There was a point in time when major fashion brands were willing to pay a premium for a storefront along Manhattan's famed Fifth Avenue. After all, that stretch of shopping is not only a draw for the city's elite but also for tourists who want the experience of browsing in a luxury store and bringing home unique, albeit budget-busting, souvenirs.
But all of that was before the pandemic. Over the course of the past year, luxury stores saw a major decline in foot traffic as stay-at-home orders and coronavirus concerns kept shoppers away. And while regular retailers may lend well to the buy online, pick up in store model, luxury shopping is more of an experience that can't easily be emulated on a tablet or computer. As such, consumers aren't simply staying away from luxury stores -- many are also steering clear of luxury products until it's safe to stroll into a store and browse them at leisure.
As such, many high-end retailers have been forced to shutter, and so there's a lot of retail space available for rent along Fifth Avenue. Not only that, but many tenants are past due on their rent. In fact, it's estimated that landlords across a 20-block stretch of Fifth Avenue are owed a whopping $200 million, and that's money they may never see if the tenants who owe it declare bankruptcy.
A prolonged recovery
While Manhattan is showing signs of slow but steady recovery, luxury districts like Fifth Avenue may lag behind. Not only are many existing tenants stuck in legal battles with their landlords over unpaid rent, but new tenants that are looking to occupy space are demanding heavy discounts. And landlords are conceding because they simply don't have a choice.
Ground-floor asking rents on Fifth Avenue between 42nd and 49th Street fell 20% in 2020's fourth quarter compared to one year earlier, according to data from Cushman & Wakefield (NYSE: CWK). And rents above 49th Street up to 60th Street dropped 3.7% during that time -- less of a hit, but a decline nonetheless. All told, the corridor between 42nd and 60th Street now has 23% of its retail space available for rent -- but whether landlords are able to find any takers is a different story.
The abundance of empty storefronts on Fifth Avenue isn't helping matters. Vacancies are a deterrent with regard to new leasing activity even in a normal market. In a market that's been decimated by a pandemic, they're downright destructive.
Commercial landlords along Fifth Avenue may therefore have some serious financial challenges ahead of them as they attempt to recoup missing rent, draw in new tenants, and sign leases at a price point that continues to make sense. In the long run, Fifth Avenue is likely to recover as New York City stages its comeback as a whole. But chances are, Fifth Avenue and comparable retail districts will be among the last to get back to pre-pandemic leasing levels, and that's something landlords and investors will need to prepare for.