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As High Street Retail Deals with an Uptick in Vacancies and Rent Declines, Investors Zero in on Class-A Assets with Long-Term Leases

Buyers want well-located assets occupied by a solid tenant with a long-term lease in place, but limited opportunities are available for that type of trade.

Even though a lot of retail is flailing, much of U.S. high street retail is still drawing both shoppers and investors, boasting extremely high rents and catching the attention of new retailers and brands.

New York City’s famous Fifth Avenue, Chicago’s North Michigan Avenue and Beverly Hills’ posh Rodeo Drive are some of the toniest and highest-trafficked retail streets in the country. They feature retailers like Versace, Armani and Tiffany & Co., as well as popular urban brands like Zara and the Apple Store.

That’s not to say that high street retail has been immune to the challenges plaguing the industry as a whole. Some high street landlords are feeling the pinch. There are vacancies in some high street corridors, and after years of double-digit rent increases, some landlords are in the second year of double-digit declines.

Manhattan’s Upper Fifth Avenue rents, for example, shrunk about 20 percent in the last year, says Garrick Brown, vice president and Americas head of retail research with real estate services firm Cushman & Wakefield.

Between 2010 and 2015, landlords were aggressively raising rents somewhere between 10 and 15 percent annually in virtually every Manhattan submarket that Cushman & Wakefield tracks, he notes, including Fifth Avenue, SoHo and Madison Avenue. Rents reached unsustainable highs.

Manhattan has also faced some high street vacancy. There were 143 retail spaces vacant for a year or more, and landlords reduced rents on more than half of them, real estate services firm CBRE reported in July. Now, more than 500,000 sq. ft. has been leased in more than 98 transactions.

Meanwhile, rents in San Francisco’s exclusive Union Square area and on Chicago’s prestigious Michigan Avenue also tumbled.

Despite these challenges, experts say high street retail continues to perform well.

“In the U.S., while there has been a lot of discussion around store closures, the main high street markets have not been as adversely affected as some of the headlines might suggest,” said Darren Yates, head of Europe, Middle East and Africa retail research for Cushman & Wakefield, in a statement. “The fact is that most retailers are not turning their backs on high street locations.”

“The thing that people need to look at with high street isn’t there exposure to luxury brands, because luxury brands are doing fine,” Brown notes. “It’s their exposure to mass market, mid-price commodity apparel players. That’s where the damage is being done as far as bankruptcies, strategic closures, etc. Even though high street isn’t seeing a lot of that, they’re seeing some of it.”

Investor demand is solid

Demand by investors for high street retail is up over last year, reports real estate services firm JLL. JLL defines high street as “prime urban retail.” Rather than focus on one particular street, it looks at the urban corridors formed around that concentration of retail.

“When you look at all retail product types—aside from malls because we’re seeing a lot of entity deals on that side (including the Westfield/Unibail-Rodamco and Brookfield/GGP deals)—prime urban retail is the only sector that has seen an increase in transactions,” says Arielle Einhorn, JLL’s manager of investor research focusing on retail and office. “Year over year for third quarter, there was a 7.8 percent increase in prime urban retail transaction volume.”

And a lack of product for sale is stifling more deals, he notes. “There’s limited opportunity, because there’s limited inventory,” Einhorn says. “They don’t come around that often because they’re really strong, long holds.”

Data from New York City-based research firm Real Capital Analytics shows that trades on urban storefronts valued at $2.5 million or more totaled roughly $5.79 billion through the first three quarters of this year. That up slightly from approximately $5.75 billion in such sales that occurred during the first three quarters of 2017.

If you already own class-A high street retail space, typically you’re not looking to sell it unless you can trade into similar space, so it has created a bit of a log jam as far as activity, according to Brown.

“Mostly, what I’m seeing if something trades, it never even comes to market,” Brown adds. “Basically, once someone decides they want to sell, they call a broker who has a long list of people they can call without even having to market it. It’s one of those things where it wasn’t made public knowledge that it was available—but boom!—this thing just traded.”

Smaller buyer pool that wants trophy assets

Due to investor concerns over the health of the retail sector overall, fewer investors are pursuing retail, while owners of class-A properties—including high street assets,—are generally not selling them.

“What it really comes down to is the buyer pool has shrunk considerably for retail,” Brown says. “We estimate the buyer pool has shrunk between 30 and 40 percent over the last year. What happened is the pension funds, under pressure from their investors, read these bleak headlines. The investors are under pressure to get away from retail and put more into industrial and multifamily.”

Brown says while big institutional investors are focusing less on retail, the lion’s share of those players still in the market are chasing core and core-plus investments.

“There are fewer sellers for high street and a lot more buyers, and that’s what’s keeping those cap rates from moving much,” he says.

Two years ago, if an investor was looking to buy a trophy high street asset in New York, “you would be [looking at] low- to mid-4 cap rates, and now they’re mid- to high-4 cap rates,” Brown says.

Overall, cap rates for high street retail are averaging in the mid-4s to really low 5s, he notes—about 50 basis points up. Two years ago, they were averaging in the low 4s to high 4s.

What do investors want in high street?

Currently, Brown says investor demand is for high street retail that’s occupied by a solid player with a long-term lease in place.

“If you’re talking about someone looking to buy a prime urban location occupied by a triple A credit tenant that’s doing well, that demand has never been stronger,” he notes. “And that’s why those cap rates have barely moved. That just doesn’t become available very much.”

While institutional players are the most active in the market, Einhorn also sees some interest in prime urban retail from  foreign investors and even some high-net-worth individuals and family offices.

What big assets recently sold?

Vornado Realty Trust continued to add to its Manhattan portfolio in September by acquiring the retail portion of the New York Marriott Marquis in Times Square. The REIT acquired a 46 percent interest for $442 million and now owns 100 percent of the retail property. (Vornado previously acquired a 54 percent interest and redeveloped the property).

The acquisition includes the retail, theater and the largest digital sign in New York. The seller is Host Hotels & Resorts. The 45,000 sq. ft. of retail is leased to T-Mobile, Invicta, Swatch, Levi's and Sephora.

“Times Square is an area that we’re seeing a lot of interest [in] from different kinds of investors,” Einhorn says. “There’s a lot of tourist demand and continued visibility. That’s really what you want from a prime urban asset. You’re paying that price tag; you want to make sure it’s seen.”

In another large transaction, Louis Vuitton’s parent company LVMH purchased a two-story, 22,251-sq.-ft. building at 468 N. Rodeo Drive in Beverly Hills for $245 million, or roughly $11,000 per sq. ft. The seller is Robert Stanley Anderson Trust. The space was previously occupied by Brooks Brothers, which vacated in August. The building first hit the market in May for $300 million.

And a 5,400-sq.-ft. retail building at 721 Collins Ave. in South Beach, Fla.—leased to Sephora—sold for $7.5 million or $1,389 a sq. ft., reported the South Florida Business Journal. The buyer is Prisma Properties and the seller is a group of investors led by Michael Comras, of the Comras Co. Nearby retailers include H&M, Guess, Armani Exchange and Victoria’s Secret. 

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