With ICSC here, it’s time to think about what’s happening in the retail property sales sector in the Manhattan submarket. For the purposes of this analysis, we will define the Manhattan submarket as the island of Manhattan south of 96th Street on the east side and south of 110th Street on the west side.
So far this year, sales volume—both in terms of the dollar volume of sales and the number of properties sold—is performing very well relative to 2013. However, the projected volumes for the year will not come close to the amazing year the retail market had in 2012—unless, of course, the market activity picks up significantly as we progress throughout the year. A noticeable exception, however, is that capitalization rates continue to shrink, with cap rate compression driving cap rates to historically low levels in the retail sector.
With regard to the dollar volume of sales, in 1Q14, there have been $405 million of retail property sales volume which, if annualized, would lead to about $1.62 billion of sales activity for the year. If we remain on this pace, the $1.62 billion would reflect a 77 percent increase over the $915 million of retail property sales in all of 2013. This figure, however, would not come close to the $2.95 billion of retail property sales recorded in 2012.
More indicative of activity in the market is the number of properties sold. In 1Q14, there were 16 retail properties sold in the Manhattan submarket. If annualized—to 64 properties sold—this pace would be about 5 percent above the 61 properties sold in 2013. Again, this figure would be well below the 111 retail properties sold in 2012.
The real story in the retail property sector is how values have simply exploded. The average price of a property sold in the Manhattan submarket in 1Q14 hit $25.3 million, a 69 percent increase over the $15 million average recorded in 2013.
More importantly, the average price per square foot of retail properties sold in Manhattan so far in 2014 has hit an amazing $5,646 per square foot. This average is an all-time record for New York City and is more than 200 percent higher than the $1,854 average recorded in 2013 (which was the previous all-time high). It must be noted that the sale of the retail condominium at 737 Madison Avenue for $31,000 per square foot skews this average. Notwithstanding that transaction, the average would still be about $1,000 per square foot higher than the previous record set in 2013.
The reason that values are escalating at such a rapid rate is that cap rates are compressing very quickly. Back in 2009, during the trough of the market, the average cap rate on retail properties in the Manhattan submarket was 7.1 percent. Cap rates have compressed steadily since and in 2013 hit an all-time low of 4.8 percent in the retail sector. So far in 2014, the average capitalization rate has been a miniscule 3.6 percent.
Based on the strength of the retail market and notwithstanding that recently released retail sales figures have been weak, we expect continued strength within the retail property sales sector at least through the balance of 2014.