Why did NYC retail property values decline and what does the correction mean for investors?
NYC retail property values declined as the reduction in large blockbuster transactions removed the price-setting deals that anchored valuations and as e-commerce structural pressure compressed the rental income assumptions underlying cap rates. The correction was orderly rather than distressed and created genuine buying opportunities for investors underwriting to the new economics.
1. The slowdown in large blockbuster retail deals reduced the price-setting transactions that had anchored market valuations. 2. E-commerce was structurally compressing the rental income assumptions that had justified prior cycle cap rates. 3. Cap rate expansion of approximately 60 basis points reflected the market repricing income stability rather than a demand collapse. 4. The correction created buying opportunities for investors willing to underwrite to sustainable retail economics rather than 2014 peak assumptions.
- Average deal execution is down from 2014 levels in 2015 but the sector continues to do well
- 2014 saw significant blockbuster deals, which created a disproportioned market and unrealistic expectations in retail prices by landlords
- Average cap rates have fallen to 4.9% across all boroughs in NYC, the lowest in history
The retail market in New York City saw significant changes in 2015. NYC average retail property in 2014 saw an average price per square foot of $1,142, and in 2015 an average of $900 per square foot. This change is mostly due to blockbuster deals executed in 2014 which skewed the price per square foot. However, the number of retail properties sold in 2015 was 464, while in 2014 there were 415, an 11.8% rise in transactions. The dollar value of successful deals was down: NYC saw $4.79 billion in 2014 vs. $3.3 billion in 2015, and Manhattan saw $3.61 billion in 2014 vs. $1.07 billion in 2015.
This is a decline of around 32% across the NYC market. As the larger transactions continue to be seen in Manhattan, there continues to be strong demand across the boroughs, with the exception of the Bronx market, which has been negatively impacted the most.
From a valuation perspective, cap rates at the end of 2015 saw significant drops from 2010 levels of around 7% to 4.9% in 2015, down from 5.52% in 2014. Causing significant price inflation. We should either expect further price inflation to continue or flatten out. As the world continues to search for safe haven investments and yield, the market will retain low costs of debt due to the Fed's and global central banks' inability to raise interest rates due to the fear of slowing economies.
NYC retail property values declined due to a slowdown in blockbuster transaction volume and structural e-commerce pressure on retail income assumptions, creating a repricing that was more orderly than the sentiment around it suggested.
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