Rent increases, the proliferation of ground floor galleries and the High Line don’t tell the whole story behind the exodus of galleries from West Chelsea. The two graphs below show the 5-year trend in price/sf pre-Lehman in 2007 through July 2012, and the numbers of galleries on upper and ground floors over the same period. As the graph on the left shows, average prices are only marginally higher today than in 2007 at the market peak, having corrected from a 19% drop during the nadir of the recession. The graph on the right shows an increase of just 16 ground-floor spaces, or a 16% increase over the past 5 years, hardly enough to decrease upper-floor traffic significantly.

Average Asking Rents | Gallery Count and Distribution 2007-2012

What stands out is the 30% drop in the number of galleries overall, most of which were small to mid-size galleries on upper floors. Some moved to the LES or Brooklyn, some moved into the newly available ground-floor spaces here, most closed. The problem seems not so much the increase of ground-floor galleries, nor a huge increase in prices but more the dramatic decrease in upper-floor gallery tenants between 2007 and 2012, due for the most part by the recession.

This infers that the real force behind this exodus has been the loss of “critical mass” necessary for upper-floor galleries to draw traffic and thrive. At 511 West 25th, which, in 2007 was a great gallery building with 27 closely-clustered galleries, today houses only 12, most of which are spread out over several floors rendering the building essentially unusable for galleries. A similar loss happened at 210 11th Avenue.

There is also the intangible benefit of  being on the ground floor versus upstairs. Despite the fact that the percentage of revenue attributable to walk-in traffic is negligible to less than 10% for most galleries, everyone wants to be on the ground floor. This is more a branding and perception issue than a practical consideration, but it is important enough to explain in part the exodus to the LES, where there is nothing but ground-floor space. Practically speaking though, asking rents down there can be as high as or higher than West Chelsea, even if bargains can be had in outlying areas. To move to the LES generally means to downsize.

Then there’s the High Line, on which the jury’s still out. Developers see it akin to West Broadway or Madison Avenue, galleries and WCH regulars see it as so much pie-in-the-sky, 25 feet up. Its impact on prices needs to be sorted out soon, otherwise it’s just costly speculation. I suggest that the Friends of The High Line commit resources to a formal survey that would sample the 2 million new visitors to the HL before they expand any farther north. This would help answer how many actually leave the park to explore the area, how many visit galleries, what their buying patterns are, and how they use the district. A posteriori evidence would indicate not very much. A dealer friend told me “all the High Line has done is make West Chelsea pretty.” If that’s true, I’m not sure what the real estate value of “pretty” is, or how it should influence prices. It would be valuable data to obtain.

Price increases have played a more subtle role, as shown below. While most of the 10 multi-tenanted buildings have simply recovered the value lost in 2008-2009, 5 buildings have increased prices an average of 32.7% beyond 2007 levels

Rent increases by building 2007-2012 showing threshhold of 10% to 20% of revenue for small to mid-size galleries.

Four of these buildings are on the two streets with the most available square footage for small to mid-size galleries, west 25th and 26th Streets (434,615 SF).

In addition, the 3 buildings with the greatest increase represent 22% (211,123 SF) of the total available (948,284 SF), placing more than a fifth of available inventory essentially out of reach of these smaller galleries. When 210 11th Avenue’s 98,000 SF is added, almost a third (32.2%) of the total is lost to them.

And there goes the neighborhood.

It’s true that the buy-or-fly offer to purchase condominiums converted from the leasable spaces at 511 W 25 drove away a number of galleries. But when previous ownership abandoned that plan and returned to rentals, the galleries didn’t return, abandoning the building to other uses. The concept of “highest and best use” in real estate valuation requires that the spaces be filled with other “maximally profitable” uses. Unfortunately for galleries, the fashion, marketing and web-design businesses – and Tesla that took two previous gallery spaces – were an easy substitute, being businesses that can afford the higher rents and are attracted, ironically, to an area made cool by galleries.

Increase revenue, downsize, relocate or close; these are the choices that have been faced by every gallery for 210 years when rents go up. The problem in the 21st Century is that downsizing or relocating to more affordable, under-developed areas has become an untenable non-option, and Chelsea is worth hanging on to in any case. Follow the lead of the owners: increase revenue.

Still, there may be other solutions… Contact ftsq if you want to know more: earl@feetsquare.com