Retail net absorption logged a 37.2% quarter-over-quarter leap in Q4 2023, growing to 17.6 million square feet, the highest level for the year. The fourth-quarter total was buttressed by a substantial jump in mall demand as such facilities have benefited from the rebound in physical retail post-COVID. According to a June report from Coresight, top-tier malls saw traffic grow from 2022 compared to 2019, while lower-tier mall traffic was up 10%—and mall absorption is starting to pick up in kind.

Meanwhile, overall deliveries of new retail space fell 5.1% quarter over quarter. The pickup in absorption coupled with the lack of offsetting supply pushed vacancy down 20 basis points to 4.0%, lowest since 2007. High costs are still holding back retail construction, presenting a challenge to retailers on the expansion track.

That challenge could turn out to be a big one if demand continues to outperform, with 2023 another active year for retail sector expansion. Per JLL’s figures, retailers announced 6,617 new store plans in 2023 (regardless of opening date). On the other end of the spectrum, just 4,412 store closures were announced.

Discount retailers are among the most active among expanding tenants, with Dollar Tree, Five Below, Burlington and TJ Maxx all among the top 10 retailers in new square footage signed. Dollar Tree tops the list by a considerable margin with 1.27 million square feet leased in 2023, handily exceeding second-place Target’s 761,800 square feet of new commitments.

Discounters are benefiting from bargain-hunting Americans’ response to ongoing inflation, with the Consumer Price Index (CPI) some 19% above its level in 2019. Discount retailers — chiefly dollar stores — announced  over 2,300 store openings in 2023.

The post Robust demand leads to strong finish for retail absorption in 2023 appeared first on Scotsman Guide.

JLL’s U.S. retail outlook report for third-quarter 2023 stated that 145 million square feet of retail space has been demolished in the past five years. What has been the result of this change?

The reality is we are in a sub-5% vacancy environment right now. There’s literally no new space to lease. At the same time, there is a significant amount of retail demand for growth and expansion, and that is putting a lot of upward pressure on rents.

This year, we’ve seen rent growth in retail, something that hasn’t been achieved for a really long time. Compounding that is just the lack of new retail construction. If you go back to the 2006 through 2008 time frame, we were delivering about 150 million square feet of new retail space each year. But in the past couple of years, it’s been closer to 15 million square feet.

Do you see retail construction increasing this year?

In the short term, the answer is no. There are limited construction starts that are permitted and approved, or are already in the ground for 2024 and 2025. Given that there has been a reset in land values over the past 12 to 18 months, perhaps there will be an increase in retail construction. But it will have to be in 2026 and beyond. Costs have significantly increased, so it’s just really hard to make the economics work for new retail construction in primary and secondary market locations.

What do you see for the retail sector in 2024?

Rents are going to continue to rise in 2024, but the growth in retail is going to slow down a bit. I think we are still coming out of the pandemic-fueled environment, with retailers having great balance sheets and a lot of pent-up demand from consumers. But the consumer is coming under a little more pressure today, so I think that retail is going to continue to be really healthy, but consumers will be less exuberant and more realistic in their buying.

How will retailers handle the lack of new space?

Healthy retailers are going to be looking for creative ways to expand their footprint. They may retrofit vacant spaces that aren’t their typical prototype in order to build new stores. They may go into secondary and tertiary markets where they otherwise might not have gone before. You are likely to see some consolidation of retailers and that, perhaps, will create some opportunities either for expansion or addition through subtraction. If rates cooperate and we are in a lower interest rate environment — and given the amount of new capital that wants to be in retail — there is going to be a ton of investment activity in the retail space.

The JLL retail report showed that malls were still suffering due to negative absorption in 2023. What do you see happening with malls this year?

What’s happening in the mall space is continued bifurcation between models that are thriving and properties that require reinvention. The best-in-class, fortress-style malls are actually seeing increased productivity and really strong same-store sales growth. In most instances, the best of the best assets are performing as well, if not better, than they ever have.

How are malls reinventing themselves?

