August 17, 2021

Cash has been crowned king of retail’s next phase, says TerraCRG’s Peter Schubert

New York Business Journal

Peter Schubert is managing director of the Brooklyn-based brokerage’s retail leasing division. His past clients have ranged from grocery stores to spas to restaurants throughout Brooklyn.

Schubert, prior to joining TerraCRG, managed the Moinian Group’s commercial portfolio spanning 13 million square feet of office and retail properties primarily located on Fifth and Madison Avenue. During this time, he represented Moinian in issuing a lease to the NBA for its 28,000-square-foot retail flagship at 545 Fifth Ave. in Manhattan.

While Brooklyn has remained strong, Schubert told me, much has changed in Brooklyn’s retail landscape.

“The biggest changes would be the demand for outdoor space and the need for more cash upfront in the form of a security deposit for landlords,” Schubert said.

Schubert and I spoke about some of the changes occurring in the Brooklyn retail landscape. This interview has been condensed and edited

Who are your clients? Landlords, tenants, or both?

I’m focused on the leasing side with my clients being evenly split between landlords and tenants. I represent them in transactions, help them acquire tenants or locations, and a wide array of other services that TerraCRG provides to our clients.

What are your clients searching for new space looking for?

Hands down, it’s the demand for outdoor space and fresh air. Everybody wants fresh air and when you’re looking for restaurant space, they’re asking about the enclosure of the space. It’s things like does it have a rear yard? Does it have sidewalk seating? Some clients are asking: What’s in front of my space? Does it have things that will stop me from having outdoor seating like a fire hydrant or a bus stop? It’s a much more three dimensional kind of a situation compared to before when it was just the physical space. Now, people want to know what’s around them and consume the outdoors.

Have you noticed any changes to how they view the interior of spaces? Are they spending money on renovations?

Let’s start by saying that last fall was nearly paralyzing for New York. However, around November and December, I was starting see a little spark of hope for New York, but by January and February, I was saying, “We’re feeling the bottom of the market” and then we started seeing restaurants coming and looking for the same thing.

They wanted restaurants built on corners  that had been left vacant by a business that didn’t survive. Let’s be honest here, around 25% of restaurants fail within the first year, and they wanted to come in and be ready to go with venting, walk-in refrigerators and lower level prep areas.

And they wanted corners because corners bring a large amount of frontage giving you two options: eating on the sidewalks or with street seating or just garnering a lot of visibility.

We saw a flurry of activity around the spaces with some being taken up in a matter of weeks, if not days, in some instances.

People want to hit the ground running and not have to spend a lot of money doing it either. You’re seeing this in other retail areas. The market is experiencing a full-on recovery and booming, but the spaces that are really in demand are the ones who can support that by having all the necessary fixtures, no Department of Building delays, and can be opened quickly.

What are you hearing from your landlord clients?

Landlords, whether they want to acknowledge it or not, are struggling or suffering, especially those trying to collect rent from their tenants. Many of them are just in a really tough place with some tenants being egregiously behind on rents and their hands being tied because of the ban on evictions.

What advice are you giving them as they seek to obtain new clients?

The first thing that I’m saying is, “Look, the government is telling you that you can no longer evict a tenant anymore so you just cannot count on it.”

The second thing I’m saying is that they’re going to have to look a tenant in the face and say, “Does your business make sense in this location?” You’re going to need to give a more serious smell check than ever because the consequences are more steep than ever before.

They could be saying all the right things and offer good rent, but also be closed in six months. It happens more than you think.

Then, after that, I tell them that they need to start expecting a larger security deposit.

How much more security deposit are we talking about here?

You have to realize that you have to have a strong security deposit, because cash has been crowned the new retail king here.

Before now, I’d say if it makes sense to you and you think it’ll work, two months would’ve worked just fine. Now, I’d say you need at least three months to play it safe and I’ve definitely recommended that they ask for five or six months in some instances and have the landlord give a month or two back after the end of a year or two.

Do you tell your tenant clients the same thing?

Absolutely. I’ve had some that have PPP money who I’ve said, “Give six months security” and wow, the landlord feels so much better now. Two months to six months is a bit more on the dramatic end, but you’d be surprised by the difference that an additional month makes.

I’ve seen landlords come back to the table after almost walking away because someone offered three months security instead of two.

It’s just tougher times for them and there hasn’t been much relief for them, especially since they aren’t really eligible for PPP.

What is the current optimism level among landlords and tenants? Has anyone given up or do people believe that better days are ahead?

A few, but not many. It’s another testament to the market here and this extends beyond Brooklyn and even into Manhattan. The ownership is a bit older and pretty smart. The market was weak for a very short time, just like after 9/11 or the housing crisis of 2009. We had a very short period of economic downturn but we’re bouncing back strong and in full swing.

Nonetheless, we’re seeing the stimulus from the federal government is helping and there’s an incredible amount of optimism that we’re seeing around vaccinations and reopening. It’s a very optimistic time here in New York.