New York City Retail

Ariel Schuster

At their core, retail rents are tied to sales and profits. New York City is facing the same challenges that the rest of the country is facing; however, according to retailers here, sales have stayed level. If a national tenant is going to expand, there is no better place to do it then in New York City.

Fifth Avenue in the 50s and SoHo are seeing the strongest demand for retail space. Fortunately, New York City is still the first stop for many international retailers, and there are some new players entering the market. On the heels of Topshop’s SoHo opening this past summer, Spanish retailer Desigual recently opened on Broadway and is currently working to finalize its second New York City deal on 34th Street. United Kingdom brand All Saints is also opening in SoHo, and men’s and women’s fashion retailer Superdry, which also hails from the United Kingdom, is opening in NoHo.

There is also demand from domestic retailers who are well capitalized and performing well. We recently secured White House|Black Market’s new SoHo flagship at 508 Broadway.

While we are starting to see some activity, the first six months of 2009 were a real challenge. It was as if both retailers and landlords decided to put everything on hold. We began to see signs of life in June, right after ICSC’s RECON. It was as if everyone realized things were not as bad as they could have been.

On the investment sales front, cap rates are currently up from high 4s/low 5s to 8 and 9 caps. Eighteen months ago, investors were clamoring for near term lease expirations, but now the word “vacant” is a 4-letter word.

Retail rents have dropped roughly 20 to 50 percent in New York City. Certain markets were hit very hard — mostly the tertiary markets like the far west part of Chelsea and the Financial District. The really strong corridors like Broadway in SoHo and Fifth Avenue in the 50s have felt the pinch, but are still commanding rents close to the peak in 2008.

Recent deals by international retailers like Desigual and All Saints show the strength of SoHo, and prove it is still a market in demand and keep it on the radar screens of other overseas retailers shopping the market.

Forever 21 signed a lease at 1540 Broadway in Times Square earlier this year, and Disney has announced that it is looking to relocate from Fifth Avenue to Times Square. This proves that Times Square is still hot and attracting major retail and entertainment brands.

 Spaces currently being marketed by RKF that will have major impact on their respective markets include 1095 Sixth Avenue, 31,000 square feet on two levels at 42nd Street and Sixth Avenue in Midtown directly across from Bryant Park; 240 East 86th Street on the Upper East Side, a two-level, 45,000-square-foot opportunity formerly occupied by Barnes & Noble and Circuit City; and 250 East 57th, a new mixed-use development planned on the Upper East Side that will deliver in two phases in 2012 and 2014. The project at 250 East 57th Street is being developed by World-Wide Group and will include retail space, two schools and a 59-story residential tower.

Rents will not get back to 2007 levels for at least 5 years. I see rents going up slowly, but consistently for the next few years. During the next year, I see a 5 percent increase in overall rents. I predict a busy leasing period over the next 12 months and the continued trend of tenants and landlords completing renewals early.

— Ariel Schuster, executive vice president with New York City-based Robert K. Futterman & Associates    

New York City (Bronx) Industrial Market Highlight

Tony Lembeck

The New York City industrial market will continue to be soft until credit is relaxed. As long as tenants, buyers, and new businesses have difficulty obtaining money from banks and other lenders, there will be very little activity. Prices are high, appraisals are low, and unless the buying entity has a lot of available cash, deals will not get done. If conditions do not improve, however, there will be deals for investors with cash, as those trying to dispose of property may not be able to hold out much longer.

In the meantime, demand for industrial space in the Bronx has stabilized. There is limited activity throughout the borough because prices remain high and credit is still very hard to get.

Vacancy rates in the Bronx increased over the past year, as a number of businesses have either closed or relocated in an attempt to find lower rental prices. Last year, there were very few vacant warehouses for lease and virtually none for sale. We are now seeing increases in the volume of both, although there is far more space available for lease than for purchase. Unfortunately, sale prices remain too high. As a result, there are a number of spaces available for purchase that have been on the market for several months.

Rents in the Bronx have begun to drop below the $10 per square foot mark. Whereas last year, prices were firmly above that number — and some deals were made in excess of $12 per square foot net — now we are seeing gross prices around $10 per square foot. We believe they will fall below that mark unless there is a substantial change in demand.

