Q. What will be the best performing property type in the Manhattan investment sales market in 2011?
A. Interestingly, we just held our first quarter 2011 press conference yesterday to review investment sales market results thus far in 2011, which were better than anticipated. One of the things we discussed was that we expect retail properties in Manhattan to do extraordinarily well in 2011, versus 2010.
The basis of this forecast is that we believe the retail sector overcorrected to the downturn in 2009 and it is poised for explosive results in the present year.
During the height of the market, cap rates on retail properties in the Manhattan sub-market were in the 5% range. In 2009, the average cap rate increased to 7.44%, a brutal overcorrection, in our estimation.
The main cause of this was the anemic level of consumer confidence. This cap rate expansion was coupled with reduced rent levels, which exacerbated the problem, causing retail values to fall by nearly 50% on a price per square foot basis.
In 2010, we saw the retail sector correct very positively but we expect this performance to increase substantially this year.
It is our forecast that retail properties will increase on a price per square foot basis by at least 30% in 2011 over 2010 levels.
There is still a significant difference between class A space in prime locations and space in secondary and tertiary locations, however. The most prime locations are commanding tremendous rents. Recent leases made on a prime stretch of Fifth Avenue have reportedly recently exceeded $2,000 psf. The retail condominium at 666 Fifth Avenue sold for $8,300 psf setting a new record for Manhattan retail properties.
Amazingly, if we extrapolate a $2,000 per s/f rent, it might not be a stretch to see retail properties selling at $20,000 psf in the most prime locations of Manhattan within the next three years. This may sound ludicrous, but let’s see what happens.
The strength of the retail market can be tied to the significant increase in tourism that the city has benefited from recently. Last year, a record 48.7 million visitors came to New York and projections for 2011 are for an even greater number.
According to Massey Knakal’s executive vice president of retail leasing, Ben Fox, several retailers are exploring the possibility of 24 hour operations. The Apple store in the General Motors Building has been doing remarkable business at this 24-hour location. Forever 21 has also recently opened its Times Square store around the clock and other retailers are considering such moves to take advantage of “The City that never sleeps”.
These trends all bode extraordinarily well for the retail sector. We expect to see tremendous gain for this asset class in 2011.
Robert Knakal is chairman of Massey Knakal Realty Services.
