Landlords at the “Crossroads of the World” are facing a crossroads of their own.
Times Square’s flashy retail scene is known for its hordes of tourists drawn to Broadway shows, mass-market shopping options and kitsch. But asking rents have plunged 18% as more shopping moves online. That has prompted landlords to seek out more “experiential retail,” such as food and entertainment venues, and more interactive elements in stores, real-estate brokers and executives said.
“Times Square remains a submarket in high demand by a broad range of conventional retailers, but we’re really seeing change from the experiential-retail guys,” said Alan Schmerzler, vice chairman at real-estate services firm Cushman & Wakefield. “It’s the surge in interest from that category that is going to drive change in Times Square in the next few years.”
At 20 Times Square, a hotel and retail development at Seventh Avenue and West 47th Street by Witkoff, customers will be greeted by a 40,000-square-foot interactive football exhibit and theater from a venture comprising the National Football League, the NFL Players Association and Cirque du Soleil. The venue is expected to open in 2017.
Kushner, meanwhile, has signed leases at its retail condominium at a former New York Times building on West 43rd Street to bring an 11,970-square-foot food hall curated by chef Todd English, a 60,000-square-foot interactive exhibit from National Geographic called ENCOUNTER: Ocean Odyssey and a 49,000-square-foot miniature world called Gulliver’s Gate.
“What matters is entertainment and food,” said Laurent Morali, president of Kushner, which bought in 2015 the retail condo covering 5 1/2 floors of the building. “That was our focus from the second we toured the property to the second we finished leasing it up.”
In the third quarter, asking rents in the Times Square submarket fell 18% to $2,104 a square foot compared with the previous year, the steepest drop in Manhattan, according to Cushman & Wakefield.
Times Square’s average asking rents have been steadily falling from last year’s highs of $2,500 a square foot. In the third quarter, the submarket’s availability rate rose 11 percentage points to 22% from the previous year.
“A lot of tenants are taking a breather because rents have gotten pretty high on the city’s major thoroughfares,” Mr. Schmerzler said.
The drop is part of a broader price adjustment occurring in all of Manhattan’s pricey retail corridors, including upper Fifth Avenue and Madison Avenue, where asking rents in the third quarter fell 11% and 11.5% respectively, according to Cushman & Wakefield. National chains that can afford top rents have been cautious, re-evaluating store locations and sizes as they factor in growth in online shopping.
Operators of experiential businesses tend to generate more sales than conventional retailers do, said Sherri White, executive vice president and partner at Witkoff, which hasn't made price adjustments in asking rents for its project.
Landlords are seeking a specific mix of tenants to cultivate their properties as destinations not just for tourists. Growing numbers of office workers and residents populating areas near Times Square in New York City are seeking out food, cosmetics and affordable fashion.
“You have a booming residential market west of Eighth Avenue and millions of square feet in Times Square that wasn’t here 10, 9 years ago, but only a handful of retailers geared toward the local-residential and local-worker market,” said Tim Tompkins, president of the Times Square Alliance. Now he is seeing more retailers aimed at “hitting that audience of tourists” but also getting the residents and workers.
One such project is Tishman Realty’s $65 million plans to revamp E*Walk, a 240,000-square-foot retail complex built 20 years ago as part of the revitalization of 42nd Street between Seventh and Eighth Avenues. Set to begin in 2018, the upgrades will include new storefronts and signage and a reconfiguration of the spaces.
Tishman will have the ability to create a destination with physical features such as double-height ceilings now desirable among retailers. It isn’t clear which existing tenants will stay when their leases expire in the next few years.
“We have the ability to merchandise the whole street,” said Patrick A. Smith, a vice chairman at real-estate services firm JLL who is on the E*Walk leasing team.
Write to Keiko Morris at Keiko.Morris@wsj.com