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When Sales At Struggling Chains Fall Faster Then Commercial Rents (#GotRecession?)

Barneys’ fight with landlord is an extreme example of an issue bedeviling many retailers: high rents. When Sales At Struggling Chains Fall Faster Then Commercial Rents (#GotRecession?)

Don’t blame all the vacant stores on e-commerce. Sky-high rents are squeezing retailers, too.

Although commercial retail rents are down from recent peaks, they haven’t fallen as fast as sales at struggling chains. The rents remain higher than prerecession levels in many prime shopping areas such as Manhattan, Los Angeles and Dallas.

In a high-profile example of this tug of war, Barneys New York Inc. has hired restructuring advisers and is considering several options including a possible bankruptcy filing, as it seeks to renegotiate the lease on its Madison Avenue flagship and other locations, according to a person familiar with the situation.

The landlord raised the annual rent on the Madison Avenue store earlier this year to $27.9 million, from $16.2 million, this person said. Barneys fought the rent increase but lost during an arbitration proceeding. Reuters earlier reported that Barneys had hired restructuring advisers.

The retailer also is looking at whether it makes sense to reduce the size of the 260,000-square-foot store, and it is reaching out to potential investors who might be willing to inject cash into the company, the person said. Hedge-fund manager Richard Perry owns the majority of Barneys with a roughly 70% stake.

“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.

Landlords say it isn’t that simple. They argue retailers fueled demand with a flood of store openings coming out of the 2008 recession. And even when the landlords dangle lower rents, it is hard to tempt retailers to open stores when they are retrenching.

“We’ve cut rents by 30% and are offering all sorts of concessions, but we still have vacant space,” said William Friedland, a principal with Friedland Properties, which owns commercial real estate in Manhattan.

In other cases, though, landlords have an incentive to leave space vacant because slashing rents would violate their loan agreements, industry executives said. Moreover, any devaluation of the property would make it harder for them to borrow in the future.

“For these landlords, maintaining the valuation on their properties is more important than collecting an immediate rental stream,” said Richard Johnson, a partner in Odyssey Retail Advisors, a consulting firm that works with retailers and landlords. “It’s a waiting game, and many landlords would rather wait it out, hoping the market improves.”

Commercial rents in San Francisco are up 53% from a decade ago, and in Miami they are 46% higher, according to CBRE. Even in smaller cities, such as Nashville and San Jose, Calif., rents are up by nearly one-third.

In Manhattan, the average annual rent more than doubled from the beginning of 2010 to the end of 2014, peaking at $1,111 a square foot, according to CBRE, as Amazon.com Inc. and other e-commerce players were changing traditional shopping habits.

Some chains wound up paying as much as 30% of their sales in rent, double the historic norm, industry executives said. “At that point you are on your deathbed,” said Nina Kampler, a consultant who works with retailers looking to reduce their store base.

What followed was a record number of retail bankruptcies and store closures as the shift to online shopping depressed store traffic, which made the higher rents even harder to absorb. Retailers such as Ralph Lauren Corp. , Macy’s Inc. and Abercrombie & Fitch Co. exited pricey flagships and reduced the size of other locations.

Even though Manhattan rents have fallen by one-third from their peak, they are still well above their prerecession levels, according to CBRE and Cushman & Wakefield Inc., another commercial real-estate company. In parts of the city such as Madison Avenue, availability rates—a proxy for vacancies that includes both occupied and unoccupied space offered for rent—have hit 30%.

“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, not just Manhattan. “Landlords aren’t willing to go backwards in terms of rent. They are hoping the business comes back.”

Don Ghermezian, president of the American Dream retail and entertainment complex in East Rutherford, N.J., which is scheduled to open in October, said landlords are making a mistake if they raise rents without figuring out a way to draw more traffic to stores.

“If you’re going to be a traditional mall and just continue to raise rents, that’s not going to work,” Mr. Ghermezian said. Barneys has signed a lease for the new center and will offer cryotherapy as well as a boutique that sells cannabis-related products.

Barneys, which is much smaller than rivals Saks Fifth Avenue and Neiman Marcus, operates 13 department stores and nine warehouse stores. Industry executives say its spat with its Madison Avenue landlord, Ashkenazy Acquisition Corp., is a high-stakes game of chicken. Both sides have much to lose.

For Barneys, finding new space would be expensive and time-consuming, according to people familiar with the situation. The flagship store does about $300 million in annual sales, the people said.

Likewise, Ashkenazy would have trouble filling the space with a single tenant. The real-estate firm, which also owns retail space in Washington’s Union Station and Boston’s Faneuil Hall, didn’t respond to requests for comment.

“There aren’t a lot of other retailers of similar size that have that prestige,” said Andrew Goldberg, CBRE’s vice chairman.

If Barneys chooses to restructure its lease under court protection, it would be its second time filing for bankruptcy. Since emerging in 1999, it has changed hands several times. Mr. Perry, who was Barneys’ biggest lender, took control of the company in 2012, in a debt-for-equity swap. He is winding down his hedge fund. When Sales At Struggling,When Sales At Struggling,When Sales At Struggling

 

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