Retail Market Report

New York, NY Market Overview

So far, Q3 2023 has shown ongoing indications of improvement in the New York retail market. As the retail sector continues to recover, retail rents are experiencing positive effects. Over the past year, rents have seen a modest increase due to the rise in leasing activity, foot traffic, and in-store sales. These improvements have given owners more leverage during negotiations. Despite these improvements, it is important to note that absorption levels, or lease-up rates, in the last 12 months have remained negative. The announced store closures of prominent occupiers like Party City, Bed Bath & Beyond, and Foot Locker are expected to adversely affect short-term absorption rates.

Highlights

• Total leasing activity during the last 12 months has been consistent with the long-term historical average.
• The Times Square submarket has the highest average rent in New York, surpassing $300/SF, as well as the most foot traffic.
• The largest construction project currently underway in the market is a retail site spanning 303,000 square feet located at 1504 Coney Island Ave in South Brooklyn. The completion of this project is expected by the end of 2023.
• The retail, dining, and hospitality industries in New York City have seen improvements in the last year as visitor foot traffic has increased.

Rents | Vacancy | Construction

Nearly all the top 20 most costly submarkets nationwide are located in Manhattan.

The vacancy rate in New York’s retail market remains at 4.3%. This figure is consistent with both the long-term historical average of 4.6% and the average vacancy rate across the U.S., 4.2%. As annual absorption and leasing activity show signs of improvement, retail rents in the metropolitan area have increased by 1.7% in the past year. It is projected that rents will continue to rise, supported by stable vacancy levels.

New York has one of the largest supply pipelines among all U.S. metros at 3.2 million square feet, according to CoStar Group. However, it is essential to mention that construction activity has significantly slowed down in recent years. While strong preleasing activity in previous years helped maintain low vacancy rates, the pace of lease up progress is expected to decrease, despite the retail sector’s improvement over the past 12 months.

Sales

Currently, the 12-month sales volume stands at $4.5 billion.

Investor activity has maintained a consistent pace annually, with approximately $6 billion being exchanged in 2021 and 2022. Buyers are becoming more drawn to New York due to its ongoing recovery and the appealing valuations available, which are more favorable compared to the previous peak of the sector.

Jersey City, NJ Market Overview

There have been clear signs of recovery across the Jersey City submarket. The market is expected to remain stable, with positive absorption projected over an extended period. Increased leasing activity, combined with a scarcity of new retail supply, has resulted in a low vacancy rate within the market. The leasing figures were primarily driven by significant lease agreements made at shopping centers in the submarket’s western outskirts. In the upcoming years, the growing number of apartment developments is expected to strengthen the demand for retail.

Highlights

• Although the closure of financially troubled department stores has recently impacted absorption levels, the base case forecast predicts that vacancy rates will remain comfortably below the metro average in the long term.
• Jersey City has experienced rapid growth and emerged as one of the fastest-growing regions within the New York metropolitan area.
• Since 2015, over 13,000 new market-rate rental units have been completed in Jersey City and Hoboken, with thousands more currently in construction.
• Investors have remained active, with over $100 million trading hands over the last 12 months.

Rents | Vacancy | Construction

A major contributor to increased leasing totals were large leases signed at shopping centers located on the submarket’s Western outskirts.

Jersey City has a low retail vacancy rate of 2.4%, indicating limited capacity for significant absorption. The tight vacancy rate is a result of increased leasing activity and historically low levels of new supply in the area. The average rental price for retail properties in the Jersey City market is below the metro average, standing at $33.00 per square foot. Despite the limited availability of vacancies, rents have increased by 1.1% over the past year.

The majority of construction activities in the submarket have been focused on office and multifamily properties, which have experienced significant inventory growth over the last two decades. Currently, only 71,000 square feet of retail space is being constructed in the submarket.

Sales

Currently, the 12-month sales volume stands at $102 million.

Ongoing residential development, positive changes in wage demographics, and the recent expansion of urban areas have all served as attractions for investors in the New Jersey City market. Investor activity has remained robust, with transactions totaling over $200 million in 2021 and $101 million exchanged over the past 12 months.

Boston, MA Market Overview

Available retail space in Boston is scarce, especially in prime suburban locations, leading to intense competition among tenants. The limited supply is impacting demand, which has reached 480,000 square feet over the past 12 months, compared to an average of 700,000 square feet over the previous three years. Despite modest development activity, demand has consistently exceeded new supply, resulting in a further decrease in availability, currently standing at a rate of 3.2%. Although consumer spending is performing better than initially anticipated, it is gradually decelerating and is projected to turn negative sometime in H2 2023. This decline is placing additional strain on retailer profitability, which was already facing significant challenges due to substantial cost increases.

Highlights

• The number of store closure announcements is on the rise, reaching approximately 2,900 year to date. This is a significant increase compared to the same period in 2022, when only 900 closures were reported.
• There is not a significant portion of pure retail space available in the Boston market, with standalone and centers/malls making up just 10% of the metro area’s entire inventory.
• The total amount of newly completed retail space has not exceeded 2 million square feet since 2017, and in terms of net additions, this milestone hasn’t been reached since 2014.
• Boston’s robust retail market can be attributed to several factors, one of which is the creation of numerous new residential areas in recent years. These developments have resulted in tens of thousands of new households, providing substantial purchasing power across large sections of the metropolitan area.

Rents | Vacancy | Construction

There is a clear preference for suburban and first-ring urban submarkets in the Boston area. which can be attributed to higher population growth and lower construction and leasing costs.

Despite growing challenges for the overall U.S. consumer market, the retail sector in Boston shows few signs of weakness. It continues to maintain a strong position compared to other major markets in the country. The availability rate of 3.2% indicates robust demand and a scarcity of speculative development. Rent growth has experienced a significant slowdown, but this is expected to be a temporary trend due to the ongoing supply and demand imbalance. As of Q3 2023, posted rents have increased by 0.8% compared to the previous year, resulting in an average rent of $26.00 per square foot NNN.

New supply is not a significant concern for the retail sector compared to other property types. Although there are indications that conditions may warrant more development, speculative projects gaining momentum in 2023 are unlikely to see a significant reversal. While three million square feet of retail space has been constructed in the past three years, expanding the total inventory in the metropolitan area by 1.0%, the current 700,000 square feet of ongoing development represents only 0.3% of the existing stock.

Sales

The average difference between the bid-ask spread was over 11% in Q2 2023. The average confirmed cap rate increased by 30 basis points to reach 6.25%.

Considering the notable slowdown observed in Q1 and Q2 of 2023, it seems nearly impossible to achieve a third consecutive year of record retail sales volume in Boston. The impact of elevated interest rates on capital markets has finally begun to weigh them down, leading to expectations that 2023 will be one of the least active investment years in the past decade. The 12-month sales volume is currently $1.7 billion.