Discount Retailers Take On the Big City

Although the economy has continued to show signs of recovery, commercial real estate rents are still down about 20 to 30 percent around the US, said David Birnbrey, chairman and CEO of The Shopping Center Group.

These lower rents, paired with strong sales from a flood of cash-strapped consumers looking for bargains, are making it possible for discount retailers to rent property in lucrative spots of major metropolitan shopping areas that they previously couldn't afford.

New York City Skyline
New York City Skyline

"Because there's so much vacancy around the country ... the barriers of entry have come way down," said Michael Burden, a principal with industry adviser Excess Space Retail Services.

Manhattan lies at the forefront of the trend, where the average asking price for rent at retail stores fell in every neighborhood but the Flatiron District in the first half of 2009, according to CBRE Research.

Prices in the Herald Square area — where JCPenney recently opened its new three-story store — are down nearly 20 percent. In SoHo, they’ve fallen almost 6 percent.

JCPenney spokesperson Ann Marie Bishop said the company signed its Manhattan lease nearly two years ago, before the commercial real estate crisis hit, but analysts said other retailers have, and will continue, to follow.

Fifteen years after opening its flagship store in Manhattan, TJX's TJMaxx is opening its second Manhattan location on 100th and Columbus toward the end of October or early November, said company spokesperson Annmarie Farretta.

Rumors are swirling that discounter Kohl's is also looking for a piece of Manhattan real estate, although Vicki Shamion, vice president of public relations said the company is reviewing multiple sites around the country and does not comment on real estate speculation.

"It's less about saying, 'We're concerned that a consumer can go to a competitor of ours,'" Burden said. "It's, 'We need to take advantage of an opportunity that there's a window for, and if we don't take advantage we may not have that opportunity again."

While it's not a new trend for affordable retailers to enter major metropolitan markets, what is new is the quality locations the stores can afford, Birnbrey said. When Bed, Bath & Beyond opened a store in the Chelsea area of Manhattan more than 10 years ago, it was an untried shopping region that carried a high level of risk.

"Now what retailers are able to do is go into proven retail areas and get achievable rents that allow them to be profitable," Birnbrey said.

And their options will only continue to flourish, Burden said. On top of the year's big-box bankruptcies of Circuit City and Linens 'N' Things, he predicts another "tsunami" of closures will strike in the next two to three quarters, causing even more space to become available, he said. He expects the trend to extend outside of Manhattan and said Chicago is another city poised for growth among discounters.

Cities in South Florida, California, and Phoenix, however — which are facing some of the toughest economic conditions in the nation — remain risky investments, and retailers will likely approach these areas with caution despite their low price tags. Atlanta is also a questionable market, with department stores coming and going without any sign of staying power, Birnbrey said.

It also depends on the retailer. While TJX — which owns stores like TJMaxx and Marshall's — and Kohl's saw sales rise in the second quarter, other discounters like Filene's Basement have filed for bankruptcy and have been forced to close stores, Burden said. Other successful discounters like Dollar General probably won't take advantage, either, because their target demographic doesn't shop in Manhattan.

But for those making the move, business will likely continue to boom after the economy recovers, as these companies have shown they can manage their costs, Birnbrey said. What's more, those discounters that prevailed during the recession should be poised to outperform their past sales, as consumers will continue to spend cautiously for some time to come and the stores will retain their geographical edge, Burden said.

"The consumer, like the retailers, going forward are going to need to be prudent," he said. "It's something that's going to stay in the psyche of the American consumer for a long time."

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