ICSC On The Mind: How is Retail in Manhattan performing?
With a large contingent of the New York City commercial real estate market’s participants heading to Las Vegas for the International Council of Shopping Centers Convention, it’s a perfect time to take a look at how the retail property sales market is performing in Manhattan.
Clearly, things have been progressing very positively for retail properties since the sector’s low point in 2009. In that year, only 23 retail properties sold in the Manhattan submarket (defined as south of 96th Street on the east side, and south of 110th Street on the west side). Total dollar volume of sales associated with those 23 transactions was about $268 million.
Last year, 112 retail properties sold, more than four times 2009’s total. The dollar volume in 2012 approached $3 billion, more than 10 times the dollar volume in 2009. The recovery in this sector has been remarkable and it is continuing to perform extraordinarily well in 2013.
Interestingly, during the peak of the last cycle in 2006 to 2007, it seemed that every retail property was selling at about a five percent capitalization rate. The quality—and creditworthiness—of the tenant didn’t seem to matter; everything was a 5 cap. As we proceeded into the recession, we witness a deterioration of consumer confidence and consumer spending. Consequently, the retail sector took its lumps. Cap rates in Manhattan averaged more than 7 percent in 2009. This was the highest cap rate in the retail sector in more than a decade.
Slowly, cap rates have been compressing with 6.84 percent, 6.03 percent and 5.46 percent respectively in 2010, 2011 and 2012. Thus far in 2013, the average cap rate on retail properties sold in the Manhattan submarket is below 4.5 percent, a sign of continuing strength—noteworthy given that consumers are nowhere near as optimistic as they were in 2007.
We’re also seeing tangible downward pressure on cap rates not just in Manhattan, but citywide, and, therefore, upward pressure on pricing across all neighborhoods and all classes of retail properties.
Not surprisingly, the properties along the strongest stretches are doing extraordinarily well—Fifth Avenue, Madison Avenue, West Broadway, Broadway, Canal Street, Times Square, 14th Street and the Meatpacking District all come to mind. Surprisingly, these dramatic rental increases have occurred in the face of dropping median incomes. When median income starts to increase, as it inevitably will, this should exert further upward pressure on retail rents, and hence on retail property values. Rents in these premier locations have gone up by incredible amounts, and this, coupled with cap rate compression, is leading to escalating values per square foot. In 2010, at the market’s low point in terms of value per square foot (notwithstanding cap rates being higher in 2009), retail properties in Manhattan were selling at about $1,137 per square foot. In 2012, the average was $1,666 per square foot, a 47 percent increase. Thus far in 2013, the average has been $1,752 per square foot—a 54 percent increase from the cyclical low.
With regard to average prices, I still remember clearly in 2009 when a retail property on Union Square East sold for more than $2,000 per square foot. This number shocked a lot of people, but since then there have been many retail properties selling for several thousand dollars per square foot. Since 2009 there have been 46 retail properties sold at a price per square foot of $2,000 or higher. Some of these transactions have gone higher than $10,000 per square foot.
Given that rents along the strongest stretches of Manhattan can exceed $2,000, and approach $3,000, per square foot, it would not be surprising to see retail properties, whether they are freestanding retail buildings or retail condominiums, sell for $25,000 or $30,000 per square foot or more.
New York City is significantly under-retailed, and given population increases, it is not surprising that retailers are increasingly bullish on New York City. Add to this the 50 million or so visitors that come to New York each year, and it makes for a retailing environment that is outstanding.
We expect rents to continue to rise as consumer confidence continues to increase, however slowly. As it does, consumer spending will follow.
For these reasons, I’m very bullish on the future of retail properties in New York City.