Why did Manhattan retail property values decline and what does it mean for investors?
Manhattan retail property values fell as institutional investors reassessed their retail exposure in response to structural e-commerce trends that made prior decade rent growth assumptions unsustainable. Cap rate expansion reflected the downward repricing of retail income stability, creating selective entry opportunities for investors underwriting to the new economics.
1. Retail property values declined as the volume of large investment sales compressed, removing the price-setting transactions that anchored valuations. 2. Institutional buyers were reassessing retail exposure as structural e-commerce trends made prior rent growth assumptions unsustainable. 3. Cap rate expansion reflected the market repricing the income stability of retail assets downward. 4. The correction created selective entry opportunities for investors willing to underwrite at the new retail economics rather than the prior cycle's 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 disproportionate market and unrealistic price expectations by landlords
- Average cap rates have fallen to 4.9% across all NYC boroughs, the lowest in history
The retail market in New York City saw interesting 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 was mostly due to blockbuster deals executed in 2014 which skewed the price per square foot in the market. However, the number of retail properties sold in 2015 was 464, while in 2014 there were 415, an 11.8% rise in transactions. However, the dollar value of successful deals was down: in NYC from $4.79 billion in 2014 to $3.3 billion in 2015; in Manhattan from $3.61 billion in 2014 to $1.07 billion in 2015.
This decline of around 32% across the NYC market has not been seen since 2012 and 2013, which saw a 62% drop due to large retail sales realized in 2012. As larger transactions continue to concentrate in Manhattan, there remains strong demand across the boroughs, with the exception of the Bronx market, which has been negatively impacted the most.
Cap rates at the end of 2015 compressed to 4.9% in NYC, down from 5.52% in 2014. This cap rate compression has caused significant price inflation in this market. We should expect either further price inflation or a flattening 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 aggressively.
Retail property values across Manhattan declined as blockbuster deal volume dried up, with institutional buyers and REITs reassessing their retail exposure in light of structural changes to consumer behavior that were making the prior decade's rent growth assumptions no longer defensible.
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