BY JONATHAN GORDON AND JESSICA MUNZEL
Two of the more pervasive strengths of Westchester County”™s retail real estate market remain its population”™s impressive buying power and the relative supply-and-demand balance of its inventory of retail properties. Augmenting those factors are the last two years”™ gains in employment and consumer confidence.
On the negative side, retailers are under great pressure from the Internet, and leasing deals, while picking up momentum, remain difficult to bring to the finish line. The opportunities in this market revolve around finding ways to harness changing consumer spending patterns in a market with strict zoning regulations.
Buying power. Westchester”™s population, just shy of 1 million people, includes a high percentage of both families and baby boomers. Population growth is modest, but income levels are exceptional. Westchester”™s 2013 average household income of $123,110 is 9 percent higher than Manhattan”™s and over 70 percent higher than that of the entire U.S., according to the Census Bureau.
Remarkable stability. In relation to many other markets in the Northeast, Westchester County has remained a remarkably stable retail market. The county”™s proximity to New York City, affluent population, limited land availability and high construction costs help keep inventory and vacancy levels within a narrow range, even during periods of great volatility nationwide.
Over the last eight years, which includes the entire span from the height of the retail market prior to the Great Recession, to the lows of 2008 through 2012 and finally to the current quiet rebound, vacancy has varied only between 5 percent and 6.2 percent, according to CoStar, an independent commercial real estate research firm. Similarly, CoStar reports total gross leasable retail area in Westchester increasing less than 5 percent over the same eight-year period, from 47.2 million square feet in 2006 to 49.4 million square feet at midyear in 2014.
While the numbers here have generally been trending positive, and Westchester County has fared far better than much of the U.S. over the last 10 years, several trends in our retail market bear watching closely.
Retail ”” changed by technology
Improved operations. On the positive side for retailers and developers/investors, technological advances have enabled many retailers to greatly improve their inventory control. Some have also benefited from lower product costs attributable to deflationary pressures in the countries manufacturing their products. The lower cost of goods sold brought about by these factors has provided some retailers the ability to support higher rents without decreasing their profit margin.
Internet pressures. The rise of the Internet is probably the most disruptive development retail has experienced in generations. The most recent data from the U.S. Department of Commerce shows $70 billion of Internet sales during 2Q14, out of total retail sales of $1,174 billion, representing 6 percent of total sales.
Continued Internet sales growth has of course put pressure on the bricks-and-mortar retailers that comprise the Westchester market. Retailers in hard and soft goods have been much harder hit than those uses that can”™t easily be sent in the mail, such as food, services, medical and recreation. Accordingly, the latter retail categories are expanding the most.
Our recent deals at Admiral Realty Services are evidence of this trend. Of the 220,000 square feet of transactions our firm has closed to date in 2014, 70 percent were in food, service, medical or recreation. Likewise, our office is currently representing Salsa Fresca Grill, a growing chain of healthy, fast casual restaurants, Peachwave, a franchisee of upscale frozen yogurt and entertainment provider, and Flywheel Sports Studios to open additional locations in Westchester County.
Sales tax disadvantage. Avoidance of sales tax has been an unfair advantage for Internet retailers, and has diminished the coffers of municipalities that depend on sales tax revenue as a funding source for such services as police and fire protection and emergency medical. To support a level playing field for all retailers, our company participates in initiatives spearheaded by the International Council of Shopping Center”™s Government Relations Committee and the Real Estate Board of New York. These initiatives educate and lobby city, state and federal legislators to enact legislation that restores the right for states to enforce sales tax collection by Internet retailers.
The power of data. As in the larger business environment, decision-making by retailers has become much more empirical and less intuitive. Retailers and their site selection teams want to be shown detailed demographics to assess the viability of potential sites, supported by hard data.
Consumers rebound and redirect dollars
Higher confidence, better bonuses. Consumer confidence has rebounded significantly and is now at its highest level since the Great Recession. As a bedroom community for job commuters to New York City, Westchester”™s overall economic health is intricately tied to the finance, insurance and real estate, or FIRE, industries. These industries were at the epicenter of the subprime financial crisis, and FIRE employment and salaries suffered accordingly. Subsequent improvements in the stock market and residential real estate markets have fortified employment in these industries, also affording bigger bonuses and, most important to the retail sector, higher discretionary income.
Changing spending patterns. The aging and retirement of the baby boomers, a large and wealthy demographic, has amplified the transformation in bricks-and-mortar spending triggered by Internet sales. Spending is shifting away from hard and soft goods and to food uses, entertainment, and services. Similarly, medical and health-related uses are also on the rise, which is tied not only to the aging and retirement of the baby boomers, but also to the still evolving effects of the Affordable Care Act.