In some cities, you continue to see multifamily developments at malls. You will also see more medical offices. Malls are sort of living, breathing organisms, and I think they drive a lot of traffic. So, they have the ability to sustain and generate other uses at the mall as well.

A lot of the better-quality malls have more outward-facing food, beverage and entertainment elements to them. It’s not just pass through a door and enter a cavernous mall space today. There is a lot of activity in terms of repositioning and redevelopment, including creating exterior spaces around entrances. It is not just an inward-facing product anymore. ●

The post Q&A: Chris Angelone, JLL Capital Markets appeared first on Scotsman Guide.

And while nothing close to an apocalypse has occurred, retail did take another turn in its long journey. Staples of 20th-century shopping such as Sears and Bed, Bath & Beyond have largely shuttered their doors. Others, like JCPenney, are doing whatever they can to stay afloat. Many malls have permanently closed, with others on the chopping block. And even some power centers and neighborhood centers have either closed or sit half empty.

When we look at the long-term national-level performance and development data, it is hard to find many bright spots. Construction of retail property has been anemic, with less than 100 million square feet of space added over the past decade, or less than 5% of total U.S. inventory, Moody’s Analytics found. For context, office-sector inventory grew by about 10% during the same period. As for rent growth, retail assets have fallen well short of inflation, even prior to the recent run-up in consumer prices.

But all of that is in the past, and while the retail sector will continue to see changes, we do see a new equilibrium on the horizon. The industry has somewhat rightsized itself, finding ways to appeal to consumers who desire the more social aspects of shopping and entertainment while also providing “showrooms” and customized spaces to enhance the online experience.

How have the performance metrics fared recently? As the accompanying chart illustrates, the U.S. retail vacancy rate has stabilized at a shade over 10%, while effective rent growth has picked up. This data shows that the sector still has plenty of room for further growth, but the aggregate statistics also mask some interesting pockets of positive activity.

One of the most startling statistics is rent by vintage. In the majority of metros around the country, there is a rent premium of 50% to 100% for properties built in the past decade — and recent rent growth has followed suit. Metro-level differences are also noteworthy. The areas of the country that have not seen large population or income gains tend to have elevated vacancy rates, often due to the disproportionate amount of older properties that are tied to a lack of development funding.

Some of the clearest examples of this trend include Indianapolis; New Orleans; New Haven, Connecticut; and Syracuse, New York, each of which have retail vacancy rates of more than 15%. Creative, modern developments in these metros may have great potential given the older stock.

Where does this ever-evolving property type head from here? Well, e-commerce is likely to continue growing. The online share of all retail sales has been trending around 15% for a while, and Moody’s Analytics expects it to jump to 20% by the end of the decade. Along with continued shifts in population and consumer preferences, this will sustain some of the same nuances for sector.

The national-level metrics will stay similar to where they are now, while older inventory will make way for trendy developments that incorporate more of the experiential and omnichannel needs of modern society. As always with commercial real estate (and maybe most importantly with retail), a close inspection of the asset, the tenants and the location are vital for a successful investment endeavor. ●

The post Retail properties settle into a period of stabilization appeared first on Scotsman Guide.

In Episode 025 of the Scotsman Guide Author Showcase, Carl White interviews Joseph M. Miller of Partner Valuation Advisors about his article, “Retail is Proving Resilient,” in the December 2023 issue of Scotsman Guide Commercial Edition.

Joseph M. Miller is a managing director at Partner Valuation Advisors and serves as national practice lead of the company’s retail valuation practice. He has more than a decade of experience and has appraised some of the most prominent commercial properties in the U.S. He was named a Retail Influencer by GlobeSt.com and is sought out as a top valuation expert.

The post Author Showcase: Joseph M. Miller, Partner Valuation Advisors appeared first on Scotsman Guide.

These factors may force them to unload their properties at bargain prices in the near future if they are unable to restructure their mortgages. While these circumstances have proven difficult for some property owners, they have also provided opportunities for investors who have the capital and the expertise to buy distressed properties.

“Shopping centers that are anchored by grocery stores or big-box retailers, such as The Home Depot, were quite resilient during the COVID-19 pandemic and continue to be strong real estate investments.”

