Commercial Retail Investment Sales in the New York City Suburbs

Kevin O'Hearn, Holliday Fenoglio Fowler As with last year, the investment sales activity in the suburban metropolitan New York area remained low through the first half of the year. More specifically, there wasn't a single sale transaction in excess of $10 million. However, the good news is that as the overall economy continues to show signs of recovery, the owners of retail assets have become more willing to test the waters.

As with last year, the investment sales activity in the suburban metropolitan New York area remained low through the first half of the year. More specifically, there wasn’t a single sale transaction in excess of $10 million.

However, the good news is that as the overall economy continues to show signs of recovery, the owners of retail assets have become more willing to test the waters. The most active group, not surprisingly, are the owners of the highly desirable grocery-anchored strip centers. Most of these centers in the region have survived the recent economic downturn, albeit, with some of the lesser quality tenants, mostly the local mom-and-pop establishments, having the most difficulty, and in some cases leading to in-line vacancies.

Additionally, some of the grocery-anchored centers with big-box junior anchors, one of the most punished retail sectors, are trying to re-stabilize their occupancy.

With most of the grocers weathering the storm, co-tenancy and go-dark provisions remain to be a non-factor. Unfortunately, it has become common for in-line retailers to seek rent relief, however, most of these agreements are on a temporary basis until sales recover. Additionally, the slowdown in the economy has led to several tenants converting to a “percentage of sales” rent resulting in lower financial returns for landlords. But again, this type of provision is viewed as a temporary situation, which will rebound with the economy. Most landlords, similar to other property types, are primarily focused on tenant retention at this point in the economic cycle.

So with the lack of sales comparables, where is pricing and who are the buyers? These are the two main questions owners of retail centers are struggling with. The hope is that retail will follow behind the red-hot multi-housing sector where there is plenty of capital chasing deals and cap rates for quality properties are approaching 5 percent.

Early indications are that there is a large pent-up demand for stabilized grocery centers in strong locations. One recent grocery-anchored marketing effort resulted in two dozen offers, with the top bids coming from institutions, REITs and private investors. Pricing for this asset reached a cap rate of approximately 5.4 percent based on in-place net operating income, in line with pricing achieved in 2006 and 2007.

This result and market sentiment has led other owners to consider the value of their assets and whether it is a good time to liquidate. The debt markets are also poised to support this uptick, as interest for this recent offering was well received by regional banks, life companies and CMBS. Not much credit is being given for vacancy, however, in-place income is being aggressively quoted at 4.5 percent for five-year money and 5.5 percen- for a ten-year loan.

HFF will be hitting the market soon with two other grocery anchored centers which should further validate the demand and pricing for this product type. We are also in discussions with several other owners who are using our marketing efforts to gauge the value of their assets. Based on the high interest level for retail, by both the buyers and sellers, we anticipate a strong and measurable recovery in the second half of the year, and a true comeback for this sector in the years to follow, especially as the economy continues to rebound.