The new department store smell still clings to the walls and clothing racks inside the 188,000-square-foot, three-floor Neiman Marcus inside New York City’s Hudson Yards shopping complex. It’s barely a year old, yet it may close for good.
The pending bankruptcy of Neiman Marcus signals the first large department store to fall victim to the COVID-19 pandemic. It also creates a challenging position for the New York City commercial real estate space.
An Overview of The Neiman Marcus Bankruptcy
If you’re like me, you keep your eyes and ears trained on the New York City commercial real estate news. One major headline that has commanded significant attention is the potential bankruptcy of Neiman Marcus and what this will mean for the $25 billion Hudson Yards neighborhood and surrounding New York City residential real estate.
Neiman Marcus is $4.7 billion in debt, and the parent company is organizing a bankruptcy protection move that would provide a $600 million refinancing package to allow the retailer to restructure its financial burden and reopen once the coronavirus crisis passes. In return, creditors would receive ownership stakes in the company.
The company owes $120 million in April alone and already missed one payment this month, which lends further evidence that bankruptcy will be filed any day now. Despite bankruptcy seeming imminent for Neiman Marcus, a group of investors has arranged an alternative strategy.
Instead of bankruptcy, investors from Mudrick Capital Management LP and Third Point LLC hedge fund are hoping to persuade Neiman Marcus owners with a $700 million proposal to sell.
Before a bankruptcy judge approves Neiman’s financing package, the investors will plead in court that their proposal is less expensive and creates a far less negative impact on the city of New York.
Hudson’s Bay Co, the parent company of Saks Fifth Avenue, is the most likely buyer because of their demonstrated interest in acquiring the luxury department store chain in three other attempts over the past decade.
Now that Neiman Marcus is facing such financial peril, the fourth time may be the charm for Saks.
Why Neiman Marcus’ Bankruptcy Is Significant For New York City Commercial Real Estate
There are 43 Neiman Marcus department stores, but the closure of the New York City location carries arguably the most significant amount of impact on the surrounding community.
When Neiman Marcus came to the city, New Yorkers rejoiced. With over a hundred years in business and an established reputation as a luxury department store, it made only sense for the legendary company to be present in America’s shopping epicenter.
It was the anchor for the Shops and Restaurants at Hudson Yards, a seven-story retail mall project on Manhattan’s west side that is headed by Related and Oxford Properties. At a time when Corona was synonymous with Cerveza, instead of pandemic, the thought of Neiman Marcus failing seemed like a near-impossibility.
So promising was the marriage of NYC and Neiman Marcus that Related and Oxford Properties offered the luxury department store unbelievable terms.
Not only did Related and Oxford Properties cover most of the costs for Neiman Marcus’ interior, but they also negotiated to receive 5% of the store’s sales in place of rent for the first three years. Then, 8% in the fourth and fifth years. They would enter a normal rent situation in year six.
The real danger, however, is the agreements that Related and Oxford Properties offered to other stores in the Hudson Yards mall. Many of the smaller lease agreements stipulate that stores can receive rent discounts or no-penalty lease exits if Neiman Marcus leaves, and a replacement store is not found.
Essentially, Neiman’s closure will cause a domino effect that will shut many of the other retailers in the Shops And Restaurants at Hudson Yards.
These closures will also have a small impact on New York City’s residential real estate. The size of the luxury department store means hundreds of New Yorkers will join the already extensive list of those on unemployment and struggling to pay their rent.
Ecommerce And COVID-19: The 1-2 Punch That Is Knocking Out Brick And Mortar Stores
The coronavirus pandemic and resulting lockdown are putting severe pressure on brick and mortar retailers. It’s being ruled as the cause-of-death for many small businesses in the city and across the country.
For as long as the idea of online shopping has existed, eCommerce has been a persistent and steady threat to traditional retailers.
The continued growth of eCommerce’s footprint in the retail world is supported by an increasing tendency of consumers to favor the convenience of online shopping. It’s creating what is known as the retail apocalypse, in which hundreds of major retail companies have closed locations or filed for bankruptcy.
New York has already seen some of its shopping landmarks stumble in the retail apocalypse. Barneys New York filed for bankruptcy last year. In 2017, Ralph Lauren closed its five-story flagship on 5th Ave. Macy’s, Forever 21, JCPenny, and many other major retailers have also had notable closures.
The Retail Future Of New York City
Retail is at the heart of New York City’s identity. People travel thousands of miles with the sole intent to shop in the Big Apple. And, with so many people living and working in the city, retail is a natural fit for New York.
With the retail world facing shifts the size of a magnitude eight earthquake, it’s expected that NYC also experiences some changes. Thus, the future of retail in the city is going to look dramatically different from the long-standing image supported by stores like Saks, Macy’s, Barneys, and others.
While we will witness many retail closures during this pandemic, it’s essential to realize that many of these commercial businesses were already struggling to adapt to a changing environment and new realities.
The long list of business closures will potentially have a stabilizing impact on rents due to a large number of commercial real estate vacancies in New York City. Property owners will be desperate to fill those spaces and more willing to offer informal lease agreements.
It’s challenging to see a staple of New York City, like Ralph Lauren or Barneys, falter, but it does mean that new and exciting businesses will soon take their place. These businesses will be able to blend eCommerce and retail into one dynamic experience that today’s consumers expect to see.
Why am I so confident that retail will always be central to the NYC experience? Easy — look at some of the city’s newest neighbors. Amazon, an internet company first, has a physical presence in New York City, as does Microsoft and many other champions of the digital world.