New York Retail on the Rise: $4.5 Billion Transacted and 3.3 Million SF in Development

  1. Vacancy Rate Stability: The New York retail market’s vacancy rate stands at 4.2%, which aligns with the long-term historical metro average of 4.0% and the current US average.
  2. Improvement in Small Urban Retail Spaces: There has been a notable improvement in smaller retail spaces (below 5,000 square feet) in New York City, particularly with leases by restaurants and fashion tenants in Manhattan.
  3. Large Leases Demonstrate Tenant Confidence: Significant leasing activity includes Target occupying 139,000 square feet, Chelsea Piers Fitness with 72,000 square feet, and Alexander Wang with 46,000 square feet, indicating a strong tenant appetite for large spaces.
  4. Increased Foot Traffic Benefits Retailers: Rising foot traffic, supported by higher mass-transit ridership, hotel occupancies, and tourism figures, is advantageous for ground-floor retail locations.
  5. Positive Economic Indicators: Enhancements in office utilization, business formations, and continued hiring across the retail sector are positive signs for the market.
  6. Higher Leverage for Owners at Negotiations: Improved market conditions and storefront leasing have empowered owners with more leverage in rent negotiations, with some asking rents exceeding $600 per square foot.
  7. Challenges in Reaching Past Peak Rents: Despite positive trends, the peak rent levels seen in areas like SoHo and Madison Avenue (over $1,000/SF) are unlikely to return soon due to the ongoing rise in e-commerce impacting physical store sales.
  8. Negative Annual Absorption Rates: Significant mall vacancies and the closure of department stores in 2023 have kept annual absorption rates in negative territory.
  9. $4.5 Billion in Transactions: Over the past year, properties with long-term leases and smaller-sized properties in popular Manhattan areas have driven approximately $4.5 billion in transactions. However, the sales volume will likely fall short of the totals from 2021 and 2022.
  10. Elevated Borrowing Costs Impacting Deals: While improving market conditions continue to attract buyers, elevated borrowing costs will likely slow down transaction activity in the near term.

    Steady Vacancy Rates Amid Challenges

    Despite setbacks from the closure of financially burdened retailers, New York’s retail market maintains a stable vacancy rate of 4.2%, noted by CoStar. This matches the metro’s long-term average and the current US average. The consistency in vacancy rates indicates a balanced market despite the ongoing adjustments.

    Recovery in Absorption Rates

    Absorption totals have seen an improvement compared to the losses of 2020. Notably, submarkets in New Jersey, including Brunswick and Easter Monmouth, are showing significant gains. This suggests a shift towards better performance in suburban areas, contrasting with the broader challenges in urban centers.

    Dynamic Leasing Activity

    Leasing remains vigorous, with major retailers like Target and BJ’s Wholesale Club securing large spaces outside Manhattan. This geographic diversification in leasing activities indicates a strategic adaptation by large retailers to explore opportunities beyond traditional urban centers.

    Business Growth and Market Favorability

    The New York City Economic Development Corporation highlights 2022 as a year of significant business growth. Manhattan retailers, especially in dining and apparel, are capitalizing on a market that has become more favorable to tenants. This shift is facilitating an increase in leases for smaller, strategic locations.

    Large Leases Indicate Market Confidence

    Significant leasing deals continue across New York City, with notable fitness and luxury retail brand expansions. The demand for prime retail space in high-traffic areas like SoHo and the West Village remains high, suggesting confidence and competition in these key shopping corridors.

    Potential Market Tightening

    While the retail sector enjoys positive momentum, potential economic challenges could impact market dynamics. Rising operational costs and borrowing rates may restrict the flexibility retailers have recently enjoyed. Additionally, any downturn in the global economy could adversely affect consumer spending in the hospitality and retail sectors.

    Gradual Rent Increase Amidst Steady Market Conditions

    Following improvements from the low absorption rates of 2020 and consistent leasing activity, retail rents in the metro have increased by 1.8% over the past year. With vacancy levels expected to remain stable, rents will likely continue their upward trend. This trend reflects a cautiously optimistic outlook for the retail sector in the New York metro area.

    Varied Rental Landscape in Manhattan

    Manhattan hosts nearly all of the country’s most expensive retail submarkets. However, there’s significant variation within the city, with prime corridors commanding high premiums compared to quieter side streets. Despite the historical highs, the shift towards e-commerce has tempered peak retail rents, with no recent leases reaching the $1,000/SF mark. This indicates a structural change in the valuation of retail spaces influenced by digital shopping trends.

    Tenant-Friendly Market Dynamics

    Despite high rents, current market conditions favor tenants, offering greater lease flexibility and potential discounts on asking rents. However, should availability tighten, landlords in Manhattan might regain stronger negotiating power. This potential shift could reduce tenants’ current advantages under more relaxed market conditions.

    Premium Rents in High-Traffic Areas

    With the highest average rent approaching $300/SF, Times Square sees substantial foot traffic, making it a prime location for high-profile leases. Retail spaces in the Bowtie area, particularly tourism-driven spots, command ultra-high rents, reflecting the premium associated with high visibility and visitor numbers. This scenario underscores the premium that high-traffic, tourist-friendly areas can command in a recovering market.

