In early March, I sat down with a landlord in a diner in Borough Park, Brooklyn to discuss options for his retail buildings in the area. As we drilled down on the possibilities, he paused and said to me, “Trever, there is a saying in Yiddish which goes, ‘When the Ashkenazi sell, they regret it. And when the Persians buy, they regret it.’ So what should I do?” Given that we were discussing selling his building and then buying a new property in Florida in a 1031 exchange, I had at least a fifty-fifty chance of saying something that he wasn’t going to like, possibly a hundred percent. In my honest assessment, his best move was to wait for a different time to sell his properties. I was more interested in the truth of the matter than his reaction to it, but it was still a relief to see that he was happy with my answer.
This anecdote highlights the dilemma that a lot of retail property owners face, summed up by Joe Sitt on Bloomberg TV last Thursday. He noted that a lot of the economic doom and gloom out there is justified, but the implications are different for each owner and each investor. Most mom & pop landlords feel completely disconnected from the financial markets, yet every interest rate move affects their prospects. Most institutional buyers and sellers follow the markets keenly, but also have varied sources of lending. Above all, Sitt stresses, you need to focus on the Green Shoots and positivity. So here are a few of those:
Green Shoot: The fundamentals of NYC retail properties are very strong. Vacancy rates are down, and asking rents are up.
Green Shoot: A 5.6% rise in store-based retail sales year-over-year last month, inflation adjusted. Physical retail space is getting more valuable.
Green Shoot: Despite elevated interest rates and a gap between buyer and seller expectations, a recent investment survey indicated that 60 percent of investors plan to be active in the first half of 2023.
Green Shoot: Chairman Powell’s comment at the March Fed meeting that, “The monetary tightening cycle may be coming to a conclusion.”
Green Shoot: With the slowdown of interest hikes comes more clarity in the lending market. Banks may, or may not, reduce the safety spread in their lending rates, resulting in lower commercial real estate loans going forward.
Green Shoot: Clarity on the cost of debt capital. Investors do not need to worry about the interest rates increasing by 75 bps while they are in the midst of underwriting or closing a deal. Buyers can make stronger bids.
This past weekend, I finally got the chance to check out the new Kith store in Williamsburg. Except, I didn’t actually go into the store, because the line to get in was too long. In fact, there has been a constant line since the location opened a few weeks ago (photo above).
OK great, who cares? If you don’t own that specific building, nor one nearby, that’s a fair question. Does every store in New York have a line out the door? Nope, far from it; there are many depressing and lonely stores in our great city. But a line stretching down a Williamsburg corridor is most definitely a green shoot, because gloom and doom notwithstanding, it’s living proof of the rising value of physical retail properties for those people and companies that need it most: higher rents, higher sales prices.