J.D. Parker, Marcus & Millichap
New York City’s retail outlook is sunny, as steady labor market expansion — bolstered by substantial Fortune 500 hiring — has spurred retailer demand for existing and new spaces in all five boroughs. Strong retail property performance in the City That Never Sleeps has supported continued rent and price growth, which will result in higher sales velocity over the short- and mid-terms.
Employment Gains, Tourism Underlie Performance
During the first six months of 2016, New York City employers created 33,600 new jobs. This pronounced job growth, which has been characteristic of the current cycle, reduced the unemployment rate to 5 percent by the end of the first quarter. This is the lowest rate unemployment rate the city has seen since November 2007. By the end of the year, area employers will add 90,000 workers, with the education and health services and professional and business services sectors projected to post the greatest increases. The leisure and hospitality sector will also contribute significantly to employment gains this year, as greater tourism spending prompts organizations in the sector to ramp up hiring.
Another important indicator of NYC’s economic health is strong retail sales, which represent one of the best paces of retail spending growth nationwide. Over the past year, retail sales in the metro have risen 2.7 percent to more than $7 billion. Positive retail property performance has prompted developers to answer retailers’ pleas for more space and a considerable amount of new retail construction is underway.
Construction Pipeline Grows
Encouraged by NYC’s retail property gold rush, builders completed 370,000 square feet of retail space during the first half of 2016 and will complete 2.8 million square feet of retail space by year’s end. Construction will be focused in Brooklyn and Manhattan, where more than 2 million square feet of retail space is scheduled to come online. For the first time since the financial crisis, Brooklyn will receive more than 1 million square feet of space. This is a reversal from the previous four-quarter period ending in March, when the Bronx and Queens topped the list for boroughs with the most construction activity. This rapid rise in deliveries will prevent further vacancy rate compression.
In 2015, two out of the metro’s five boroughs registered vacancy rate decreases, with vacancy in Manhattan, the Bronx, and Staten Island edging higher. With deliveries doubling this year, vacancy will edge up 10 basis points to 4 percent, as new properties lease up. Despite this slight lift in vacancy levels over the mid-term, asking rents will continue to rise.
Retail Rents, Prices and
Sales Velocity Trending Up
Over the past 12 months ending in June 2016, the average asking rent metrowide advanced to $57.25 per square foot. Rent growth was most pronounced in Brooklyn and Staten Island, while Manhattan was the only borough to see asking rents fall. Though occupancy is expected to dip slightly, average asking rent growth will continue to surge. By year’s end, the average asking rent in NYC is projected to rise to $56.50 per square foot.
The attractiveness of the metro’s retail assets will also support higher asking prices and greater sales velocity.
Last year, transaction velocity fell 4 percent as a limited listings environment constrained investors’ ability to deploy capital. Closed deals proliferated in the Bronx and Queens, while transaction levels went largely unchanged in Manhattan and Brooklyn. Both institutional and individual investors have been actively seeking retail and mixed-use assets.
Though first-year yields vary borough to borough, average metro cap rates were in the mid-5 percent range, although implied first-year yields vary widely by borough. In Manhattan, cap rates could be found in the high-3 percent to low-4 percent range, depending on quality and lease term. In Brooklyn and Queens, the majority of deals closed in the mid-5 percent range, with waterfront assets priced well below the average in these boroughs.
Activity in Brooklyn and the Bronx posted the largest uptick in transaction volume as yield-oriented buyers focused their attention in the suburbs in search of greater cap rates. Yields in these two boroughs will exceed Manhattan by more than 150 basis points and 300 basis points, respectively.
Looking forward, continued low interest rates will encourage more investors to seek retail properties with greater yields than most other asset classes. Value-add seekers will search the outer boroughs for more robust first-year returns.
To conclude, robust job growth and tourism have led the retail property boom in the Big Apple, which has caused the development pipeline to expand. Occupancy will contract slightly in the mid-term as a result but this will not diminish rent growth nor be detrimental to retail property values, both of which will continue to increase.
— J.D. Parker, Senior Vice President/Division Manager, Marcus & Millichap. This article originally appeared in the August/September 2016 issue of Northeast Real Estate Business.