NY Real Estate Blows Its Top

This post first appeared on Minyanville.

Don’t tell Teva-toting Midwesternerns and flash-popping Japanese tourists there’s a recession on: They’ll call you crazy.

Despite souring economic conditions and evidence that consumers are cutting back, the peddlers of the non-essential that line Manhattan’s Fifth Avenue are battling to snap up pricey storefronts.

The New York Times reports rents on the prestigious retail strip are at an all-time high, and 2008 has already seen more new leases inked than in 2006 and 2007 combined. Landlords are literally paying existing clients to break their leases in favor of new, higher paying tenants.

Rents are up to $2,500 per square foot from $1,500 just a year ago, a jump many attribute to higher foot traffic generated by the weak dollar, which makes American goods attractive to foreign tourists.

Highbrow shops are giving way to mainstream chains looking to show off their more glamorous side. In just the last year, Tommy Hilfiger and Abercrombie and Fitch (ANF) signed leases on new office space, while Hugo Boss slinked away after its landlord ponied up big bucks for the retailer to vacate its prominent 56th street location.

Traditionally, opportunities to move into one of the most famous shopping areas in the world have been scant, so when space does become available, the gloves come off. Real estate agents auction off space to the highest bidder, a process one broker at CB Richard Ellis (CBG) described as “frenzied.”

One mass-market brand is bucking the trend, however, and trading down. Walt Disney (DIS) said it won’t renew its lease for the World of Disney when it expires in 2010. Mickey’s crew will be relocating to an undisclosed Manhattan location, likely close to Madison Park, to scoop up spillover traffic from yuppies descending on the Shake Shack.

And while American Express (AXP) may complain its wealthier clients are starting to crack under mounting economic pressures, the resiliency of high-end shopping is evidence of just how difficult it will be to loosen consumerism's grip on the US.

But there may be a more insidious cause for the rent explosion: Hysterical demand -- particularly when it defies all logic -- is often evidence of a blow-off top. A blow-off top is defined as a steep, fast spike in prices, followed by an equally sharp and rapid fall.

Rents that nearly double in the span of 12 months in the teeth of a recession certainly fit the bill. Especially when the battle is for the right to sell the world’s most overpriced pair of jeans.

Retailers, afraid they’d missed the boat on the weak dollar trade, have rushed into the game just in time to see their fortunes reverse. If the greenback catches a bid, an idea investors are increasingly warming to, merchants may see their well-hatched plans backfire.

Opportunistic international bargain hunters are already flocking to Dubai’s glitzy commercial centers and other trendy overseas bazaars, and a snappy dollar is only likely to accelerate this migration. Coupled with the shift in social mood away from the superfluous, the rush to relocate to 5th Avenue may be a contrarian indicator of consumerism's final gasp.

But it’s unlikely the wide promenade that stretches from Rockefeller Plaza to Central Park will become a ghost town any time soon. I mean, who can resist the allure of being lifted across 54th street on a sea of human traffic, wedged against dudes in painfully undersized I Love New York t-shirts and abrasive soccer moms dragging 8-year-olds to the American Girl Place?