    Fluctuating Premiums in Iconic Shopping Corridors

    Madison Avenue and Fifth Avenue, known for their dependency on tourism, have experienced fluctuating rent premiums due to an incomplete recovery in the tourism sector. Although substantial, deals like those by Aritizia and Michael Kors show a decline from past highs. This shift reflects broader market adjustments as the area grapples with the slower return of international visitors.

    Broader Rental Spectrum Across Boroughs

    Outside of Manhattan’s prime shopping corridors, rents vary significantly, from $100/SF to $300/SF. In Brooklyn, rents range from $40/SF to $100/SF, while more affordable options are available in Queens and the Bronx, typically from $30/SF to $70/SF. Suburban areas see the lowest rents, ranging from $20/SF to $40/SF. This gradient across different areas highlights the diverse investment opportunities and challenges across New York’s extensive retail landscape.

    New York’s Large Retail Supply Pipeline

    New York maintains a substantial retail supply pipeline totaling 3.3 million SF. While construction has slowed, strong preleasing has historically kept vacancies low. However, lease-up progress is expected to slow despite recent improvements in the retail sector. This trend reflects a cautious approach in a market adapting to post-pandemic realities.

    Major Development at Glenwood Greens

    The largest ongoing project is Glenwood Greens, a 360,000-SF shopping center in Old Bridge, New Jersey, set to open in 2024. Target and Shoprite have made significant leasing commitments, indicating vigorous prelease activity. This project exemplifies the ongoing interest in suburban retail spaces as developers and retailers adjust strategies in response to evolving consumer preferences.

    Expansion in South Brooklyn

    Another significant development at 1504 Coney Island Ave., a 303,000-SF retail space in South Brooklyn, will be completed by the end of 2023. With much of the space still available for lease, this project represents an opportunity for new and existing retailers to establish or expand their presence in a bustling urban area.

    Strategic Openings by Major Retailers

    Non-speculative projects continue with Target and Life Time Fitness expanding their footprints. Target plans to open a 195,000-SF store in Yonkers, and Life Time Fitness aims to establish a 120,000-SF facility in Red Bank by 2024. These developments indicate that major retailers confidently invest in locations they believe will attract significant consumer traffic.

    Challenges for Large-Scale Developments

    Recent years have brought challenges for mega-projects like The Shops at Hudson Yards and the American Dream Mall, each over one million SF and opened just before the pandemic. With struggles like low foot traffic and financial losses, these large developments highlight the complexities of managing superstructures in the retail sector. While recovery is on the horizon, the scale of these projects means adjustments might take longer to show significant financial improvement.

    Increased Buyer Attraction to New York’s Retail Market

    The New York retail market has seen a growing attraction due to its recovery and more appealing valuations compared to past peaks. With $4.5 billion in transactions over the last year, investment activity remains robust, indicating strong confidence in the market’s long-term prospects.

    Significant Transactions Highlight Market Resilience

    The largest transaction in the past year was the $112 million sale of The Source at White Plains. Purchased by Hines, the mall’s resilience to various market pressures was a key factor in the investment decision. This sale underscores the perceived value of grocery-anchored malls in stable suburban locations.

    Challenges in Mall Valuations Across the U.S.

    Despite strong individual sales, malls nationally are experiencing higher availability rates post-pandemic, affecting overall valuations. For instance, the sale of a property for $41 million less than its 2005 price reflects ongoing adjustments in the sector’s valuation norms, signaling a cautious approach by investors towards certain types of retail assets.

    High-Value Asset Pricing in Manhattan

    Manhattan continues to see high-value asset pricing, with properties in prime locations fetching top dollar. Recent sales such as 102 Greene St and 155 Mercer St demonstrate the premium investors are willing to pay for well-located retail spaces in the city, highlighting ongoing investor interest in premium real estate.

    Preference for Assets with Long-Term Leases

    A trend in recent transactions is the preference for assets with stable, long-term leases. Properties like 809 Neptune Avenue and 310 State Route 36, mostly leased to credit tenants, have been popular among investors seeking reliable cash flows. This strategy reflects a broader focus on reducing investment risk through secured tenancies.

    Slowing Deal Volume Despite Optimism

    While the retail sector shows signs of optimism, analysts anticipate that deal volume in 2023 will fall short of the previous two years, mainly due to higher borrowing costs and economic uncertainties. These factors, combined with a potential recession and increasing store closures, are causing investors to proceed cautiously, impacting the current year’s pace of transactions. This cautious approach might shape investment strategies in the near term as the market adjusts to evolving economic conditions.

    Closing Thoughts

    In conclusion, New York’s retail market shows signs of recovery, with steady investments and strategic leasing driving optimism. The landscape offers diverse opportunities, from high-value Manhattan properties to resilient suburban malls. However, investors should navigate with caution due to economic uncertainties. For tailored investment strategies, contact Lumicre for your investment needs.

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