New York City will soon be celebrating the completion of the nation’s costliest real estate project ever – the $25-billion Hudson Yards on the west side of Manhattan.

The project’s towering architecture and 18-million SF of mixed-use space dominates the Chelsea and Hell’s Kitchen districts. The development will have 4,000 residential units, a hotel and 100 shops and restaurants that total more than 1 million SF. All the retail space was pre-leased.

But the project’s early success stands in contrast to the city’s unprecedented slump in demand for space that is now entering its fourth year.

The decline has landlords slashing lease rates throughout most of Manhattan, with rents in some submarkets cut by half. Brick-and-mortar merchants – locked in struggle with e-commerce for the consumer’s dollar – have been slow to respond, but some retail neighborhoods are showing signs of improvement.

“Certainly, there’s been a bigger correction than at any other period that I can remember. It’s chiefly because landlords were raising rents to levels that were just not really sustainable in the first place,” says Peter Braus, a veteran retail broker and partner in Lee & Associates’ offices on Madison Avenue.

“Online shopping has obviously changed shopping habits quite a bit. Some call it ‘the Amazon effect.’ A lot of this vacancy has resulted from the combination of high rents and changing demand. And in the last two years this really has started to take a big bite out of the retail pie,” Braus said.

Braus said the overall vacancy rate in Manhattan is averaging roughly 10% but the availability rate in many neighborhoods is two or three times greater. This is despite an otherwise healthy economy.

There are about 53 million SF of retail space in Manhattan, Braus said. In the 12 months between fall of 2017 and fall of 2018, asking rents in 15 of the borough’s 17 retail submarkets were cut an average of 25%. Asking rents fell more than 20% in 10 of the 15 retail neighborhoods and three submarkets posted declines of more than 30%, according to surveys by the Real Estate Board of New York of which Lee & Associates is a member.

Ground-floor retail space on Broadway in Soho, for example, has been among the hardest hit submarkets. Between 2010 and 2015, asking rents skyrocketed 68%, peaking at $950 per SF. Since 2015, landlords have slashed lease rates all the way back to 2010 levels, according to the REBNY’s semi-annual reports.

As expected, lease terms are more flexible with landlords accepting more short-term deals and increasing improvement allowances. For their part, merchants are testing different concepts before agreeing to long-term deals.

“Simple economics would dictate that when prices go down demand will increase.  I think we’re seeing some of that on an anecdotal basis as landlords re-lease their spaces,” Braus said.

“I would say that the vacancy rate probably will be lower a year from now. Then again, there are a lot of things going on that are very concerning: political events, the trade war with China and the recent government shutdown. All these things are sort of self-inflicted wounds on our economy that affects consumer confidence. And when consumer confidence goes down, people spend less at retail. When people spend less at retail, stores close.”