By Katie Kabili, Associate – Avison Young Tri-State Investment Sales Group
The Manhattan Retail real estate market underwent a significant transformation in the first quarter of 2023, with owner/users making up nearly two thirds of buyers, a remarkable 150% increase from the same period last year. This shift was driven by a variety of factors, but overall has created an opportune time for owner occupants to capitalize on current market conditions.
The retail sector has emerged as a resilient asset class in the Manhattan commercial real estate market, despite its recent fluctuations. Avison Young’s latest quarterly report indicates that over the last four quarters the sector has shown an impressive surge in total dollar volume, with a 48% increase across 12 transactions, amounting to a total of $179 million. Additionally, the price per square foot has risen significantly, reaching $1,578 per square foot, which outpaces the trailing four-quarter average by 32%. The retail sector’s strength is largely attributed to the robust activity of owner/users in the market.
Decline in Buyer Competition:
Navigating the rapidly evolving retail landscape is a challenging task for traditional investors. In response to inflation, the Federal Reserve has raised interest rates at an
unprecedented pace, bringing the federal funds rate to 4.75% – 5%, more than double that of January 2022. As a result, deals have become less attractive to traditional investors and are prompting many to exit the market or remain on the sidelines. Additionally, the perceived distress on the horizon has contributed to a lack of urgency among traditional investors, who are waiting for more attractive pricing before focusing on purchase opportunities.
With the lack of traditional investors active in the market, owner/users are taking advantage of the opportunity to acquire retail assets in prime locations which were previously beyond their reach, even if it means paying a premium price.
Owner/Users Paying Premium for Highly Visible Storefronts in Desirable Locations
In the first quarter of 2023, the demand for prime retail spaces in major shopping corridors by owner/user buyers has set a new bar, with 30% of owner/users primarily purchasing in high-traffic, low vacancy areas like SoHo, which has seen a significant 50% increase compared to Q4 2022. The attractiveness of areas like SoHo stems from the diverse audience and branding opportunities it presents, as indicated by the Placer.ai foot traffic data, which shows that retail foot traffic in SoHo has returned to pre-pandemic levels as of March 2023.
Owners of vacant retail spaces in well-located areas, particularly in sought-after
locations such as SoHo and the Upper West Side, are in an advantageous position to sell
their properties at a premium to eager owner/users, as there is less competition in the
market from traditional investors. Typically, owner/users tend to purchase at a 10-15%
premium over traditional investors on account of having more flexibility in their
decision-making and are often motivated by more emotional factors such as location,
branding, and where their clientele is located.
Just last month, Avison Young’s Tri-State Investment Sales team achieved a new milestone by signing a retail condo with an owner/user in the West Village at a record-breaking price per square foot along Bleecker Street. This purchase follows Dyson Vacuum’s recent acquisition of 155 Mercer Street from Thor Equities and ABS Real Estate Investments for a staggering $60 million in Q1 2023. These transactions are representative of the increased demand for highly visible storefronts in desirable locations and the willingness of owner/users to pay a premium to secure them.
The trend of owner/user buyers is not just limited to the retail sector, but is also rapidly
growing in the office sector. This is evidenced by recent high-profile purchases such as
Hyundai Motor Group’s acquisition of 15 Laight St. in Tribeca for $275 million, which will
serve as their office and showroom, and New York University’s purchase of 400 Lafayette Street, for just under $100 million in their latest expansion around their Greenwich Village campus. These acquisitions are part of a larger trend of companies and occupiers expanding their base in NYC and owning their own real estate.
SBA 504 Loans: An Advantage for Owner/Users
Owner/users have a distinct advantage over traditional investors thanks to the availability of SBA 504 Loans. These loans are an attractive option for businesses due to their cost-effectiveness and have played a significant role in the rise of owner/users as dominant buyers in the market. SBA 504 Loans offer a multitude of benefits for those seeking to enter the commercial real estate industry.
SBA 504 Loans offer up to 90% financing, competitive fixed interest rates, and long-term
financing options that extend up to 25 years, enabling businesses to retain working
capital and reduce debt service which is especially crucial during unpredictable
economic times.
With owner/user’s ability to own an asset at only a 10% down payment, the asset itself
typically becomes self-liquidating, meaning that it pays for itself using the income
generated by the asset purchased with the loan. This not only allows the borrower to
benefit from the asset’s appreciation but also provides a sustainable and self-sufficient
investment opportunity.
In conclusion, there has been a clear shift in the Manhattan Retail real estate market in
favor of owner/users, who have emerged as the dominant buyers over the last 2 quarters. As the market inevitably strengthens, it will be fascinating to observe whether this trend becomes the prevailing norm, or if investors will shift to a more assertive approach in pursuing vacant spaces.
