Price Escalation in Other Asset Classes Pushes Investors Toward NYC Retail
The value proposition for retail investment in New York City is reaching new highs amid an arguably overvalued office market and a multifamily market that continues to grapple with onerous new regulations. Rapid price escalations in both of these sectors have played an integral role in spurring additional investor demand for retail as of late.
Analysis of Avison Young’s third-quarter property sales report for Manhattan revealed a rare opportunity, as the average price per square foot for retail properties has now dipped to $1,449, nearly 40 percent below the trailing four-quarter average. In addition, deal volume was also down nearly 40 percent below the trailing four-quarter average, clocking in at just $175 million.
The glory days of 2014, when the market eclipsed $3.5 billion in sales volume, are well behind us. “For Rent” signs now cover swaths of the hardest-hit corridors of Broadway in SoHo, Third Avenue on the Upper East Side and Canal Street.
What’s The Upshot?
All is not lost, however, in the world of retail investment. In fact, it’s very much the opposite.
The legislative constraints putting pressure on the multifamily investment market do not currently exist in the retail world. And with retail pricing down significantly and supply up — plus an office market that looks increasingly pricey — investors are beginning to set their eyes on retail.
We saw this trend manifest itself a few years ago when many active investors pivoted from their traditional strategies and turned to office properties as the multifamily sector became overheated. We believe retail will fill a similar gap going forward.
Many of the recent trades handled by the Tri-State Investment Sales Group at Avison Young shared common themes that appealed to investors. These quality assets — corner and block-through properties and/or new construction with easy-to-backfill layouts, heavy foot traffic, creditworthy tenants and experiential concepts — have sold at capitalization rates well into the 5-percent-plus range, even on Fifth Avenue.
Transactions such as Avison Young’s $14 million sale of a retail space at 262 Mott St. — a property that featured 120 feet of frontage and which traded at below-market rents and a 5.25 percent cap rate — exemplify some of these themes in action.
Another good example involves the $7.6 million sale for a corner property leased to CityMD at 5024 Fifth Avenue in Sunset Park, Brooklyn. That transaction closed at a 5.16 percent cap rate, again reflecting the healthy and diverse level of investor demand throughout the marketplace.
We’ve also seen an uptick in interest on a number of the properties we’re currently marketing. Interestingly, these properties are quite diverse. For instance, an array of investors have shown interest on a fully occupied property located at 20 Pine Street in the Financial District. Similar interest has been expressed for a vacant retail condominium space at 163 Duane Street at Hudson and Duane streets.
We’re also expecting a strong response for a space at the base of The Kent, Extell Development’s ultra-luxury condominium project at 1683 Third Avenue, and a restaurant space at 351 and 354 Bowery. But while these properties do check many of the “quality” boxes investors are looking for, there is hungry capital looking to invest in retail that may not check every box. The capital is there, and borrowing rates are hovering near historic lows at sub-4 percent.
In addition, an astute investor with a creative business plan and a vision to bring in quality credit tenants can overcome the obstacles, including spaces in midblock locations and those with challenging layouts
and/or low ceilings.
The caveat is that these increasingly discernable investors will only buy if the pricing matches the implied lease-up risk. But as the retail market adjusts to strike this equilibrium, we expect investment in the asset class to pick up, especially as office and multifamily look increasingly prohibitive.
So if you’re a real estate investor noticing increased opportunity in retail, you’re not crazy. The latest data from Avison Young and the interest our team is seeing on the ground backs that up.
High-quality properties are available at significant discounts. Even properties that may not check every box for “quality” will prove to be sound investments with a little creativity and the right tenants.
— By Brent Glodowski, director of Tri-State investment sales, Avison Young. This article first appeared in the November/December issue of Northeast Real Estate Business magazine.