To the extent consumer spending does increase in line with the NRF’s projections, it will enhance property value within the retail and mixed-use segments. Values within these sectors have been interesting to follow. Within the retail sector, value is surprisingly down on a price-per-square-foot basis from 2009 to 2010 (all data compares 2009 totals versus 2010 results through Nov. 15) in all five submarkets that we analyze. The submarket that has performed best is northern Manhattan, which has experienced just a 4 percent reduction in value on a price-per-square-foot basis, moving from a $324 average in 2009 to a $312 average in 2010. The most adversely affected submarket has been the Bronx, where value has dropped from an average of $341 per square foot in 2009, to $200 per square foot in 2010, a 41 percent decline.
Capitalization rates within the retail sector have been on a roller-coaster ride since 2007. For example, in Manhattan in 2007, almost any retail property or retail condominium could be sold at a 5 percent cap rate regardless of the creditworthiness of the tenants. The average cap rate in the first half of 2009 in the retail sector increased to nearly 7.5 percent; since then, cap rates within the sector have continued to decline, now averaging just over 6 percent. It is counterintuitive to see that the value per square foot continues to fall even though cap-rate compression is occurring. This is due to the fact that retail rents have seen sharp declines and are only beginning to stabilize.
NOTWITHSTANDING THESE GENERAL trends, well-located prime retail properties continued to be highly sought after by investors in the marketplace. The supply-demand imbalance that the investment-sales market is currently experiencing and the extraordinarily low-interest-rate environment that we are operating in have created circumstances under which some outstanding transactions are occurring.
Recently, James Nelson, a partner at Massey Knakal, and I represented the seller of six retail condominiums at 367-369, 382-384 and 387 Bleecker Street, located on the prime luxury retail corridor in Manhattan’s West Village. The retail condominiums were fully leased to established, high-quality tenants, including Michael Kors, Marc Jacobs, Burberry, A.P.C. and Mulberry. These units contained a total of approximately 5,100 square feet and were sold for $34 million, or approximately $6,700 per square foot, one of the highest prices paid for retail properties in the United States. Even at this high price per square foot, the cap rate was approximately 6.3 percent based on the high rents commanded on this stretch of Bleecker Street
“New York City retail condos with credit tenants are rarely offered in this market,” Mr. Nelson said. “As a result, institutional, foreign and local investors competed aggressively for this offering. After receiving multiple preemptive offers near the ultimate sales price, the contract was signed within three weeks of bringing this offering back to the market.”
In another recent retail property transaction, Guthrie Garvin and I represented the seller of a 27,700-square-foot retail condominium at the base of Trump Palace on Third Avenue between 68th and 69th streets. This space was completely net-leased to Great Atlantic & Pacific Tea Company on a very long-term basis, at a rent well below today’s current market. Given the tremendous amount of upside in this property, notwithstanding the exceptionally long duration of the lease, the buyer paid $21 million for this asset, yielding a 5 percent cap rate. This property was purchased by shopping mall developer Equity One.
In another noteworthy retail transaction, James Nelson and Clint Olsen, Massey Knakal’s first vice president of sales, represented the seller of a 3,750-square-foot retail condo at the southwest corner of 49th Street and Second Avenue in the new Alexander Condominium. The space was recently net-leased to TD Bank and was sold for $11.1 million. At that price, the cap rate achieved on this transaction was about 6.5 percent. The buyer was a high-net-worth South American investor.
Many other retail transactions are occurring at a very healthy pace, although location and, more importantly, the relationship between existing rent level and today’s market is driving capitalization-rate fluctuations on these transactions. Clearly, the supply-demand dynamics and interest rates will significantly impact the value of retail and mixed-use properties moving forward.
Additionally, the state of the U.S. housing market and the overall performance of our economy will impact the behavior of consumers. As consumers feel more confident, they will spend more, leading to higher rents in the retail sector. As rents increase, upward pressure on value will be exerted, moving the market in the right direction. New York City is under-retailed by a wide margin relative to other major U.S. cities and is, therefore, poised for a significant comeback as economic conditions improve.
rknakal@masseyknakal.com
Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,100 properties, having a market value in excess of $6.8 billion.
