Q&A: Harrison Abramowitz Explains Why Retail Spaces Are Shrinking

(Inside a Nike running concept store in New York. / Photo via Shutterstock)

In his role as Director in the New York office of Newmark Grubb Knight FrankHarrison Abramowitz has helped retail and restaurant brands including 7-Eleven, Arby’s, CVS, and Al Horno lease space that’s perfectly suited to their needs.

We spoke to Harrison recently to learn why retailers have been trending toward smaller spaces, and what business owners have to consider when looking to lease new space for their operations.

INCREDIBLY: How do retail stores determine how much space they need? What are the calculations you use?

HARRISON ABRAMOWITZ:
It depends on the retailer and what they’re selling, whether it’s food, dry goods, service, etc. There are certain retailers and certain business models that will do the same business out of 600 [square] feet that they will out of 1,000 feet, and we can use that rule of thumb going further: Those businesses will do the same sales out of a 2,500-foot space as they would if they had 3,500 feet.

Food [brands] look at how many seats they can fit, and it also comes down to public assembly — if they have 75 seats or more, that changes certain things in terms of things like egress. But keep in mind, the more seats they fit, the higher performance they can project for their store sales.

There is certainly a tipping point where retailers are finding if they’re a 2,500- to 3,500-foot tenant, there’s really no need for them to reach and take 4,000 feet, and pay for an extra 1,200 feet that they’re not actually using. Every square foot is so expensive here in New York.

Is it worse to have too much space or not enough?

I think tenants will argue that they’d rather not have enough and get by, because of how much of a premium they’re paying in rent on a per-square-foot basis — especially if their building doesn’t include additional storage. In the city, we don’t charge for basement space, but some spaces don’t come with lower-level basement storage, and some tenants are forced to use precious ground floor space for storage.

Harrison Abramowitz Newmark Grubb Knight Frank new york real estate retail space

Harrison Abramowitz

Why have retailers been seeking out smaller spaces lately?

I think it’s just how crazy the rents have climbed in the cycle since the 2007-2008 downfall. The number one group we can talk about is banks. These banks that used to take 4,000, 5,000, 7,000 square feet are now doing 1,500 to 2,500 square foot branches. That’s what a bank branch is becoming. There are projections that, in the next the next five to ten years, there may not even be a retail bank presence, period.

That would affect street retail leasing tremendously because banks make up such a large group of users for ground floor commercial space, especially in Manhattan. But the bottom line is, retailers are going smaller, and the food guys are trying to squeeze into pockets of the city where they need to reach their customers while still being able to operate efficiently.

It’s interesting that the trend towards smaller spaces is mostly due to higher rents, because my assumption was that E-retailers are cutting into brick-and-mortar sales: Fewer shoppers in stores means less need for space. Is there any truth to that?

Yes and no, but it’s funny you bring that up. Take Amazon, they wiped out the bookstore; Borders and Barnes & Noble, for the most part, got destroyed by them. Well, now Amazon is doing their own bookstore concept and reinvigorating this sector. They’re about to finish the first deal in New York to do one, and it just speaks volumes about how they could be a category killer, then resurrect from the ashes and start it up again.

E-retailers are definitely hurting traditional malls, but Manhattan’s a different animal. I specialize in street retail, so I can’t really comment on mall traffic sales. But in New York, there were a lot of Borders and Barnes & Nobles stores, and now there are only a couple — I think there are only two left. That certainly speaks to the impact that E-retailers have had on brick-and-mortar operations.

So, rents go up, retail space shrinks, and that naturally results in retailers not being able to have as much product on the sales floor. Is that a challenge for retail brands? What’s the solution to having to work with less space?

I think what you will see is these retailers starting to get creative with new concept stores, creating an experiential component in driving traffic that offers something that the consumer can’t get online. That’s why you’re seeing a lot of brands do concept stores, combining it with some of their major office leases. Samsung recently did a deal with Newmark in the Meatpacking District at 837 Washington Street to create an interactive showroom at the base of their new building, while occupying the office floors above. Amazon plans to do a similar play at 7 West 34th Street having a retail presence on the ground while occupying nearly 500,000 square feet of office space in the building as well.

In terms of limited inventory, retailers are getting more creative in not having all their inventory in one setting. Lululemon just opened a concept store on Bond Street — you can only find this type of store in Vancouver, where their headquarters are, and in Manhattan. They’re spreading out where the consumer can find all their things. It’s not like back in the ’40s or ’50s where you go to a big store like Sears, and that’s it, it’s a one-stop shop.

The world we live in now is more of a curated, selective setting for retailers. Since their stores are smaller, they might do a couple more locations and have their inventory and selection spread out through the city.

Is there any advice you can share for retail store owners looking for the right space? What’s important to you when you’re trying to match up a landlord and a tenant?

I advise my clients that the key is doing your homework in the Manhattan market because it is so block-by-block. There are divides in the city that can make or break a store. Being one or two blocks north or south can literally be the recipe of either disaster or success.

Fast casual food tenants as well as dry-use retailers are using demographics and psychographics nowadays to really gauge who’s walking these streets. Are these millennials? Are these baby boomers? What is the disposable income? What is the office inventory around there? What anchor tenants are in these office buildings? What residential developments are going on? Who’s buying these apartments?

All these things are taken into consideration in identifying your pool of customers, who will be spending money in the stores, and in turn, paying your rent and helping you turn a profit, hopefully. Heavy analytics are being done by all retailers going forward, and it’s a very sophisticated process.

This is not just storefront retail with mom and pops anymore. A lot of strips in Manhattan now look like a mall, with national credit tenants, and that’s influenced what we’ve seen over the past 15 to 20 years — the real change of this sector of real estate. Because before then, it was mostly a lot of local tenants and there was no real due diligence being done. Now there’s a real science to it and the tenants that are doing the best are the ones that put the most effort into doing their homework.

Are there any other trends you’ve noticed in retail leasing lately that you think business owners or retailers should be aware of?

Health and wellness have become very important. The millennial generation really cares what they’re putting into their body and how they’re treating it. So, tenants that are doing the most deals right now are the ones that serve very health-conscious users, whether that’s apparel brands with fitness as a strong element like Lululemon, or boutique fitness brands like SoulCycle, Flywheel, Barry’s Bootcamp, and Orangetheory Fitness. And then you also look at the healthy eats sector, brands like Sweetgreens and Dig Inn. The tenants that are expanding and doing a lot of deals are the ones that cater to health and wellness.

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