$20 Million for Rent? Why Even Luxury Brands Can’t Afford New York Anymore
Business + Economy

$20 Million for Rent? Why Even Luxury Brands Can’t Afford New York Anymore

Anthony Quintano - Wikipedia

Asking rents along Manhattan's upper Fifth Avenue edged higher in the first quarter, ending a three-quarter streak of year-over-year declines, according to Cushman & Wakefield's research arm.

But the reversal is weak and comes as the amount of available space continued its march higher, leaving real estate experts to predict pressure will remain on the tony shopping street for several more quarters.

Related: Why March’s Shockingly Weak Jobs Report Is No Reason to Panic

Stymied by a slowdown in luxury spending, the shift to online shopping and the buildout of competing shopping centers in Manhattan, retailers are taking a closer look at their real estate portfolios before committing to the lofty prices associated with Fifth Avenue.

That could skew the balance into retailers' favor.

"The smart [property owners] are making very amicable deals," Faith Hope Consolo, chairman of Douglas Elliman's retail group, told CNBC.

Indeed, while Cushman & Wakefield's latest data shows that asking rents on upper Fifth Avenue ticked 2.9 percent higher in the first quarter, the amount of available space grew 4.4 percent. Cushman's research team defines upper Fifth Avenue as 49th to 60th streets — home to the famous stretch of stores that includes Tiffany & Co.

Ralph Lauren this week became the latest luxury brand to flee the area, saying it would shutter its Fifth Avenue Polo location as part of a broader cost-savings plan. The abrupt decision surprised many in the real estate industry, as the company had just signed the lease for that space in 2014.

Related: The 15 Best Home Remodeling Projects for Your Money

Diesel and Juicy Couture have also closed stores on Fifth Avenue, with the former relocating to the nearby Madison Avenue.

"This is absolutely the reality of our new retail economy," Gene Spiegelman, a vice chairman at Cushman & Wakefield, told CNBC. "It's going to be a challenging cycle."

To cope, some landlords are offering more favorable deals to tenants, Consolo said. Those can include shaving a percentage off their rent. But more often, landlords are giving tenants perks like allowances to build out their space or free rent during construction, she said.

Spiegelman said he hasn't yet seen these types of concessions happen in "any quantifiable fashion" on Fifth Avenue. Yet even if they did, he's not sure they would have the same impact they did in the past. That's because the shift in consumer demand has thrown the typical economics of supply and demand out of whack.

That includes the rapid shift of spending to the internet, Spiegelman said.

"You could lower prices right now and I'm not sure demand would flow back in at the same velocity that it did historically," he said.

He added that it will take time for landlords to fill their Fifth Avenue vacancies, which carry an asking price of $3,123 per square foot. That includes the vacant Polo flagship, which he said was costing the retailer more than $20 million a year in rent.

Yet it isn't all bad news. He noted that Sephora and H&M recently traded in their former Fifth Avenue addresses for larger locations.

"Fifth Avenue has the highest rents in the world," Consolo said. "But you know what? It has more foot traffic than anywhere else."

This article originally appeared on CNBC. Read more from CNBC:

The initial panic has passed, but Syria could still be a danger spot for traders

US military advisors have a complex job — especially in the Middle East

How a biotech start-up is making expensive wines without grapes