Urban real estate prices have seen a steady increase over the years.
With more people moving into cities for proximity to work and play, already overcrowded places like Boston and New York have seen a more dense population. As such, more businesses have sought out the coveted spaces of posh neighborhoods like Manhattan, causing a domino impact on rising real estate prices. Following the 2008 recession, Fifth Avenue retail prices increased by 50 percent, reaching an astounding $3,213 per square foot.
While retail space occupancy has seen a severe decrease following a steep increase in reported record level rents, Manhattan landlords needed to find a way to counteract this phenomena. Rather than cutting back prices for retailers, landlords have begun to pay for other big ticketed items, like moving expenses and new interior designs. These new perks are known in the area as concession packages.
These offerings have become so popular that retailers are now seeing them as a key way to help negotiate with landlords. Fate may now be smiling down on the retailers’ side as concession packages offered by different landlords become bargaining chips. Some of the more outrageous retailer requests have come from bigger brand names. While Nike’s Soho landlord built out a basketball court for consumers to try out sneakers, fashion designer Tom Ford’s new store will receive a $12 million improvement allowance.
The issue here is likely to become where a line is drawn, or if it should be drawn at all.
At what point does providing these types of extraordinary concession packages no longer make sense?
With the eCommerce world fast on retailers’ tails, there’s likely to be an imbalance between store profit and landlord concession in the next five to ten years. If we see brick-and-mortar profits fall due to increasing online consumer shopping, it’s likely that these concession packages may stop and landlords may resume power.
In order to maintain the upper hand, retailers will need to step up their in-store offerings to keep consumers coming back for more.