The question for commercial mortgage brokers whose clients want to buy real estate then becomes, which of these distressed property types is the most favorable to their needs? One category not to be overlooked is retail — specifically, open-air community and neighborhood shopping centers.

Resilient properties

Shopping centers that are anchored by grocery stores or big-box retailers, such as The Home Depot, were quite resilient during the COVID-19 pandemic and continue to be strong real estate investments. In recent years, in fact, restaurant and retail chains that traditionally stayed in urban markets have suffered from diminishing foot traffic in the urban core due to office workers embracing remote work. As a result, they have been drawn to the well-located, suburban shopping center for greater access to consumers.

Not all centers are flourishing. When one of these properties is considered distressed, it is typically due to one of the anchor tenants going dark or because high interest rates are preventing the owner from servicing the debt. And not every distressed property is equal. Experienced investors often prefer to buy a shopping center with characteristics that the new owner can enhance.

One important characteristic, naturally, is location. Acquiring an existing retail property on a busy thoroughfare allows the new owner to focus on ways to create added value through renovation or expansion. Another technique is remerchandising, which involves the landlord rethinking the shopping center to bring in the most popular retail uses to fill vacancies and replace tenants as leases expire. This may include leasing to health care storefront providers, educational uses and even fast casual restaurant concepts.

Prospective buyers often seek short-term loans from regional banks to cover the costs of acquisition and renovation. Within a year or two, they’ll typically seek permanent financing from a CMBS source or an institutional lender, a trend to watch today as interest rates return to more reasonable levels in the second half of 2024 or in 2025.

Getting started

Before a buyer invests in an existing retail center, it is important to know every aspect of the property and analyze how best to enhance the project to increase value. One of the first factors to consider is how to raise the equity needed to buy the asset.

The best place to start is with the potential owner’s circle of friends, family members and other high net worth individuals in their local community. The buyer can sell this group of investors an equity stake in the new venture. This way, the partners can share the profits of the acquisition and benefit from joint ownership.

Another challenge to overcome is raising the debt capital. A mortgage broker can help the potential buyer understand all the nuances relating to the availability of capital, the interest rate environment for the type of acquisition and how to structure the loan.

It’s also crucial to know the market in question. Brokers should advise borrowers to invest in properties near where they and their business partners live. This way, the owners can easily visit and assess the performance of both the property and individual stores.

Know the property

Three aspects of a property that potential owners need to pay attention to include the site’s layout, location and accessibility. How a shopping center is laid out — including which side of the road it’s on, and how easy it is to enter and exit — make a major difference. Shopping centers that run parallel rather than perpendicular to a main road are much more viable in attracting shoppers. They offer tenants more visibility to potential customers driving by.

Also, it’s usually best to be on what’s sometimes referred to as the “going-home” side of the road. Many people like to shop after work and prefer to take a right turn into a shopping center, rather than a left turn against traffic. Of course, other businesses, such as Starbucks or Dunkin’, fare better on the “going-to-work” side of the road since they offer what morning commuters crave.

The size of the project is another key factor. Potential owners and their investor partners won’t have an endless supply of money, so the size of a shopping center they want to purchase makes a big difference. A general rule is that a retail asset of 10,000 to 50,000 square feet is a good starting point for first-time investors. These are considered strip convenience centers. Novices should stay away from projects of 100,000 square feet or more until they are more established and experienced.

Potential buyers should examine all existing leases. Each tenant in the retail center has a lease, so investors should read and understand these agreements prior to their purchase. Also, read any correspondence in the tenant files that would indicate promises made outside of the lease. If most tenants have relatively long lease terms, or they hold options for renewal at preset, below-market rental rates, there is little owners can do to grow revenue and show added returns to their investors.

Look for growth

Investors should look for properties that offer the potential for improvement and expansion. This might be counterintuitive, but shy away from stable, successful properties. They aren’t likely to give the new owners and investors the opportunity to add enough value to provide the investment returns they desire.

