Retail's Details NYC

  • Urgency & Optimism

    “It’s not the market I care about, it’s the deal.”

    Last week, I was in the office of a Billionaire real estate investor, who was discussing all of the deals he has in progress. He’s currently acquiring hundreds of millions of dollars of NYC real estate through purchasing distressed debt, partnership buyouts, recapitalizations, and outright building sales.

    New York has a lot of billionaires. Many of them have achieved that status by seeing things differently, and many of them are as active as ever in real estate. I look around today and see a constantly shifting retail properties market, driven by factors including rising Retail leasing demand, fluctuating interest rates, maturing mortgages, the Signature Bank loan pool, new risks of supply chain inflation, and upcoming elections. Meanwhile, the Billionaire I spoke with sees the market deal by deal, and finds plenty of reasons for optimism.  In fact right now there is a lot of optimism plus urgency.

    Let’s pause for a moment to analyze what happened last month on Fifth Avenue. Prada purchased 720 and 724 Fifth Avenue for a total of $807,395,000, while Gucci acquired 715-717 for $963,000,000. Global giants do not pour hundreds of millions into NYC retail without good reason; Meanwhile, having two world class retail locations permanently off the leasing market will raise the value of others on the Fifth Avenue corridor, perhaps a sign of things to come.

    If you would like to know more, feel free to reach me at (212) 430-5269 or Trever.Gallina@marcusmillichap.com

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  • A Shared Optimism

    Retail vacancy across the nation is down to 4.7%, the lowest it has been since 2007. One retail asset manager of over 100 shopping centers told me, “The only spaces I can’t rent are the ugly spaces, and even those are starting to get a little attention.” Add in the continuing rise of retail sales (up .02% year over year, inflation adjusted) and tentative relief about the 10-year treasury hovering around 4.2%, and it’s no wonder that this year’s International Council of Shopping Centers (ICSC) convention had a primarily upbeat vibe.

    However, even with rising demand for properties and plenty of capital poised to enter the retail real estate sector, the market faces strong cross currents. Financing remains the defining challenge of the times. High interest rates persist, and banks are playing Scrooge with cash to safeguard against runs like the Silicon Valley Bank debacle. Meanwhile, speculation abounds about the potential outcome of Blackstone’s purchase of a massive portfolio of Signature Bank loans. Yet in reality, no one knows what that outcome will look like.

    We do know that buyers have a keen interest in buildings with vacancies, something I could not have said in the recent past. However, with store occupancy the highest it has been in years, such opportunities are scarce. With competition intense, buyers with a shot at properties with available spaces and/or high-value tenants would be well served to make a move, before too many others solve the financing puzzle.

    Happy Holidays and I look forward to bringing you the latest in the New Year

  • A Shared Obstacle Between Buyers & Sellers of NYC Retail Property (What is Driving the 10 Year Treasury)

    Right now, a shared obstacle which is completely out of the control of both buyers and sellers of retail property is the volatility of the ten-year treasury, which is how a lot of retail property is financed. The unknowns can outnumber the knowns in this arena. Interest rates increases are fairly easy to understand, but the question of what is driving the increase in the ten-year T-note is much more complicated. So Marcus & Millichap’s research department has put together a great video describing exactly what’s behind that increase, and what might lie ahead.

    As always one must pay attention to Retail’s Details. You can see that video below:

  • How to build a $2,000,000,000 real estate portfolio

    Last week, I asked an older gentleman how he built his $2B (B for BILLION) retail real estate empire. His answer: “Slowly”—no pause for effect—“and I bought the right locations.” As this guy sees it, the extraordinary success of his portfolio boils down to that. He kept his focus on buying top-tier locations,  and still does. Right now, he is only looking at triple A locations at over $100MM.

    Good for him, who cares?

    Retail buyers currently face two interlinked challenges: (1) How to create value from a retail property; and (2) Getting banks to believe in said property. By choosing the elite of the elite locations, the above mentioned billionaire was able to do both, even during tight times when others could not or did not. After all, real estate is a performance game.

    The biggest surprise I’ve seen in recent months is the number of buyers looking for vacant retail, even as vacancy rates are down across the City. Why? Retail rents are mostly going up; some post-pandemic leases area already under market, and the those annual escalations are indeed an attractive hedge against inflation. So it makes sense that buyers are seeing that the easiest way to create value is just letting the market do it for them.

    Price discovery is also easier than six months ago. However, getting financing is harder, and as a result,  some long-time NYC real estate families just aren’t buying. Banks have capital calls on existing loans and, they say, there just aren’t any “deals” out there.

