Retail Property Sales: the Ups, Downs and Records
Robert Knakal April 1, 2014, 6 a.m.
It’s April, spring is (almost) in the air, and with it comes thoughts of the ICSC convention in Las Vegas in May. So I have been thinking a lot about retail real estate these last few days and thought I would take a look at how the sector has been doing recently.
When we look at the performance of the retail sector of the building sales market, we generally look at how the retail rental market is doing to gain some insight into what can be expected on the sales side. To a large degree, the health of this sector is dependent upon consumer sentiment and, subsequently, consumer spending. Essentially, the better people feel, the more they spend, and the more they spend, the better this sector performs.
It can be said that the retail market is a microcosm of the broader economy and with good reason. Seventy percent of America’s output, or gross domestic product, is based upon consumption, so “as the U.S. economy goes, so goes retail.”
The best gauge of consumer sentiment is the Thomson Reuters/University of Michigan index, which has been around since the late 1970s. The index’s all-time high was about 111 in 2000 and its all-time low was in 1980 at a level of about 52. During the recession in the early 1980s, the index was at about 62; during the recession in the early 1990s, it was about 55; and during the recession in the early 2000s, it was around 82. During our most recent recession, sentiment bottomed out at about 57. Last week, Reuters/Michigan reported that it was currently at 80.
While not great, the numbers are getting better and are driving retail rents upward. This upward rent pressure is helping retail property values but is not having an impact on the volume of sales—yet. Let’s take a look at the numbers.
In 2012, there was $4.65 billion of retail property sales volume in the city. This total plunged to just $1.75 billion in 2013, a 62 percent reduction. The biggest drop was observed in Brooklyn, which fell by 71 percent. The surprise occurred in the Bronx, where retail activity rose from $86 million in 2012 to $240.5 million, a 180 percent increase. This was due mainly to some very large transactions that significantly skewed the dollar-volume numbers. Several very large transactions were actually responsible for a tremendous 2012. The number of properties sold is, Massey Knakal believes, a much better indicator of market activity.
There were 354 sales in 2012. This figure dropped to 266 in 2013, a 25.8 percent reduction. The submarkets that really took it on the chin were Manhattan and Northern Manhattan—we view the two as separate markets—which experienced 45 and 46 percent reductions in the number of retail properties sold, respectively.
While volumes were down, values were up across all submarkets. Average retail prices per square foot saw average increases of 9.2 percent year over year, with Manhattan and the Bronx performing best at 12 percent and 18 percent, respectively. In Manhattan, the average price per square foot reached a remarkable $1,854. Recently, a reported sale at 787 Madison Avenue occurred at a record-breaking price. A store of approximately 4,000 square feet sold for $120 million, or about $30,000 per square foot. This was something that amazed many market participants, but it was inevitable. See an excerpt below from an article I wrote in April of 2011:
“The most prime locations are commanding tremendous rents. Recent leases made on a prime stretch of Fifth and Madison Avenues have exceeded $2,000 per square foot. The retail condominium at 666 Fifth Avenue recently sold for $8,300 per square foot, setting a new record for Manhattan retail properties. This sale eclipsed our sale of six retail condominiums on Bleecker Street, which sold a few months ago for nearly $7,000 per square foot. Amazingly, if we extrapolate a $2,000 per square foot rent, it might not be a stretch to see retail properties selling at $20,000 to $30,000 per square foot in the most prime locations of Manhattan within the next three years. This may sound ludicrous, but let’s see what happens.”
Will we see $40,000-per-square-foot retail rent soon? Let’s talk about it in Vegas next month!