A trajectory gone amok finds its bearings

BY GERRY HOULIHAN

I have been asked to give my opinion on the current state of the local commercial real estate market and compare it with the rollercoaster ride that has been the last decade.

I started my second career ”“ after 20 years a restaurateur ”“ as a commercial real estate agent and business broker in April 2002 as the economy was still finding its footing after a mild recession and the attacks of 9/11. It took me six long months to close my first deal, but from there things just took off. From 2003 to 2008, I was closing 14 to 16 deals a year. It was a great time to be in real estate.  Everyone was busy and it seemed like there was no end in sight.

The first time I really felt the market shudder on its climb to some unreachable summit was late 2007. Deals were still getting done, but things were starting to stall. While there was still activity in the commercial market in 2008, the collapse of Lehman Brothers was the final blow; the market stopped. Nobody knew we were about to experience the deepest, longest bear market in real estate the country had ever seen.

All the money ”“ the easy financing ”“ evaporated overnight. In 2009, I closed four deals; six in 2010. This was bad. My brothers and cousins, who have all been doing this longer than I have, all said it was the worst market they had ever seen.

In 2011, things started to get better and 2012 was surprisingly a good year. Where does that leave us now?

The great recession is over, but its impact is still being felt as our market shifts into a cautious, but optimistic, mood.  A lot of people and their businesses did not make it and a lot us still standing are sporting post-recession scars. I think everyone realizes now that the numbers really do matter and that upward momentum is not a guarantee that rents and values will continue to rise.

Things are definitely better, but this is not the better we knew in 2002 and variations on the word are found in every corner of the market. Here is a quick review of what I am seeing in multifamily, commercial and retail sales, retail leasing and restaurant business sales markets.

Hands down, the hottest segment in the market is multifamily properties with six or more units. There are numerous reasons for this, but the biggest factors are low interest rates and the fact that banks will finance these loans because they are considered low risk. You put all of this together and you have a market that has more buyers than sellers and, therefore, prices are high and deals are moving fast. My brother Dan and I have recently worked on three multifamily deals in Westchester and the Bronx.  All three had multiple offers within weeks of coming to market. Now, two deals are already closed and a third is near contract. The multifamily segment was the least affected by the crash and many market participants see prices at all-time highs compared with net operating income.

Retail commercial sales have been strong, specifically if the property is multi-tenant and has a very low history of vacancies. I recently sold a small 3,600 square foot building on South Forth Avenue in Mount Vernon. All four tenants were current and the building was in good condition. The owner listened to our advice and it was priced correctly. We had a lot of activity leading to an all cash offer within three months.

Single tenant, owner occupied buildings, such as, stand-alone restaurants can still be a challenge, but a worthwhile one. I am working on a restaurant deal now were the business owner also owns the real estate. In deals like this, there are two separate contracts: one for the business and one for the real estate. Contracts are signed and the buyers have a commitment letter from the bank, which would not have looked at a deal like this during the depths of the recession.

The retail leasing segment is a mixed bag, varying dramatically depending on location and the type of space for lease. The majority of retail space in Westchester can be broken into two categories: premium shopping centers, like Vernon Hills Shopping Center in Scarsdale, and downtown shopping districts that have always been part a part of Westchester”™s unique charm.

With low vacancies and rents at all time highs, the top-tier shopping centers in lower Westchester are doing very well.  It is not uncommon for the base rents in such centers to be $70 per square foot or more. In addition, the tenant pays the pro-rata share of real estate taxes and common area maintenance charges which can be an additional $10 to $15 per square foot.

The premium retail segment of the market is growing as exemplified by The Ridge Hill Shopping Center in Yonkers, which added 1.2 million square feet of retail and entertainment space. The proposed River Town Square in Dobbs Ferry will add an additional 50,000 square feet of new retail space, plus a Sundance movie theater and a new supermarket. Add in the several new White Plains retail developments and the Echo Bay project in New Rochelle, which are all in some stage of the approval process, and it appears the demand for this type of space is strong; a real contrast to the market lows of four years ago.

With some exceptions, the demand for retail space for lease in lower Westchester”™s downtown shopping districts is rebounding, but is not yet at pre-recession levels. Vacancies are lower, but the time it takes to fill a vacancy is still markedly slower than the bull market of yesteryear. Landlords are making more contributions, in some deals, in the form of landlord work, free rent or a combination of both. I am currently working on four restaurant leases in downtown shopping districts and in each deal, the spaces have been available for well over year. In general, retail rents in this segment have made moderate increases over the last few years, but there is a large variation of the rents per square foot from town to town.

From what I have seen over the last five to six years, the industrial warehouse market has not recovered. Dan and I have worked on a half-dozen deals that have all taken over a year to two to complete. I sold a warehouse last year for $78 per square foot. In 2007, I sold the same warehouse for $100 per square foot.

My previous life running two restaurants is where my knack for selling restaurants finds its root. In the majority of these deals, the restaurant owner is the tenant who sells his assets in place and assigns the lease. This segment was very hot during the bull run, but came to a standstill in the ensuing downturn. This segment is regaining its footing, but is still soft.  The main reason for this is financing. In the height of the market, a buyer could finance through a home equity loan. The second common way to finance the purchase of a restaurant or other small business was through deals with SBA-backed loans. In today”™s market the home equity route is almost completed closed. The SBA is doing deals again, but it now prefers 504 Loans, which are a business and real estate loan combined. From 2003 to 2008, 7A Loans, which are only backed by a business, were more popular. So if you are just trying to finance a restaurant business today that leaves two options: the buyer pays all cash or the seller is financing the deal, with the latter becoming more common.

From a three- to six-month turnaround at the market peak, it now usually takes over a year for a restaurant deal to close. I speak to a lot of potential buyers that have great industry credentials, but very few of them have the financial backing to open a restaurant in today”™s highly competitive market.

I am cautiously optimistic that the market in Westchester will continue to improve and grow. As our economy regains its footing, I look forward to working in a market that is a leaner, smarter and hopefully a less vulnerable version of its pre-recession self.

Gerry Houlihan is a licensed real estate salesman with Houlihan & O”™Malley Real Estate Services, founded by his brothers Dan and Joe in 1982 and focused on the residential and commercial sale-lease market;  and principal in Houlihan Business Brokers, focused on the sale of restaurant businesses, both at 141 Parkway Road, Bronxville.