Two leases, totaling around 12,000 square feet, recently brokered by our company were with large medical users with strong credit. These types of tenants have the added benefit of bringing significant pedestrian traffic and consumer dollars to neighboring retailers.
Bridging market gaps
Adjusted rents. Over the last year, the gap between landlords”™ and prospective tenants”™ rent expectations has diminished, facilitating the leasing process. Although Westchester County”™s vacancy rate has been quite stable, quoted triple net rents have shown a more significant change, ranging from a high of $30.76 per square foot in 2006 to a low of $25.86 per square foot in 2010, according to CoStar – a spread of just under 20 percent, although that percentage would be lower if comparing total rent costs ,including triple net reimbursements. In 2011, quoted triple net rents averaged $26.42 per square foot, and have remained relatively flat through this year”™s second quarter.
Tougher deals. Paradoxically, while more leasing deals get past the letter of intent stage, they have been more difficult to close. A greater number of negotiations seem to be getting mired in legal nuances and obscure what-if scenarios. Moreover, email and texting from small screens have made business communications copious, rushed and at times less courteous, which can quickly undermine the trust upon which the negotiation process is predicated. Neither email nor texting has the benefit of face-to-face discussion, which is more likely to help foster mutual understanding.
Also, as the Westchester retail market continues its transition from a tenant”™s market to a more balanced market, a potential stumbling block in negotiations is tenants”™ and landlords”™ misaligned expectations about what terms are truly representative of the current market standard.
Strong investor demand. On a positive note, an indication of confidence in the long-term prospects of the Westchester retail market is the pent-up investor demand for Westchester retail real estate. Our firm, primarily a seller”™s agent, has assembled a continually updated database of current owners and active buyers with significant capital ready to invest in retail properties within our market. As the specter of an increased interest-rate environment looms, these buyers are hoping to capitalize on the window of opportunity afforded by today”™s artificially low interest rates.
New shopping centers planned
Tenant mixes in new centers reflect consumer demand in the market, often showcasing large, upmarket grocery-anchored centers with service, food-use, medical and recreation tenants to complement soft goods retail.
The largest recent retail development in Westchester County, the 1.3 million-square-foot Ridge Hill in Yonkers, was completed in 2011 and is finishing its absorption in the market. The 53,000-square-foot Armonk Square just opened its doors last quarter with DeCicco”™s as the anchor tenant.
Upcoming approved or proposed developments in the county include:
Big-box retailers such as Target strive to find ways to expand in the Westchester market, but limited land availability, high construction costs and community opposition have constrained their growth. These category-killers draw huge numbers of people to an area, but by definition drain retail demand from neighboring markets.
Location, location, location
The Westchester County retail market is very local. Shopping centers have a very different set of dynamics from Main Street retail, and the relative health of any retail has to do with the forces affecting its specific location and the municipality in which it is located, particularly for the downtown areas.
Zoning codes. Most zoning codes favor soft goods retail because it is perceived as having the least impact on parking. However, increased consumer spending on services and food uses have changed the ideal retail mix necessary to maintain vibrant shopping areas. Going forward, retailers and consumers will favor those municipalities that are willing to expand their zoning codes to adapt to the changing retail environment.
Parking. Parking remains a key issue for many downtown areas. Increasing parking inventory near shopping areas is the most obvious, and most difficult, solution. More manageable ways to minimize real and perceived parking friction is by making retail streets one-way, or using less onerous parking rules and enforcement ”” free weekend parking, for example.
Pulling from Manhattan. Manhattan retail rents have quadrupled in some areas in the last five years. Westchester County can be a less expensive way for New York City retailers to reach their customers, reinforcing their brand in areas where their patrons live, as well as gaining access to the larger population, which does not work in Manhattan but has similar spending habits.
Stability and opportunity
In summary, technology-driven changes have created more uncertainty in the retail environment. While increased consumer confidence and spending power have improved overall sales, Internet retail and demographic trends have directed bricks-and-mortar retail growth toward food, service, medical and entertainment uses.
Tenant and landlord rent expectations are not as far apart as they were two or three years ago, but deals are taking longer to get done. Municipalities that are best able to formulate zoning codes and approval processes that address the changing retail environment will offer the best opportunities for both tenants and landlords.
It is the nature of retail real estate that each space needs to be assessed on an individual basis. However, at its core, the Westchester County retail market provides a remarkably stable foundation on which creative tenants and investors can take advantage of the depth of buying power in the market.
Jonathan Gordon is president and CEO and Jessica Munzel is chief operating officer and chief financial officer at Admiral Real Estate Services Corp., a full-service commercial real estate firm in Bronxville. They can be reached at 914-779-8200 or by email at jgordon@admiralrealestate.com or jmunzel@admiralrealestate.com.