Instead, prospective buyers should look for a fixer-upper property that can be upgraded. They might create additional value with new landscaping or signage, repainting or other measures. Also, determine whether the center can be expanded. Increasing the size of the shopping center is one tried-and-true method used to increase cash flow and asset appreciation. An expansion project doesn’t have to be big. It can be as simple as adding a fast-food restaurant in the parking lot facing the road.

As with any real estate investors in learning situations, commercial mortgage brokers should caution clients about doing their homework before plunging into a shopping center investment. The retail landscape is changing constantly. To succeed, you must be prepared to change with it. Time does not stand still, not even for a day. ●

The post The Allure of the Shopping Center appeared first on Scotsman Guide.

Urban foot traffic slowed to near zero in almost every city during the COVID-19 pandemic due to mandatory store closures and occupancy restrictions. Even though an American populace eager to leave their homes returned to in-person shopping almost immediately, urban retail destinations lagged compared to suburban centers, mirroring residential migration patterns that emerged during the depths of the pandemic era.

But urban traffic has seen a considerable recovery this year due to the reversal of these population outflows from large cities, along with the gradual return of on-site office work to central business districts. The return of international and domestic travel has played a part too. Consider that visitors to the U.S. spent a combined $156 billion through the first nine months of this year, up 31.6% from the same period last year and a staggering 183.7% above 2021 levels.

Consequently, coastal gateway hubs that double as white-collar business centers and major tourist destinations have been big beneficiaries. Pre-pandemic levels of foot traffic have been recorded this year in cities like Boston, Chicago, and Washington, D.C., joining others like Miami, which saw pedestrian traffic return to historic norms by early 2021 due to more lenient COVID restrictions.

The trends of heightened tourism and more employees returning to in-person office work appear to have plenty of momentum, especially if any economic downturn in 2024 is closer to a soft landing than a full-blown recession. This bodes well for the continued strength of prime urban retail next year, with some retail subsectors well poised as tenant sources.

Apparel retailers, for one, are taking full advantage of consumers who are keen on returning to the in-person shopping experience. A robust 48% of overall prime-corridor leasing thus far in 2023 has come from apparel companies, up from 35% in 2022. In particular, athleisure retailers comprised 21% of new apparel leases, with brands like Lululemon, Vuori and Hoka leading the charge.

Luxury retail, too, has been a leader in the physical retail rebound due to the value of the in-store experience for the subsector being difficult to replicate online. Bottega Veneta, Cartier, and Dolce & Gabbana, among others, have been proactive in opening new spaces in anchor markets like Chicago and New York.

The post Urban retail outlook promising as foot traffic rebound continues appeared first on Scotsman Guide.

“Given these occupancy challenges, investors are interested in redeveloping malls into other uses, such as medical offices or multifamily communities.”

The slowdown of the commercial real estate market has affected all asset classes, but the retail sector — which faced its own difficulties prior to the period of rising interest rates and return-to-work challenges — is somewhat less impacted. Unlike industrial and multifamily properties, retail did not see significant pricing increases over the past few years. Capital market struggles and capitalization rate increases are being felt across all property types, but the recent changes in retail property values are not as dramatic when compared to other sectors.

Value by subsector

Across the country, there are varying levels of interest in retail properties based on size, quality and tenancy. Single-tenant net-lease properties with long remaining lease terms continue to be the most sought-after assets.

This property type typically attracts a large pool of potential buyers, which drives pricing upward. Net-lease properties with strong credit tenants and remaining lease terms of 10 years or more are seen by many investors as being similar to a corporate bond. The shorter the lease term or the higher the risk associated with rent payments (tenant credit), the less interest the property will gather in the marketplace, pushing pricing downward.

Overall, the second most-desirable retail property type is the grocery-anchored community shopping center. Many institutional investors view grocery-anchored centers as a stable investment opportunity. Typically, grocers have performed well over the years and have been relatively “internet-proof.” Many tenants in grocery-anchored centers strategically lease these spaces due to the increased customer traffic that a grocery store will drive to a center. While grocery-anchored centers are judged as a positive, the specific grocer in place affects this desirability. Many investors still view Whole Foods and some large, national grocers as value-add opportunities, while local grocers and other national chains are not viewed as strong in-place tenants.

