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Ralph Lauren is battling its landlord over a store on the world’s most expensive shopping corridor, Manhattan’s Fifth Avenue.
It’s a showdown that could hold huge consequences for the once-stratospheric prices on the iconic stretch just south of Central Park.
The brand has entered into an arbitration against its landlords at 711 Fifth Avenue, owners who purchased the 350,000-square-foot office building with retail space at its base for a reported $937 million in October 2019.
At issue is Ralph Lauren’s efforts to sublease its 28,300-square-foot store at the building; it shuttered a retail outpost for its Polo clothing and apparel line there back in 2017. The fashion label pays an exorbitant rent of roughly $27 million annually for the now-unoccupied space, according to two sources familiar with the lease.
To try to lessen its losses, Ralph Lauren recently reached an agreement to sublet the store to the Spanish fast-fashion chain, Mango, for just a fraction of its rent: a deal totaling around $5 million annually, according to sources with direct knowledge of the terms of the sublease.
That sublease, however, was rejected in recent weeks by the partnership of investors that owns 711 Fifth, the New York-based real estate investment firm Shvo Group, Bilgili Group, Deutsche Finance, and the German pension fund Bayerische Versorgungskammer — on the grounds that Mango doesn’t meet the caliber of luxury tenant they envision for the property.
To settle the dispute, Ralph Lauren and the landlord will go to arbitration, three sources with direct knowledge of the situation told Insider.
Some observers say that underlying the landlord’s objection is a concern over the dramatically discounted economics of the sublease agreement. The bargain deal could set a new benchmark for what are already heavily diminished rents on the corridor, undermining the exorbitant prices that investors paid to acquire property there in pre-pandemic years.
If a brand pays a low price for the space, owners believe it sets a risky precedent for subsequent tenants that could threaten their bottom lines even after the pandemic has waned.
“Landlords are loath to contribute to massively discounted market lease comparables,” said Michael Glanzberg, a principal at the retail leasing and consulting firm Sinvin Real Estate. “With broad vaccination around the corner, no owner wants to benchmark COVID rents.”
Ralph Lauren didn’t respond to a request for comment. A spokesman for 711 Fifth Avenue’s ownership group declined to comment.
Fifth Avenue’s average asking rents fell from $1,976 per square foot at the start of the year before the COVID-19 pandemic to $1,693 per square foot at the end of the third quarter in 2020, according to data from Newmark Knight Frank, a roughly 14% decline.
Asking rents at some locations on Fifth Avenue have sunk more dramatically. The office tower at 767 Fifth Avenue, for instance, is now asking $1,245 per square foot for its available retail space, according to data from Cushman & Wakefield. Rents on Fifth Avenue had once routinely reached as high as $3,000 per square foot or more during their peak about five years ago — the highest retail rental rates in the world at the time.
Since hitting that pinnacle, however, rents have steadily fallen on the corridor, whose retail district spans from 42nd Street to 57th Street in Midtown, as competition from online shopping has sapped in-store sales and a glut of retail space, both in the city and nationally, flooded supply. The pandemic has dramatically worsened the situation, virtually halting tourism, which accounted for a large portion of Fifth Avenue’s retail sales, and foot traffic as most office workers have shifted to remote work.
Some landlords, though, have pointed to encouraging signs in recent months that luxury retailers are coming back to Fifth Avenue.
The landlord Paramount Group, for instance, announced in October it had signed a deal with jeweler Harry Winston to renew its 19,000-square-foot store at 718 Fifth Avenue and expand into another 18,000 square feet at the neighboring property, 712 Fifth Avenue.
Paramount, however, said that the 37,000-square-foot deal was struck at an initial rental rate of just $437.43 per square foot for the multi-level space. Generally, quoted rental rates on Fifth Avenue are given for just the ground floor, which carry far higher rates than second, third, or basement levels. That means the blended rent in the Harry Winston deal could reflect a lower figure than the cost of the space on the ground level alone.
Chopard, the Swiss luxury jeweler and watchmaker, also signed on for roughly 2,400 square feet at the Crown Building, a gilded tower on 57th Street and Fifth Avenue, last summer. One source with direct knowledge of the transaction said that it amounted to roughly $3,000 per square foot for the space’s ground floor. But another person, who had seen other terms for the lease, told Insider that the rent for the ground-floor space was likely closer to $2,000 per square foot — potentially even lower when factoring in periods of free rent that the landlord had granted the tenant as an incentive to sign the lease.
A spokesman for Brookfield Property Partners, which owns a majority stake in the building, didn’t immediately respond to a request for comment.
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Originally published at https://www.businessinsider.com/ralph-lauren-fifth-avenue-mango-sublease-arbitration-2021-1 on .