Luxury stores can't afford Madison Avenue

“For Rent” signs, like this one at 753 Madison Ave., are becoming a familiar sight along the avenue’s “Gold Coast.”

After more than 30 years on Madison Avenue, the retailer E. Braun & Company is packing up its $3,500 hand-embroidered tablecloths and $2,390 bedding sets and will defect in April for cheaper space on Park Avenue.

And it is not alone. New York’s most elegant shopping corridor, the Gold Coast of Madison Avenue, from 57th Street to 72nd Street, is pockmarked with vacancies as retailers flee sky-high rents. More than two dozen retail spaces are on the market and are either empty now or about to be. Windows that once showcased hand-tooled leather suitcases are now plastered with for-rent signs.

“This is as bad as I’ve ever seen it,” said Alan Victor, a broker who has worked the street for more than four decades and who is an executive vice president of the Lansco Corporation.

Another broker, Gene P. Spiegelman, an executive director at Cushman & Wakefield, said that 13 percent of the retail spaces on Madison Avenue were available either as a direct lease or a sublet. Not included are those with tenants who would move if the right offer turned up.

“There are tenants that say, ‘If you get me a good sublease, I’ll take it and run,’ ” said E. William Judson, a broker who is also the chairman of the Madison Avenue Business Improvement District, a group made up of property owners and retailers. “Some people are thinking, ‘Maybe I’ll either downsize or I’ll close the store.’ If they have a lousy day, they say, ‘Let’s get out of here.’ If they have a good day, they say, ‘Let’s stay.’ ”

Lately, the people who sell $2,400 leather bags and $1,600 satin-and-rhinestone evening sandals are more likely to have bad days. Of all retail chain categories, luxury stores had the greatest decline in sales in 2008, falling 7.5 percent from 2007, according to the International Council of Shopping Centers, a trade group. From 2004 to 2007, by contrast, the luxury sector outperformed all other categories by a wide margin.

The recent holiday season was the worst in four decades for the retail industry. Sales at Neiman Marcus’s specialty division, which includes Bergdorf Goodman, declined 31.2 percent. Tiffany reported that sales in stores open at least a year were down 24 percent.

“If you’re in New York, and you’ve got the financial services industry in a depression, how can you possibly do well in high-level goods?” asked Howard L. Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm.

Madison Avenue has traditionally catered to the wealthy, but until Polo Ralph Lauren opened at the former Rhinelander Mansion on 72nd Street in 1986, most of the shops were private boutiques like E. Braun. In 1998, the stretch on Madison Avenue known as the Gold Coast surpassed Causeway Bay in Hong Kong as the most expensive shopping strip in the world, Cushman & Wakefield reported, with annual rents averaging $550 a square foot. By then, Giorgio Armani had two 16,000-square-foot stores on Madison and Hermès was about to move there from 57th Street.

For many international retailers, a Madison Avenue address was viewed as essential for promoting their brand, even if sales were not robust enough to justify the rent. Often, part of the rent came out of the marketing budget — a practice that brokers say is fast disappearing.

Rents began escalating rapidly a few years ago, after the stores on the Madison Avenue side of the General Motors Building, at Fifth Avenue on 58th and 59th Streets, were expanded and began commanding annual rent of more than $1,000 a square foot, said Benjamin Fox, the president of Winick Realty Group, a New York retail brokerage.

In 2007, fancy jewelers clustered on the avenue, especially between 61st and 64th Streets. They were able to afford higher rents because their costly merchandise could fit into smaller spaces and more revenue could be squeezed out of every inch. Rents skyrocketed to $1,250 a foot or even more. (Even so, Fifth Avenue between 49th and 59th Streets is now ranked as the world’s costliest shopping strip, with asking rents as high as $2,000 a foot. Its luxury tenants share the avenue, however, with shopping-mall clothing chains like Diesel and Abercrombie & Fitch.)

Retailers typically expect their rent to equal about one-tenth of their sales volume. “In a prime location like Madison Avenue, most retailers will change that to 25 percent,” said Joel Isaacs, the president of Isaacs & Company, a retail brokerage. Even under that formula, a tenant paying $1.25 million for 1,000 square feet would need to have nearly $5 million in annual sales.

Today, however, asking rents on Madison and elsewhere are dropping by as much as one-third, brokers say. And many landlords will offer more concessions than before, like additional months of free rent. “If you’re a good retailer and you’ve got a good product, the landlord wants you,” said Faith Hope Consolo, the chairwoman of the retail group at Prudential Douglas Elliman. “The word ‘no’ no longer exists.”

Taking advantage of the softening market, Lalique, which sells crystal goods, gave up its two-level store near 63rd Street — now occupied by the watchmaker Mauboussin — and is moving into smaller quarters five blocks to the south, with lower rent than it would have paid six months ago, Ms. Consolo said.

The astronomical rise in rents did not cause all the impending vacancies on Madison. Some tenants, like the jeweler Graff, have moved to larger quarters nearby. (Hublot, a Swiss watchmaker, recently came close to leasing Graff’s former store but got cold feet and withdrew, said Robert C. Fink, director of leasing for the landlord, the Winter Organization.)

William Friedland, the Gold Coast’s largest property owner, is emptying out a building that houses the restaurant La Goulue and several stores in order to redevelop it.

Frederic L. Barbatelli, a co-owner of E. Braun, said he was moving to be closer to D. Porthault and other Park Avenue purveyors of luxury home goods. But Ms. Consolo, who is offering a Mini Cooper to the broker who snags a lease for E. Braun’s Madison Avenue space, between 63rd and 64th Streets, said the store had been driven out by high rents.

Mr. Victor of Lansco said that lower rents would be good for Madison Avenue. “The market reached a crazy level,” he said. “A lot of people who wanted to look at Madison Avenue couldn’t make it pencil out. This may be a reality check. It will still be high-end, but it will be a healthier Madison Avenue.”