Power centers and lifestyle centers can be attractive to investors at higher capitalization rates. These are large outdoor shopping complexes. Power centers typically have three or more big-box stores, while lifestyle centers house upscale shopping, restaurant and fitness options in promenade-style spaces. The main driver of value for a power center is the tenant mix. If there is a good blend of national and local tenants with internet-proof offerings, the center will likely command decent investor interest. Many of these properties have a large entertainment focus (movie theaters, experiential offerings or restaurants) that can create a more attractive tenant mix. The most significant concern for these centers is the occupancy cost that a tenant can bear during their lease term.

As real estate operating costs (e.g., insurance and taxes) continue to rise, tenants are hyperfocused on industry-average occupancy costs, local occupancy cost ratios and brand occupancy cost ratios. If occupancy costs at one location are considerably higher than average, many tenants will look for cost-effective alternatives in the market. As tenants continue to focus on operational expenses, landlords must offer upper-level amenities and incentives to retain existing tenants and attract new ones.

Mortgage environment

Toward the lower end of the range in value for retail properties are smaller neighborhood centers with local tenants, as well as Class C and lower regional malls. Many of these centers have seen continuous declines in occupancy rates and tenant quality, which can result in questions of highest and best use for the center, as well as its long-term viability.

Overall, debt remains available for retail properties, but commercial mortgage lenders are taking a harder look at asset quality, tenant quality and cash-flow stability before financing a transaction. Lenders are still willing to finance upper-tier retail assets and single-tenant net-lease properties with relatively long remaining lease terms.

These types of properties are viewed as strong investments and are less risky than many other retail assets. While lenders are willing to place debt on these assets, property owners are dealing with lower loan-to-value (LTV) ratios compared to prior years. On top of the LTV constraints, the debt-service-coverage ratio may also impede the lending decision, as many borrowers are experiencing lower levels of cash flow than in previous years.

For less desirable assets, traditional financing remains difficult. Lenders are often concerned with the best uses of these properties and their future viability. Owners of these assets may seek alternative financing from private lenders, hard money lenders or mezzanine lenders. The short-term funding offered by a nontraditional lender allows the property to be repositioned or stabilized so that traditional long-term financing can eventually be secured.

Occupancy challenges

As a result of market disruption caused by e-commerce, malls continue to struggle. With brick-and-mortar retail sales permanently impacted by online competition, retailers must reduce expenses to keep physical stores open.

Since they’re among the most expensive retail environments for tenants, malls must reduce rents to remain competitive. Consumer sales are not likely to increase dramatically, so rents must trend down. This leaves mall owners to choose between lower occupancy and more income, or higher occupancy and less income as compared to prior years.

Given these occupancy challenges, investors are interested in redeveloping malls into other uses, such as medical offices or multifamily communities. Municipalities are beginning to work with developers to help loosen the restrictive covenants that have historically hindered redevelopment efforts, resulting in success for some properties. But adaptive reuse can be more costly than ground-up construction, particularly in the case of a retail-to-multifamily conversion.

Vacancy issues, of course, are not limited to malls. With the closure of businesses like Bed Bath and Beyond, vacancies plague owners of big-box retail centers everywhere. Gyms and other types of tenants have absorbed some of these vacancies, and in some markets, landlords have attracted community colleges or churches to replace the former anchor tenants. Where demographics support them, experiential tenants such as golf simulators may lease large spaces — a boon for landlords since these ventures not only solve the vacancy problem but attract valuable foot traffic to other parts of the center.

If they’re unable to attract a replacement tenant, many landlords will have to redevelop these big-box spaces and create smaller spaces. Multiple small spaces will bring in higher rents than one large space, but converting a big-box space into in-line suites requires significant capital investment.

Informed decisions

To undertake any of these options, retail property owners must determine whether a project offers sufficient return on capital. To inform their decision, they may request a market study, performed by a valuation consultant with retail expertise and knowledge of the local market.

