Retail Investment Sales, Rents Will Rise

J.D. Parker, Marcus & Millichap, says low interest rates are bringing some CRE investors into retail.

NEW YORK CITY—Defying the growing specter and influence of online retail, bricks and mortar retail here to be a hot investment. Retail development is on the rise in the metro region and—thanks to broad-based growth in the labor market—investment sales volume will rise, as will asking rents, according to Marcus & Millichap. In its third quarter retail market report for the city, the brokerage firm predicts that builders will complete 3.1 million square feet of retail space this year, a dramatic rise from the 1.3 million square feet delivered in 2015. The report notes that two-thirds of the new retail supply will be located in Manhattan and Brooklyn. The New York City retail vacancy rate continued to decline over the past 12 months to 3.5% at the end of June 2016. Brooklyn and Queens registered the largest declines in retail vacancy, falling 110 basis points to 3% and 110 basis points to 2.8% respectively. Due to the predicted rise in retail deliveries this year, Marcus & Millichap believes retail vacancies will rise this year and rent growth will exceed inflation over the coming months. Some of the positive economic data fueling retail investment here include robust tourism spending and continued job growth, which will lead to a 2.7% increase in retail sales in metro New York City this year to more than $3.3 billion. The hike in retail sales this year follows a 5.9% increase last year. Marcus & Millichap predicts the New York City labor market will add 90,000 new workers this year, down from 101,000 created in 2015. J.D. Parker, SVP, division manager for Marcus & Millichap, says buyer volume is shifting to the outer suburbs in search of higher yields. He notes that while valuations have continued to rise, low interest rates are prompting some investors to deploy capital into retail properties that offer higher rates of return on investment. Parker oversees the firm’s Manhattan office, as well as its Brooklyn; New Haven, CT; New Jersey; Westchester County, NY; Boston and Toronto/Ottawa offices. “Larger institutions remain active mostly in the Manhattan suburbs,” he says. “However the vast majority of metro capital sources have shifted their allocation strategies toward the outer boroughs, with Brooklyn and Queens making up the majority of transaction volumes.” Cap rates are typically in the mid to low 5% range in New York City, with assets in the Bronx and Staten Island providing more robust returns, the report notes. Parker adds that institutional players are mainly restricting their investments to Manhattan-based properties. “While value-add properties can still be located, the vast majority of these assets require capital intensive improvements and remain highly appealing to investors, increasing the cost of acquisitions and reducing returns,” adds Marcus & Millichap regional manager John Krueger. With uncertainty expected to rise due to volatility in other asset classes, more sellers are expected to be putting their properties on the market. “As a result, deal volume is likely to expand over the coming year as buyers seek opportunities,” Krueger predicts.