    Translation: There are no steals out there, why? Because there are so many buyers today.

    Which brings us right back to the question of the right location. It’s far easier to get a bank to commit to an A+ location than anything less. As the gentleman points out, billion-dollar empires are built on the lasting value of prime properties.

    Right now, I have the honor of marketing some once-in-a-lifetime retail properties in Manhattan. Please call me to discuss.

  • Pricing Guidance for NYC Retail

    Pricing guidance remains a moving target for all asset classes all over the country. And for good reason, transaction volumes are down across the board. The headline YoY is a 63% decline, therefore, if there are less transaction, there are less comparable comps to gauge pricing. New York City is the same but different. The number of retail property sales are down nearly 1/3 off the last five-year average but pricing guidance is much clearer than other assets classes and much more so that it was six months ago. This is because the financing market is more stable (yet more restrictive), and there are simply more sold retail properties and/or on-market properties than this time last year.

    Pricing guidance for NYC retail is much clearer than other assets classes.

    Great, who cares? ‘Rates are high so prices are down’

    Not so fast.  Yes, we are now in the ‘longer’ part of the “higher, longer” in terms of interest rates. And no, nobody is buying properties over the cost of capital (meaning if interest rates are a six percent, the likely of selling something under a six cap rate is not happening).

    However, quick story, last Friday evening around 5pm I ran into a long-time mentor of mine that is the President of the NY TriState region at one of the larger RE brokerage firms on the corner of Park and 40th Street. He gave me a synopsis of the office leasing market whereas within three minutes I felt that I had a great understanding of the office leasing market. In short there are many stories to office leasing right now and that yes, some parts are the office market are dead and never coming back, like the midtown Class B office space that I am currently writing this article in or the large block office space south of 23rd Street which Tech companies flocked to only a few years ago. Or are white hot like One Vanderbilt which is 100% leased with a line out the door of office tenants that want to get it. Class A office is white hot.

    The demand for trophy retail locations are white hot, just as it now is for neighborhood retail.

    Great who cares? This article is about NYC retail. Well, replace office leasing in the above with retail investment sales.  Granted we’re way ahead in the cycle but similar story lines. In fact there are many story lines in NYC retail property sales.  Tertiary markets are tough.  In East New York I had a 6,000 SF commercial building fall out of contract at a 7.1% cap rate back in February and it recently sold at a 8% cap. Fire sale. However, the demand for trophy locations are white hot, just as are neighborhood retail. And buyers are happy to make purchases with leases under market or better yet, vacant. Buying on a belief in NYC Retail.

  • Velocity of Retail Properties Sold in Manhattan. This Year vs. the Last Five Years.

    At the halfway point of the year, sellers and buyers are starting to accept that higher interest rates are here to stay, with at least one more rise indicated by the Fed. Some sellers who made moves early are reaping the rewards, while some who have waited are looking at increasing competition. However, that doesn’t mean that waiting was necessarily a mistake. There is never just one right way to do things in retail real estate.

    One buyer of Manhattan retail properties recently said to me, “Things could be a lot worse, but they’re not.” And he’s right, for both buyers and sellers. Granted, transactions across the commercial real estate spectrum are at a historical low,  but I don’t discuss the entire spectrum, only retail properties in New York City. So let’s take a look at the facts here.

    “Things could be a lot worse, but they’re not.”

    -Buyer of Manhattan Retail Properties

    This time last year, there were only a few stabilized income-producing retail properties on the market in Manhattan. Now, there are more than a couple handfuls, with still more on the way. But maybe more importantly, the retail properties that did sell last year were on the market for almost a year and half, almost double the average for the previous four years (which included the pandemic). Signs indicate that Time on Market is now coming down, partly because we’ve passed the phase of rates rising at warp speed.

    Interestingly, the transaction volume for Manhattan retail properties is typically lowest in the second quarter, a pattern that has held through all the divergent economic trends of the past five years. See the below data that my team put together.

    Q1Q2Q3Q4
    13.612.213.420.4
    Five Year Historical Number of Retail Properties Sold in Manhattan

    In a clear positive sign, during the First Quarter of this year, 16 retail properties sold in Manhattan, with that number likely to rise since data is slow to be recorded by the City. We won’t know the stats for Q2 for a few months, but I’d guess the trend in the above table will continue to hold true.

    Okay, great, so what does that mean for right now? Things could be a lot worse, but they’re not.