 Industrial property values in the Bronx have slipped approximately 25 to 30 percent over the past 18 months. Buildings were being marketed for $175 per square foot and in some cases even higher, but now, the highest appraisal we have seen is $140 per square foot and that was 4 months ago. We believe prices will further drop to $125 per square foot or less. If a building must be sold, the price will not likely be over $100 per square foot. Investors who would have paid up to $120 per square foot before current conditions won’t offer more than $80 per square foot in this market.

However, there are bright spots in the market. NAI Friedland Realty recently participated in one of the largest sales in Bronx history. 1080 Leggett Avenue, a 140,000-square-foot warehouse situated on 4.9 acres in Hunts Point, sold for $20 million. This sale was notable not only because of its size, but because of the story surrounding the transaction. Although there were several parties vying for this site, we were able to locate the one who had the ability to close quickly. A member of our Industrial Division, Executive Director Steve Kornspun matched the property and purchaser, Manhattan Beer, early on and was able to meet the seller’s aggressive timetable.

Although we are still in the “wait and see” stage, the Bronx is the best deal in New York City for business. There is a great work force and fantastic proximity to ports, airports, trains, and mass transit. In general, businesses are being cautious. We are all hopeful that as banks begin lending again, businesses will expand, hire more people, who in turn will spend more money, which will then increase demand. Only then will the upward cycle will begin again.

There are definitely signs of businesses looking. My brokers and I are getting an average of 50 calls per week on our listings throughout the area. People (and businesses) are actively seeking deals. It is difficult, however, to make a transaction happen unless the lenders are ready to help businesses.

— Tony Lembeck, chief operating officer with Yonkers, New York-based NAI Friedland Realty

New York City Multifamily

Peter VonDerAhe

The New York City multifamily market continues to be challenged by economic contraction. Deep job cuts that began late last year among Wall Street and financial services companies have spread to other industries. Although the prohibitively high cost of homeownership within the city will prop up the rental market, employment losses, which impede household creation, will continue to erode demand and cause owners to lower rents in order to retain tenants. That said, I do not see this as a long-term trend, and we are closer to the bottom of the residential market today than we were 12 months ago. Many are looking at 2010 as a year to invest.

In general, falling rents and revenues are eroding property values. Citywide, the median apartment sales price was $126,875 per unit in 2008. So far this year, however, the median price has decreased 9 percent to $115,385 per unit, as buyers are pushing for price cuts based on the expectation of continued rent reductions.

Sales of distressed or debt-burdened properties are occurring throughout the city; however, there are transactions closing at competitive price points. In SoHo, for example, a mixed-used property on Broome Street recently sold at foreclosure auction for $15 million. The building contained seven residential and commercial units. A premier location and an established, high-end, ground-floor tenant helped the asset fetch more than $2.1 million per unit, or $400 per square foot, from an out-of-state investor. While most New York City apartment properties are not trading at such elevated per-unit prices, this sale indicates that there are still buyers willing to pay a premium for quality multifamily and mixed-use assets.

On the operations side, renter demand is waning. However, a lack of alternative housing options has buttressed operations to an extent. Vacancy at large, market-rate buildings, for instance, remains below 3 percent in the Upper East Side, Upper West Side, Brooklyn and Queens. At large, market-rate complexes citywide, the third quarter vacancy rate was estimated at 3.1 percent. Although vacancy remains at healthy levels, the average rate has increased 100 basis points year over year.

While vacancy rates are not increasing significantly, rents have fallen markedly in many parts of New York City. As of the third quarter, asking rents at the city’s large, market-rate apartment buildings were $2,710 per month — down an estimated 7.5 percent year over year. In Manhattan and Brooklyn — boroughs where rents are particularly elevated — asking rents have receded approximately 9 percent and 2 percent, respectively, over the past 12 months.

Alternately, with some renters migrating to more affordable parts of the city, demand has ticked higher in Queens and the Bronx, allowing owners to achieve modest rent growth during the last four quarters.

Approximately 3,600 market-rate units are slated to come online next year, although the tepid economy and tight debt markets may stall some developments.

Silverstein Properties’ Silver Towers in Midtown West is the largest current construction project, containing 1,090 market-rate apartments and 270 affordable units. Completion is anticipated for early 2010, though some units began renting in May of this year.

Layoffs are forecast to persist well into the second half of 2010, albeit to a lesser degree than what was recorded during the final quarter of 2008 and first half of this year. Easing economic headwinds, in turn, are anticipated to yield incremental improvements in key leasing metrics such as rents and vacancy. Aside from a mild acceleration in leasing activity, though, revenue gains are expected to lag behind job creation, which may not occur until late next year. Deal flow will persist at a conservative pace in 2010. Tighter lending standards and the prospect of further revenue declines will dissuade some investors, but experienced New York City buyers with sufficient capital reserves will begin to come off of the sidelines, capitalizing on an infrequent, short-term decrease in apartment values.

