High Rent Costs Hurting Retailers

Retailers are feeling the heat from high rent costs.

According to a report in The Wall Street Journal, while commercial retail rents are down, rent costs still remain higher than prerecession levels in many prime shopping areas, including Manhattan, Los Angeles and Dallas.

Rents have gotten so out of hand that one source revealed Barneys New York has hired restructuring advisers and is even considering a bankruptcy filing as it attempts to renegotiate the lease on its Madison Avenue flagship store and other locations. Its landlord raised the rent on the Madison Avenue store this year to $27.9 million, from $16.2 million. The retailer fought the rent increase but lost.

The average annual rent in Manhattan has more than doubled from the beginning of 2010 to the end of 2014, hitting $1,111 a square foot. Commercial rents in San Francisco are up 53 percent from a decade ago, while in Miami they are 46 percent higher. Smaller cities, such as Nashville and San Jose, California, have also seen rents rise by nearly one-third.

“Compared to a decade ago, rents are still up considerably – and for some retailers, it’s too much,” said Nicole LaRusso, director of research and analysis at CBRE Group Inc., a commercial real estate company.

But landlords argue that these retailers created the demand with a slew of store openings after the 2008 recession.

“We’ve cut rents by 30 percent and are offering all sorts of concessions, but we still have vacant space,” said William Friedland, a principal with Friedland Properties.

But even those slashes weren’t enough for some retailers, resulting in a record number of retail bankruptcies and store closures.

“It’s a huge challenge to negotiate renewals,” said Alyssa Gates, director of U.S. real estate for cosmetics retailer Lush, speaking about the country as a whole. “Landlords aren’t willing to go backwards in terms of rent. They are hoping the business comes back.”

But Don Ghermezian, president of the American Dream retail and entertainment complex in East Rutherford, New Jersey, which is scheduled to open in October, said landlords cannot simply raise rents without finding out how to boost traffic to stores.

“If you’re going to be a traditional mall and just continue to raise rents, that’s not going to work,” he noted.