributor to New York's economy and employment. While the city is home to some of the largest companies in the world, small businesses employed about 900,000 people and made up 98 per cent of all businesses before the pandemic.

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Employment at small service-industry businesses in Manhattan neighbourhoods with lots of office buildings was down 20 per cent from pre-pandemic levels at the beginning of March, according to Gusto, which provides payroll and benefits services. In the wider New York metropolitan area, employment at such businesses is down much less: 6 per cent.

"Right now, small-business jobs are disappearing from cities - and may never come back even after the vaccination is widespread and the economy fully reopens," said Luke Pardue, an economist at Gusto.

The owner of the Empire State Building said last Wednesday that just 48.3 per cent of the building's retail spaces were occupied, a sharp decline from the end of 2019, when that number was nearly 70 per cent.

GFP, Vaturi's landlord, has allowed more than half its storefront tenants to pay roughly 10 per cent of their sales in rent so they can survive, said Eric Gural, a co-CEO at the company. The forgone rent is increasingly becoming a burden: The financial cushions that GFP keeps for unexpected costs at each of its 56 buildings have been "materially depleted," Mr Gural said, meaning they might not be able to make up for rent shortfalls from other tenants.

"We always say, 'How is it going to rain 56 times?' " he said. "And there it was, it happened. It rained 56 times." Some landlords took on lots of debt before the pandemic, thinking rents and building values would go up and up, and now some cannot offer rent deals for much longer - or at all. Breathing down their backs are banks and investors, whose patience may run out.

Asking rents for ground-floor storefronts have plunged more than 20 per cent in neighbourhoods such as Times Square and Midtown East, the real estate services firm CBRE said. Across Manhattan's retail corridors, they are down more than 13 per cent since the start of the pandemic, putting rents at the lowest level in a decade.

On Friday afternoon, a stretch of Madison Avenue that used to be home to a flagship Brooks Brothers store was as quiet as a Sunday even though it is now dominated by One Vanderbilt, a huge, new office tower. Bank branches, outlets of cellphone companies and a Starbucks were open but had few customers.

At Langford Wine and Spirits - located off Madison, on East 43rd Street - Sandeep Tirumalasetty had almost no customers to serve. Before the pandemic, Fridays were particularly busy, he said, because companies bought crates of alcohol for office happy hours. "Now, it's completely dead," Mr Tirumalasetty said.

All across midtown, there were vacant storefronts on nearly every block.

Francesco Perillo, CEO of Dr Smood, a small health-food chain, closed three Manhattan locations, including his top-performing store, located on Broadway just north of Madison Square Park, where his monthly rent was more than US$30,000 for 2,000 square feet. He said he would have stayed in that store, which employed as many as 14 people, had his landlord agreed to let him pay a percentage of his sales as rent.

"Not being able to have a flexible deal was making the business unsustainable," Mr Perillo said.

Premier Equities, the landlord of Mr Perillo's store, declined to comment on its dealings with Dr Smood. But property records show that Premier had amassed a big debt on the building that housed the store, which may have factored into its decision.

In 2014, Premier paid US$11.25 million for the building, financing the purchase with a US$9 million mortgage. In 2017, Premier borrowed another US$5 million against the building, records show. Premier also declined to comment on the debt.

Some property owners have deeper pockets than others, and in big office buildings where retail income makes up a small fraction of overall rent, landlords are not hurting as badly because corporations, law firms and other tenants are still paying rent. These landlords can offer rent deals for longer to keep their properties looking lively.

Mark Strausman, a noted chef, went ahead last fall with plans for a new restaurant, Mark's Off Madison. He could do so in part because his landlord, Rudin Management, is not charging him rent, except for the first month's payment.

Nonetheless, the restaurant is losing money. But, Mr Strausman said, "I don't believe that after all of this, people want to stay home and cook."

Rudin CEO William Rudin said he wanted the restaurant to stay open in part so that employees in the offices above might feel better about returning. Mr Rudin said he believed in Mr Strausman's vision but had not decided how long to keep waiving the rent. "Luckily, this is a small percentage of our portfolio, so it hasn't impacted us, but for small owners, these are very difficult decisions to make," Mr Rudin said.

Some stores do not rely on office workers and are struggling because tourists are also staying away.

Paul Prianti, whose family owns Christmas Cottage, which opened in 1985, said that during the pandemic, he had opened the midtown store only sporadically. "For us, it's been a slow death," he said.

He hopes more people will start coming to the city after Labor Day.

In Grand Central Terminal, Inna Zelikson, who owns Inaya Jewelry with her sister, said sales have tanked because of the months-long absence of commuters. Her landlord, the Metropolitan Transportation Authority, has not been as generous as other property owners.

The MTA forgave four months of rent last year and now requires her and other tenants to pay 20 per cent of original rent if that sum is higher than 10 per cent of sales. Ms Zelikson said she's paying a little more than US$3,000 a month, with fees, which is more than what she's taking in, even though it is not the US$12,000 she was paying before the pandemic. She is dipping into savings to keep the shop open.

"I would love to pay them just a percentage of my sales," Ms Zelikson said.

The MTA said in a statement that it was offering the best deal that it could, noting that it was "different from other landlords in that, as a public authority, any additional subsidies provided come out of taxpayers' pockets".

Other store owners expressed more optimism. Ken Giddon, owner of men's clothing store Rothmans in Union Square, said he is doing better now than last year. He has moved suits to the back and packed the front with casual attire - T-shirts and hooded sweatshirts. Young men, he said, want to look stylish for a summer of socialising, returning to the office and attending a frenzy of weddings and events.

"We've gotten through the worst of it," Mr Giddon said. "The city is different now - it's hungrier and younger in many ways, and it's very exciting."

To fill storefronts and counter the dominance of retail chains, some landlords have let smaller retailers operate out of trophy buildings at very low rents.

Before the pandemic, Jill Lindsey said, she spoke with Tishman Speyer about opening an outlet of her apparel and housewares store in Rockefeller Center in a few years, when a particular space was supposed to become available. But Tishman Speyer contacted her in July, asking if she was interested in moving in sooner, into another space, set aside as an "incubator" for small retailers to prove themselves. Another retailer had left one of the incubator spaces after five months.

Ms Lindsey, who opened the store in November, said her rent - 15 per cent of sales - is a lot lower than what she discussed with Tishman Speyer in 2019.

The store, called Jill Lindsey, took in just US$8,000 in March. "I feel it's OK to laugh about this," she said, "because I do think we'll come back and we'll thrive." NYTIMES