    Trever J. Gallina, VP – NYC Retail Properties Sales

    Marcus & Millichap

    Trever.Gallina@trevergallina | (212) 430-5269

  • “Covid was the greatest stress-test ever for retail,”

    “Covid was the greatest stress-test ever for retail,” is what the CEO of a national shopping center ownership group told me earlier this month. That CEO, like nearly everyone else I speak to, is bullish on retail. He recently convinced his board of directors to increase the company’s spending budget for the remainder of the year from $1B to $1.2B. This euphoria over buying retail properties was echoed by three different CMBS loan originators I’ve spoken with in the past two weeks. All of them want to lend on retail.

    Unfortunately, those same lenders have set lower loan-to-value ceilings than we’ve seen in the past.* The resulting equity gap poses an undeniable challenge, yet buyers are showing a willingness to put in the additional equity to get the assets they believe they should have. They’ll refinance later if interest rates come down. There also seems to be a price threshold where interest rates become much less impactful. I’d say that number is $10M in Manhattan, with lower figures in the boroughs.

    His biggest current challenge as a buyer is the slow pace of the pricing discovery process

    The existence of those thresholds highlights the critical importance of pricing discovery. The CEO quoted above noted that his biggest current challenge as a buyer is the slow pace of the pricing discovery process and when things go South, that tends to happen quickly. Cap rates are great as far as they go, but they are a backward-looking metric, so coming up with a value for a retail property is a murky business these days. We are experiencing this challenge in NYC as well, although things are gradually getting clearer.

    As a core policy, I never tell people when they should or should not sell. Each person’s or company’s internal situation is unique to them. Nevertheless, the fundamentals of retail look great right now. All appropriately priced assets have multiple offers on them, lenders want to lend, and buyers want to buy.

    *All three loan originators mentioned above are lending at about 55% loan-to-value, with rates in the high 6’s on a 30 yr. amortization schedule.

    Trever J. Gallina, Marcus & Millichap | Vice President, Retail Property Sales

    Trever.Gallina@marcusmillichap.com | (917) 692-9929

  • FOMAM: Fear Of Making A Mistake

    Two weeks ago, I had a conversation with an investor who owns and operates over two hundred shopping centers in twenty-five states from Florida to Alaska, and who is looking to place a pretty hefty investment into New York City Retail. He shared a sentiment that I’ve been hearing a lot lately, which is that the biggest obstacle in today’s retail real estate market is the Fear Of Making A Mistake, FOMAM. That fear often takes the form of, “I want to wait & see what happens with interest rates,” and it’s completely understandable.

    OK, what’s the problem?

    There may not be one. If you are locked in with a low long-term interest rate and your retailers are paying their rent, or your property is otherwise generating problem-free cash flows, then party on. You have good reason to set a selling price floor, and not act until the market or a buyer meets or exceeds it.

    OK great, so what about everyone else?

    The problem with FOMAM is that waiting out the market might feel risk-free, but actually has its own insidious, inherent risks with long-term implications. Both known unknowns and unknown unknowns lurk around the corner. Firstly, are interest rates even going to come down? The ongoing arguments between more esteemed economists than myself leave plenty of doubt. You can listen to one here between Former Treasury Secretary Larry Summers, who gives well thought out reasons that rates will stay higher indefinitely, and  Solow Professor of Economics emeritus at MIT Olivier Blanchard, who sees lower rates coming sooner, and decide for yourself.

    FOMAM: Fear Of Making A Mistake

    Every landlord has different goals, but the other risks of FOMAM may include:

    • Building owners who bet on interest rates coming down and Loan-to-Value going up may run into scores of others owners doing the same. Putting the building on the market later might mean competing with dozens more similar properties.
    • Conversely, if rates do not go down, or down enough, there may be a spike in distressed properties on the market. Once again, building owners might find themselves competing with more landlords, and in this case, landlords desperate to make a deal.
    • For owners with vacant buildings looking for cash flows, or those just tired of management, waiting might mean missing out on the generally higher cash flows currently available. If rates do go down and access to capital becomes easier, then cap rates will likely compress.
    • As cap rates go down, the window for a building to produce desired income may shorten. For owners seeking to do a 1031 exchange either in NYC or out of state, waiting for a better price on the current building could mean significantly diminished cash flows from the acquired property.
    • How long is too long? Losses and recoveries tend happen over a few years, not a few months. Building owners sometimes get stuck in endless FOMAM cycles, waiting for a dramatic market shift that never happens.

    In short, every choice involves risk, but so does letting the markets make choices for you. Success depends not on risk avoidance, but on risk identification and management. Knowledge is king.