A market study can inform income projections for the proposed use by providing an analysis of supply and demand within the local market. Owners may also engage with a qualified engineering consultant to perform a feasibility study. This includes information about the site and its infrastructure, potential improvements, a conceptual layout, permitting requirements and costs, and an estimate of construction costs.

If owners can overcome the obstacles to redevelopment, the overall inventory of retail square footage will decrease to a volume that might be more appropriate for today’s retail industry, where online sales compete with traditional stores. Less inventory will allow for better absorption of space, providing a potential upside for the retail sector in the long term. ●

The post Retail is Proving Resilient appeared first on Scotsman Guide.

Despite growing fears that a downturn may be pending in the first half of next year, retail sales gained steam in the months leading up to the holiday season, according to JLL’s Q3 2023 Retail Outlook report. Retail sales grew for the sixth consecutive month in September, rising by 0.7%, according to data from the commercial real estate service company.

Subsequently, retail real estate demand remains consistent with levels seen during the first half of this year. Retailers are grappling with higher operational costs due to inflation, a lack of labor and ever-present, elevated interest rates. But thus far, the largest headwind to leasing activity has been a lack of available space in prime locations.

JLL described the shortage of space as “significant,” considering that 145 million square feet of retail space has been demolished in the past five years and high building costs continues to hold back construction. Deliveries fell 30.4% quarter over quarter to stay near historic lows. Availability in the sector, per JLL, is nearly 200 basis points below its historic average of 6.8%, and is not expected to see meaningful improvement in the coming year given the slowdown in construction and a projected increase in teardowns of obsolete space.

Market rents are still on the upswing as a result, although rent growth is moderating from its high points logged last year. The strongest rent growth is still concentrated in the Sun Belt states, where space for midsized boxes and outparcels is hard to find.

Retail deal volume, however, remains muted. Outside of entity-level activity, capital markets were essentially flat between the second and third quarters. JLL’s early estimate of Q3 transaction volume (excluding entity-level deals) was approximately $9.9 billion, down slightly quarter over quarter and a whopping 40% decrease compared to third-quarter 2022.

The post Retail sales still growing, keeping demand for real estate strong appeared first on Scotsman Guide.

A top supporter of this form of retail is Gary D. Rappaport, whose company, Rappaport, has been developing and operating shopping centers for nearly 40 years. Rappaport and his team have invested more than $1 billion in retail properties throughout the District of Columbia, Maryland and Virginia. He is also the author of “Investing in Retail Properties: A Guide to Structuring Partnerships for Sharing Capital Appreciation and Cash Flow,” with the third edition published by Forbes Books last month.

“Retail real estate, I believe, is the most complicated sector of commercial real estate.”

Rappaport spoke with Scotsman Guide earlier this year about the unique strength of the neighborhood shopping center. He also offered advice to investors who are interested in the sector.

What are some of the main trends you see in the shopping center sector?

Grocery-anchored shopping centers continue to be the most stable property subsector in retail, as well as one of the strongest property types in all of commercial real estate. Whereas most retail categories have a few creditworthy tenants, the grocery category — more specifically in the Washington, D.C., market where most of our operations are located — has multiple creditworthy tenants all seeking to expand. There have been very few neighborhood and large community, open-air shopping centers built during the past 10 years. Because of this, occupancy and demand for space have remained relatively high.

What are the key factors investors interested in this sector should keep in mind?

Location is very important, but so is the creditworthiness of tenants and the length of their leases. The type of financing we place on these acquisitions is also key. For example, fixed or floating loans and the length of time, which we use to obtain the projected returns versus the evaluated risk. The grocery-anchored product tends to have a significant, reliable cash-flow growth potential that investors can have confidence in. The yield of this type of real estate can start at a much higher point relative to office, industrial or multifamily.

Why has this type of real estate been so successful?

