Retailers See Sliding Property Prices As Chance To Control Their Destiny
Depressed prices and a chilly investment environment in the city are opening the door for a new generation of real estate owners — retailers who are seizing the moment to buy properties, rather than sign leases, to have more control over their spaces.
Investment sales volume plunged across the board at the start of 2021, with commercial transactions down by nearly 50% year-over-year. A total of eight retail buildings traded during the quarter, per Avison Young’s figures, and almost all of those sales were either vacant or bought by an end user, per the brokerage.
In fact, the biggest retail sale of the quarter was jeweler Graff International’s $43M purchase of 712 Madison Ave. from SL Green. Graff had entered into a 25-year ground lease with the company back in 2019, which included an option to buy.
The average price of $1,996 was up from 2020, according to Avison Young, but down nearly 50% from $3,485 in the peak of 2016.
“It's bouncing around right now, it's trying to find the floor,” said Avison Young Tri-State Investment Sales Group Head James Nelson, who has recently arranged a sale of an East Village property to a bar owner, along with a Bleecker Street retail property sale to a restaurateur. “But the retail prices have no doubt dropped since Covid, and we've seen several examples now of retailers stepping up and buying their properties and controlling their destiny."
Manhattan retail rents have been in free fall as the number of empty stores across the city has soared. Direct ground-floor availabilities in the major Manhattan retail corridors have reached a new high, hitting 275 in the first three months of the year, according to CBRE data. Rents are down some 13% in the borough, while Brooklyn retail rent prices are said to be down by 15% to 25%.
The environment has paved the way for some retail tenants to pounce on favorable deals in prime locations across the city, but it is also helping to sink some property prices.
A recent valuation of one Fifth Avenue retail property, for example, pegged its worth at just $37.8M — a 70% drop from six years ago. Last October, three retail properties on Madison Avenue sold for $1,340 per SF, a reported 80% drop from 2014. A tenant in one of the spaces, Swiss clothing retailer Akris, was the buyer, with company President Peter Kriemler telling The Wall Street Journal traffic would pick up once the coronavirus is brought under control.
“We're seeing a lot of opportunities that were not available in the past decade,” Compass Vice Chair Adelaide Polsinelli said.
This month, Polsinelli arranged for Japanese food company Minamoto Kitchoan’s purchase of 604 Fifth Ave. for $45M from The Riese Organization. The company, she said, is planning to open a store and possibly a restaurant in the building, which is currently occupied by a TGI Fridays.
The company was first looking to buy before the virus hit, but got serious as the pandemic wore on, Polsinelli said, adding the final sale price was about $15M down from what the seller had been asking just before the virus.
“The idea is to really expand the brand and be in what they believe is the epicenter of the world: Manhattan, New York City, Fifth Avenue, prime Rockefeller Center. This is Main and Main for them,” she said. “They know what the city was like before, they know where it's going, they know this is a blip in a very long timeline.”
Polsinelli said she recently sold a retail condominium on 16th Street to a retailer, who had told her they had been looking for three years but recent price reductions meant it is now worth it to buy rather than pay rent and common charges. She said she is working with six other retailers right now who are prowling the city, looking to make similar deals.
“There's a huge demand amongst retailers who believe now is the time to be buying versus leasing,” she said.
The trend runs counter to a prevailing fear of a mass exodus from New York City, with rising taxes on high earners and a political environment that is considered anti-business. For much of the winter months, the city remained under restrictions while places like Florida took a different approach — much to the despair of many real estate players who said businesses were being crushed as a result.
But Nelson said several retailers are making use of low interest rates and looking to put down roots in places that have been out of reach for years. He and his team recently arranged the sale of an East Village property to a bar owner, though he declined to provide specifics as the deal has not yet closed. He also arranged the sale of 357 Bleecker St., which was purchased by a restaurateur, who paid $5.6M for the site.
"We sold it at over $2K a foot … Back in the day, we sold properties on Bleecker Street for north of $6K or $7K a foot,” he said. “We're talking about retail values, in some cases, that are less than half what the peak was.”
Bleecker Street was one of the city’s most famous casualties of soaring rents in the city and a flood of brands that were crammed into the small spaces. At one point, there were six Marc Jacobs on the street. Retailers were unable to stay and left in droves, and it became something of a retail ghost town, with vacated storefronts populating buildings up and down the stretch.
“The fact that you've got these retailers doubling down and buying New York is a huge vote of confidence,” Nelson said. “If a retailer or a restaurant doesn't look like they're going to make it, they're probably a lot more inclined to just give the keys back to a space that they lease and go try something else.
"Whereas if they own it, they've got a lot more invested in that location and I think they're going to work that much harder to keep it afloat.”
Sources noted food and beverage companies are looking to buy and reposition non-kitchen spaces for their own uses, while some operators are anxious to lock down their own fulfillment centers as that sector becomes more expensive.
“In the fulfillment and logistics space, a lot of those companies are looking to buy because the pricing is just out of hand and probably is going to get even more so in the next couple of years,” said Brandon Singer, the CEO of brokerage firm Retail by MONA.
Even as retail property prices are tumbling, there hasn't been a wave of distress or bank-owned auctions as many predicted, Marcus & Millichap Senior Vice President Joseph French stressed.
“Everyone’s been talking and waiting for this huge distress sale of real estate,” he said. “And it really hasn't happened.”