Investors with a 5- to 10-year horizon should take advantage of current market conditions. On a risk-adjusted basis, New York is one of the best markets in the country for multifamily investment, and buying into the economic headwinds today will allow one to reap the benefits of the recovery when they occur.

— Peter Von Der Ahe, a vice president investments with the Manhattan office of Marcus & Millichap Real Estate Investment Services

New York City (Manhattan) Office Market

As the current economic downturn nears the 2-year mark, the global recession’s impact on the Manhattan commercial office leasing market has been less profound than anticipated, but painful nonetheless. For the Manhattan office leasing market to have any hopes for recovery, New York City must first experience a rebound in job growth. Recently, there have been signs that a rebound in employment is beginning to occur. Although the New York City economy has continued to deteriorate in concert with the national recession, the pace of job loss in New York City slowed considerably from an average of 23,000 losses per month in fourth quarter 2008 to approximately 8,000 per month in second quarter 2009.

Manhattan’s overall office vacancy rate has doubled from a below-equilibrium rate of 5.3 percent in May 2007 to 10.9 percent in August 2009, but the rate increase has leveled off since June 2009. The overall asking rents for Manhattan dropped to $60.23 in second quarter 2009, down 16 percent from mid-year 2008. Although a decrease in rents was widely expected, it is the rate at which rents have decreased during this downturn that has taken most by surprise. In the prior two recessions, peak-to-trough asking rental rate declines averaged 15 percent to 25 percent over a 3- to 4-year period. In the current recession, the average asking rental rate has already dropped 27 percent in just 1 year. Adding to this value erosion, free rent and tenant improvement allowances have substantially driven down net effective rents, with Midtown Class A net effective rents down 48 percent from their peak.

Although the Manhattan leasing market continued to weaken into second quarter 2009, there are some positive signs developing in the market. Leasing activity saw a surge in June 2009, representing the strongest month of leasing in Manhattan since June 2008. While it is difficult to decipher if this increase in activity was a result of the pent-up demand resulting from a year of relative inactivity, the increased activity is a positive sign, indicating the market deterioration is slowing. This recent slowdown of the deterioration of market fundamentals has led many to believe that the most significant declines in leasing fundamentals may be behind us.

Finally, throughout this decade, Manhattan has lost approximately 40 million square feet of office space, mainly due to residential/hotel conversions and the events of September 11. This phenomenon, coupled with the fact that the credit crisis has prevented a glut of new supply from coming into the market, should facilitate the rapid absorption of available space as the New York City economy begins to improve.

On the sales side, the global recession’s impact on the Manhattan commercial real estate market was reflected in 2008’s significant decrease in the real estate investment sales volume. 2008 sales volume dropped to $19.6 billion compared to $47.7 billion in 2007, a decline of close to 60 percent. 2009 sales volume through the second quarter dropped to $1.8 billion and is the lowest annualized volume this decade. The decrease in sales volume over the last 18 months has made pricing assets even more challenging in the current economic environment. Buyers have been reticent to invest with the expectation that values will decline further and owners and lenders have been putting off the recognition of losses, which has reduced the availability of investment sales properties.

As the number of completed transactions slowly picks up, more investors are seeking to invest near term; the price reductions have been significant and investors want to deploy capital. The majority of the 2006 and 2007 vintage Class A transactions were purchased at price levels in excess of replacement cost, while the six properties that have sold this year have traded at a fraction of replacement cost. This pricing correction reflects the erosion in leasing fundamentals and the dearth of available credit to finance asset sales. Although further price declines are possible, it is likely that we are close to the bottom and that supply will not increase quickly enough to meet demand for product based on the new acquisition and debt financing underwritten standards.

New York City property values have declined anywhere from 30 percent to 60 percent, depending on the in-place income, credit-worthiness of the tenancy, future rollover exposure, property location, and the availability of credit to finance the purchase (or the availability of assignable financing). Owners and lenders are starting to accept the new market economic fundamentals and how they translate into lower property values which is the first step to seeing an up-tick in the volume of investment sales. The market over the next couple of years presents an opportunity to those investors able to commit equity capital.

— New York City-based Murray Hill Properties/TCN Worldwide

©2009 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.

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