The Bronx, which was burning with investment opportunities before the credit crunch, is seeing the pace and size of its commercial deals level off, commercial brokers said.
While brokers are bullish on the potential of the borough, which they say is stocked with established residential neighborhoods that are underserved by retail, investors appear to be putting on the brakes.
Of the 25 largest commercial deals in the Bronx in 2007, according to data from Real Capital Analytics, only four deals were closed during the fourth quarter of the year: a $37 million office building, a $20.5 million apartment building, a $15 million mixed-use property, and a $12 million development site.
By contrast, the largest deals of 2007—the $165 million sale of Bruckner Plaza, a retail strip, to Vornado and the $133 million sale of Eastchester Heights, an apartment building, to RA Cohen & Associates – were both completed during the first quarter, well before the credit crunch started roiling the market in late summer.
Still, some of the factors that brokers think make the borough attractive to investors remain.
“One of the best investment markets in the country right now,” is how Dan Fasulo, managing director of Real Capital Analytics, characterized the formerly down-and-out borough.
“There is tremendous opportunity and a lack of institutional-type knowledge for the market,” he added.
While many investors may be familiar with the Bronx’s fancy residential neighborhoods—such as Fieldston and Riverdale in the northwest, and City Island to the east—commercial development is also on the rise throughout the borough.
Fasulo said that retail real estate is a particularly strong investment vehicle in the borough as it is “tremendously underserved—it is [like] a city of 1 million people; they need places to shop.”
At least until the recent credit crunch, cap rates—the expected annual income generated by a property expressed as a percentage of the purchase price—were moving downward as underlying property prices moved upward.
According to a report published by Real Capital Analytics, in the 12-month period leading up to Sept. 30, 2007, 18 retail buildings had been purchased in the borough at an average price of $334 per square foot and a minimum cap rate of 5.4 percent.
In the prior-year period, five buildings were purchased at an average of $253 per square foot, with cap rates at a minimum of 6 percent.
One of the areas that Fasulo is bullish on now is the northeast Bronx, which he said benefits from being anchored by strong residential neighborhoods and a large medical community. Office, retail and residential space are all seeing increased investment in this area.
Another swath Fasulo likes is the southern Bronx, near the new Yankee Stadium, which is scheduled for completion in 2009. He said that the Yankees’ new ballpark has attracted related construction, including the Gateway Center Mall, office buildings, government and cultural buildings, and a civic center. “All of these projects will create an influx of capital,” he said. “Any neighborhood that has billions of dollars of development under way, I am bullish on.”
Brad Barr, managing partner of real estate management company Bradford N. Swett Management LLC, notes that he has seen cap rates decline from a range of 10 to 11 percent to the current 5 to 6 percent as residential development drives demand for more upscale retail. “Mostly what we are seeing are restaurants and cafes in the South Bronx,” he said.
J.D Parker, regional manager at Marcus & Millichap Real Estate Investment Services, noted that many New York City investors consider the South Bronx the next hot spot. Parker said that four to five years ago residential properties sold for five to six times their rent roll, and they now sell at about seven to eight times.
One target of new residential improvement and investment in the South Bronx has been the Mott Haven area located along Bruckner Boulevard, Barr said. Investors are increasingly buying industrial buildings in the area and converting them for residential use after a recent mixed-use rezoning, he said.
Pure industrial plays are also going strong in the area.
“The [industrial] market in the South Bronx has improved. There are many more investors and users looking to the Bronx than 10 years ago,” Barr said. As an example, Manhattan-based car service companies and luxury auto repair businesses are looking north for real estate as space diminishes for these facilities in Manhattan, he said.
Companies are also turning to the area for industrial uses such as clothes-cleaning facilities, food storage and publishing fulfillment centers, he said, though he declined to specify cap rates for these sectors.
Cap rate compression
Along the Grand Concourse, a north-south thoroughfare lined with large apartment buildings (which generations ago had Park Avenue-like status in the borough), cap rates have compressed from about 9 percent just a couple of years ago to roughly 7 percent, said Peter Hauspurg, chairman of real estate investment brokerage Eastern Consolidated.
Hauspurg noted that residential cap rates in the northern half of the borough are lower than those in the southern half because it is simply “more desirable.”
Falling cap rates may be contagious as Bronx’s Westchester neighbor to the north, Yonkers, is attracting increased investment in multifamily rentals and sales, Hauspurg said.
Hauspurg said that average residential cap rates in the past two to three years have slipped about two percentage points to roughly 8 percent. “Now, more people of higher incomes are moving into the area—they are being driven out of Manhattan and priced out of other areas of Westchester.”
Some investors are “sick” of managing apartments, noted Marcus & Millichap’s Parker, and they are being attracted instead to “pure-play retail.” Areas of the Bronx seeing insatiable retail demand “because there is not a lot of product out there” include Gun Hill Road and White Plains Road, he said.
Go to chart: Largest Bronx deals of 2007