Avison Young’s 2Q19 Property Sales Report for Manhattan shows that retail properties sold for an average price per square foot of $2,006, down 14 percent from the trailing four quarter average and likely to dip further. Cap rates are up to 5.95 percent, a 108 basis point increase, and transaction volume has trended down 57 percent to $153 million.
The glory days of 2014 when we saw the market eclipse $3.5 billion in sales and cap rates at record lows are well behind us. We all walk up and down streets and avenues and see the “For Rent” signs in some of the hardest hit corridors like Broadway in SoHo, Third Avenue on the Upper East Side and Canal Street. It’s a tenant’s market, investors and sellers know it, and the retail investment market has slowed down as its result.
But all is not lost. The legislative constraints and regulations putting pressure on the multi-family investment market do not currently exist in the retail world. We’re just in the midst of a market correction spurred on by a retail “arms race” from 2014-15 that led to artificially low cap rates. The capital to invest in retail still exists and buyers still want to buy, but there is a flight to quality and investors want that shiny new Ferrari with a full tank of gas and a supermodel sitting shotgun for 75 cents on the dollar!
To date, many of the trades we have seen locally share the common theme of “quality”. Corner and block-through properties, new construction, easy-to-backfill layouts, heavy foot traffic, credit-worthy and experiential tenants and cap rates well into the 5 percent plus range (gasp!) even on Fifth Avenue. Our team’s success stories follow those themes: 262 Mott Street with 120 feet of frontage and below market rents sold for $14 million, a 5.25 percent cap, and 5024 Fifth Avenue in Sunset Park, Brooklyn, a corner property leased to CityMD, sold for a 5.16 percent cap at $7.6 million.
Indeed, it’s harder to sell retail space in midblock locations with challenging layouts and low ceilings. Vacancy is “okay” but the pricing needs to match the implied lease-up risk. Investors are more discernable when it comes to their next buy and are willing to pay up (in their minds) but only for the quality characteristics that check most, if not all, of the boxes.
So where does that leave us? Elected officials have altered the multi-family investment sales market as we knew it, and alternative locations like Austin, Nashville and parts of North Carolina, to name a few, are trendy but in some cases already picked-over. I’ll make the argument that many of the local investors will pivot to retail. After all, pricing is down, supply is up and willing sellers are realistic to the market. We saw it a few years ago when many of the active multi-family groups turned to office properties as they saw market inefficiencies and I believe we’ll see it now with retail.
The market will operate efficiently and effectively as long as commercial rent control isn’t passed (unlikely). Capital to acquire buildings is still hungry and borrowing rates are at or near historical lows at sub-4 percent, making investing in retail is a viable option.
So what’s next for retail? The Tri-State Investment Sales group is marketing a number of compelling retail properties. These include 20 Pine Street in the Financial District, a fully-occupied property with four recognizable tenants on staggered leases. It shares a pavilion with Fosun Property’s MarketPlace 28 in the former Chase Manhattan Plaza which will feature 200,000 + square feet of retail space.
Farther north, we are marketing 1683 Third Avenue, which has 212 square feet of frontage on the corner of Third Avenue and 95th Street at the base of Extell’s The Kent, an ultra-luxury condominium development. 163 Duane Street is a vacant condominium that features fantastic light and air and foot traffic on Hudson and Duane streets. Finally, we are marketing 351 and 354 Bowery, a vacant built-out restaurant space and an occupied 7-Eleven, respectively. While unique addresses in their own right they each check many of the “quality” boxes I mentioned earlier and we’re expecting a strong response from the investment community.
New sentiment giving me hope is that we are starting to see new investors enter or re-enter the New York market, who initially shied away because they were priced out or unwilling to chase low yield.
Increasingly, I’m having more conversations like the following, which give me hope:
Investor: “I’m typically priced out of New York, but I’m starting to see some opportunities in retail, is that crazy?”
Brent: [putting my arm around you over the phone!] “Not at all, let’s see what we can put in front of you that would be a fit!”