Shopping centers attract retailers that cater to consumer needs for essential products and services. I describe it as necessity retail that is mostly internet-proof. You can buy groceries online and have them delivered, but most people want to see the food for themselves. The centers also tend to act as last-mile merchandise providers because they are closer to where consumers live than the regional malls. At the same time, the open-air centers are less costly to operate and so can offer lower total occupancy costs than enclosed malls. The centers are attracting anchors and specialty retailers such as Kohl’s, Lululemon, Athletica, Express, Apple and Foot Locker. These retailers have been pivoting away from malls for more than a decade.

What do you look for in a shopping center property?

There is virtually no new supply being built and while difficult to find, we are always looking for a shopping center where we can use our expertise to create value through re-leasing, remerchandising, renovation, and professional management and marketing. I believe there is nothing like local knowledge and relationships to give us an advantage over other buyers. We have a reputation as strong community members who add value to a shopping center and the whole close-by community.

What are some of the mistakes that investors need to avoid with these kinds of projects?

Retail real estate, I believe, is the most complicated sector of commercial real estate and the sector in which the expertise of the sponsor is most important. In retail, one needs to understand cross-shopping and tenant mix to maximize sales across the property. One needs to understand tenant leases with clauses, such as exclusive and broad leasing rights, co-tenancy requirements, no-build areas, percentage rents and other restrictions that could materially affect the long-term success of a retail property.

Some developers are quite successful buying a shopping center that needs a capital investment and expertise, as we would provide, and then when the property stabilizes, they sell. I do not sell. I believe owning real estate for the long term is the way to create material assets for one’s partners and one’s family. Investors wishing to place funds in a partnership — as opposed to purchasing shares in publicly traded REITs — should be aware that this is a long-term investment and they need to have a long-term horizon for their investment. They must be content with receiving fairly reliable, tax-advantaged annual distributions that equal about 8% of their initial investment. ●

The post Q&A: Gary D. Rappaport, Rappaport appeared first on Scotsman Guide.

Economic recovery from the COVID-19 pandemic is mixed, but all four states saw yearly gross domestic product (GDP) growth of 1% or more in first-quarter 2023. The highest GDP growth was recorded in Pennsylvania (1.9%), nearly on pace with the national growth of 2%. Growth in the Mid-Atlantic states was mostly in line with their Northeast neighbors.

Using 12 economic indicators to measure inclusive growth, the Brookings Institution’s Metro Monitor 2023 report tells a story of a region tested during the pandemic. Notably, extra-large metros in the Mid-Atlantic appear to have struggled the most, while many large and midsized metros showed remarkable improvement.

The report measures a broad range of growth indicators, including GDP and jobs; wages and productivity; poverty rates; and racial income and employment gaps. The largest metros in the Mid-Atlantic Region, including New York City, Pittsburgh, Philadelphia, Buffalo and Rochester, landed in the bottom half of all U.S. metros analyzed for post-pandemic inclusive growth.

But the region’s smaller cities thrived, welcoming growth and narrowing inclusivity gaps. New York’s capital, Albany, ranked No. 44 prior to the pandemic and jumped to No. 23 among the 192 metros studied. In Pennsylvania, two metros jumped from the bottom half of the rankings to the top: Allentown (up 62 spots to No. 52) and Harrisburg (up 51 spots to No. 66). Other Mid-Atlantic metros saw similar improvement, including Syracuse and Utica (New York), Trenton (New Jersey) and York-Hanover (Pennsylvania).

Although many larger Mid-Atlantic cities took an economic hit, recovery is still in progress. And even though some commercial real estate sectors are struggling in 2023 — especially the office market — other sectors are getting healthier, deals are still happening and new developments are breaking ground. Tourism figures have surpassed or approached pre-COVID levels in New York, Philadelphia and Pittsburgh, boosting retail demand.

In NYC, developers are reinvigorated and The New York Times reported a “wave of new development” in the boroughs outside of Manhattan. Some 56,000 rental units are expected to be delivered from 2022 to 2025 in Brooklyn alone, fueled by an affordable housing tax subsidy. Developer Silverstein Properties announced a “shovel-ready” double-skyscraper project this past summer that will house 100 affordable apartments, a casino, performance hall and massive luxury hotel. And in August 2023, NYC Mayor Eric Adams rolled out a plan to convert empty office space into as many as 20,000 new housing units. ●

Manhattan is on track to welcome 63.3 million tourists this year and the summer tourism season boosted the retail market significantly. Foot traffic increased, subway ridership surpassed 4 million daily riders and Broadway show attendance returned to 87% of pre-pandemic levels. More than 20,000 new hospitality jobs were filled this past May. With people flooding the city and a lot of space discounted, retailers are snapping up new locations and expanding.