  • Chairman Powell + Kith

    In early March, I sat down with a landlord in a diner in Borough Park, Brooklyn to discuss options for his retail buildings in the area. As we drilled down on the possibilities, he paused and said to me, “Trever, there is a saying in Yiddish which goes, ‘When the Ashkenazi sell, they regret it. And when the Persians buy, they regret it.’ So what should I do?” Given that we were discussing selling his building and then buying a new property in Florida in a 1031 exchange, I had at least a fifty-fifty chance of saying something that he wasn’t going to like, possibly a hundred percent. In my honest assessment, his best move was to wait for a different time to sell his properties. I was more interested in the truth of the matter than his reaction to it, but it was still a relief to see that he was happy with my answer. 

    This anecdote highlights the dilemma that a lot of retail property owners face, summed up by Joe Sitt on Bloomberg TV last Thursday. He noted that a lot of the economic doom and gloom out there is justified, but the implications are different for each owner and each investor. Most mom & pop landlords feel completely disconnected from the financial markets, yet every interest rate move affects their prospects.  Most institutional buyers and sellers follow the markets keenly, but also have varied sources of lending. Above all, Sitt stresses, you need to focus on the Green Shoots and positivity. So here are a few of those:

    Green Shoot: The fundamentals of NYC retail properties are very strong. Vacancy rates are down, and asking rents are up.

    Green Shoot: A 5.6% rise in store-based retail sales year-over-year last month, inflation adjusted. Physical retail space is getting more valuable.

    Green Shoot: Despite elevated interest rates and a gap between buyer and seller expectations, a recent investment survey indicated that 60 percent of investors plan to be active in the first half of 2023.

    Green Shoot: Chairman Powell’s comment at the March Fed meeting that, “The monetary tightening cycle may be coming to a conclusion.”

    Green Shoot: With the slowdown of interest hikes comes more clarity in the lending market. Banks may, or may not, reduce the safety spread in their lending rates, resulting in lower commercial real estate loans going forward.

    Green Shoot: Clarity on the cost of debt capital. Investors do not need to worry about the interest rates increasing by 75 bps while they are in the midst of underwriting or closing a deal. Buyers can make stronger bids.

    This past weekend, I finally got the chance to check out the new Kith store in Williamsburg. Except, I didn’t actually go into the store, because the line to get in was too long. In fact, there has been a constant line since the location opened a few weeks ago (photo above). 

    OK great, who cares? If you don’t own that specific building, nor one nearby, that’s a fair question. Does every store in New York have a line out the door? Nope, far from it; there are many depressing and lonely stores in our great city. But a line stretching down a Williamsburg corridor is most definitely a green shoot, because gloom and doom notwithstanding, it’s living proof of the rising value of physical retail properties for those people and companies that need it most: higher rents, higher sales prices.

  • How to Invest in NYC Foot Traffic

    Early this month, an 87-year-old New York City retail landlord told me that,“Buying into the Dollar is just investing into a belief system.” Making the case for why he’s still buying retail properties, he added, “With retail, I am buying into New York’s population, compounded by appreciation.” Contrary to ageist stereotypes, he is well versed in Omni-Channel retailing, and keenly tuned into the importance of brick & mortar stores in this new age of retail.  

    With Retail, I am buying into New York’s population, compounded by appreciation.

    87 Year Old NYC Retail Investor

    Some people think that once interest rates return to normal, there will be a ferocious appetite for retail. And there are good reasons for this belief: There is still pent-up/post-covid demand, and retail sales are up year over year 8.2% (notably out pacing ECom sales at 6.2% yoy). Furthermore, there simply haven’t been new retail properties built in the City—in 2022, developers completed the second smallest amount of retail square footage in multiple decades, with the annual total falling below the 1-Million sf mark for the third year in a row.  Yet others believe that right now is the new normal: Interest rates are only going up, and if they do go down significantly, then the abundant supply of available retail properties will tip the scales toward a buyers’ market. In this view, disruption is the only consistency.

    I do not have a crystal ball, and have never pretended to have one, but I don’t need one to see that right now is an excellent time to buy retail properties. Whether it’s the right time to sell, on the other hand, depends on the owner and the building. I am currently near to completing a transaction where my client is benefitting from interest rates being right where they are. She’s selling a troubled retail property and doing a 1031 Exchange into a NNN leased property in Florida, where her cash flow will be greater, with a much more solid tenancy.

    Please send me a note if you would like to understand the above a little more.

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