By Adelaide Polsinelli, principal, senior managing director, Eastern Consolidated
Despite claims that retail is dead, from an investment perspective, it’s far from it.
Although retail property sales volume in core Manhattan has dropped from its $3 billion peak in 1Q 2015, volume in the last three quarters has been steadily increasing from a low of $266 million in 4Q 2016.
Retail trades in core Manhattan totaled $694 million in Q3 2017, which is a 12 percent increase in dollar volume from Q3 2016 and a 24 percent increase from Q2 2017.
Data calculated by Real Capital Analytics shows that retail properties sold in the third quarter had an average cap rate of 4.5 percent and that pricing averaged $1,496 per square foot.
The breakdown of who is investing in retail also is interesting. So far this year, private investors have accounted for 43 percent of the retail investments in core Manhattan; REITs 29 percent; international investors 14 percent; institutional investors 10 percent; and owner-users four percent, compared to 2016 when private investors accounted for 54 percent; REITs 2 percent; international investors 18 percent; institutional investors 27 percent; and owner-users 0 percent.
It’s clear that many investors aren’t buying into the “gloom and doom” hype about the demise of brick-and-mortar stores and see this as an opportunistic time to buy retail assets.
My experience supports this view, especially concerning the owner-users who are entering the market. I’m finding that many businesses are buying their own retail spaces because they see ownership as a way for them to gain flexibility and control over their income and future.
Here are just a few of the advantages available to retailers who own their own space:
Writing off mortgage interest and other deductions against your income;
Answering to yourself and not your landlord;
If you decide retail isn’t for you, repositioning the retail space and leasing it to another retailer or business without fearing the consequences of breaking a lease;
Owning an asset that can appreciate.
One of my clients, a chef who wants to open his own restaurant, exemplifies this trend. After running the numbers, he concluded that instead of renting, he’d been better off buying a mixed-use building, opening his restaurant on the ground floor, and earning income on the rental units upstairs.
He told me, “‘When you see how much money many of the restaurants are paying in rent and see how narrow the margins are, you realize that there’s no room for error. But when you own your own space, you have options.’ “
I spent months searching for the perfect space for his restaurant and finally found it in the Flatiron District. The mixed-use property is now in contract and scheduled to close early next year.
Another owner-user, a gallery, is in contract to buy a retail condo I’ve been marketing in Tribeca.
Retail properties in Tribeca are hot, accounting for nearly 60 percent of the $158 million in investment properties sold in the neighborhood in 1H 2017, because investors recognize their tremendous potential rental upside and believe it’s only a matter of time before Tribeca becomes the new SoHo.
The price differential between the two neighborhoods is dramatic.
Asking retail rents for ground floor space on Broadway in Tribeca range from $100 to $200 per square foot compared to asking rental rents that have historically ranged from $550 to $800 per square foot on Broadway from Houston Street to Broome Street just a few blocks north in SoHo, even though Tribeca offers the same historic, cast iron buildings as well as a growing population.
It’s no surprise that owner-users are rediscovering retail. After all, Manhattan was developed by mom and pops and families who operated their small businesses out of the buildings they owned.
I grew up with businesses like Faicco’s Pork Shop on Bleecker Street, which has been operated by the same family for three generations, and it’s refreshing to see that the city is returning to its retail roots.