According to a second-quarter 2023 retail report from Cushman & Wakefield, available retail space declined or stayed steady in nine of 11 Manhattan submarkets. In the SoHo, Madison Avenue and Third Avenue submarkets, available storefront space hit historic lows. Retailers signed 20 new leases in SoHo during the quarter and the vacancy rate fell to 13.4%, its lowest point since 2014.

Manhattan retail asking rents have stabilized since their trough in second-half 2021. While still lower than 2019 levels, prices climbed 2.2% year over year in Q2 2023. Demand from luxury and apparel brands remained strong, especially in the Madison Avenue submarket. Most discounted space there had been leased by midyear, Cushman & Wakefield reported, driving rents up 9.4% year over year to an annualized rate of $813 per square foot.

What the Locals Say

The New York market is always going to be the pinnacle of U.S. real estate. Everybody wants to be in New York. Everybody wants to own prime properties in New York. Buyers will always be attracted here. The question is, can they afford it?

The sellers think that because it’s New York, or it’s the tri-state area, they should demand a premium for their properties. And in this market, if you can’t finance it with a reasonable deal, it doesn’t make sense. If properties were more reasonably priced, given today’s conditions, there would be more activity. Banks are pulling back, and we’re seeing more people having to resort to private loans and bridge lenders to bridge that gap until the banks want to get back in the business.

Sellers are still selling properties at what they think are reasonable cap rates, which probably aren’t, given financing conditions. That’s suppressing deal values. I have customers calling me and trying to buy a property at a 4.5% cap rate when rates are 6.5%, and they don’t understand why the property doesn’t have cash flow.

We’re seeing a lot of activity moving out of the primary urban markets into more tertiary markets to get better deals. We have a lot of people now who are moving further upstate, where it’s more rural, or into other areas just to get out of the competitive New York market. Whether it’s upstate or into less-populated areas in Connecticut or New Jersey, we see people expanding a bit because they’re not finding the prices they want in the urban areas.

3 Cities to Watch

Buffalo

Just 20 miles south of Niagara Falls, Buffalo (276,000 residents) supports a metro-area population of more than 1.1 million. During the Gilded Age, Buffalo was one of the largest cities in the nation and had the most millionaires per capita of any U.S. city, due to massive industrial growth. The city is now a major trade center for Canadian imports and exports. M&T Bank, Kaleida Health, Tops Markets and aerospace firm Moog Inc. are headquartered in Buffalo.

Philadelphia

Besides cheesesteaks and cream cheese, Pennsylvania’s largest city might be best known for its deep history and involvement in the American Revolution. Philly is now a center of financial services, technology, advanced manufacturing and life sciences. Greater Philadelphia (6.2 million people) generates more than $450 billion per year in gross regional product. Many large corporations call Philadelphia home, including Comcast, DuPont, Aramark and Campbell Soup.

Trenton

New Jersey’s capital city sits on the border with Pennsylvania, along the Delaware River, and is home to nearly 90,000 people. Once famous for its rubber, ceramics, iron and steel industries, Trenton is now a center for government, logistics and manufacturing. Several projects are underway there, including a $73 million mixed-use redevelopment of the historic Van Sciver Building, which will bring 120 apartment units and 7,500 square feet of retail space.

Sources: Britannica.com, Brookings Institution, CBS Philadelphia, Cushman & Wakefield, Invest Buffalo Niagara, Mercer County (N.J.), Pittsburgh Magazine, Select Greater Philadelphia, Spectrum News 1, The New York Times, TrentonDaily

The post Commercial Spotlight: Mid-Atlantic Region appeared first on Scotsman Guide.