by Neil A. Dolgin
This year has been a challenging one for building owners because of high inflation, rising interest rates and the increasing costs of doing business in New York City.
It’s been an even tougher one for owners of vacant buildings who tried to sell their properties on the high side and waited for one better offer that never appeared. Now buyers are asking for higher cap rates while sellers are holding to higher prices. Something has got to give because there are few buyers out there right now especially given the rising interest rates. So if an owner receives an offer today that is remotely close to an asking price, it’s probably a good idea to take it because there may be few better offers to be had in the near future or until there’s some relief by bankers in the form of reduced interest rates or ways of reducing a borrower’s risk.
The reverse is happening with commercial real estate rentals. There are plenty of companies looking for space and increasing inventory. Unsold buildings are returning to the rental marketplace to meet a growing demand. We are also advising owners that don’t have to sell right now to renovate their buildings and return them to the rental marketplace. This is a unique market where small tenancies will thrive… new businesses are starting up and looking for smaller spaces and existing tenants that might be cutting costs are reducing their size or physical footprint, and subleasing a portion of their property. Owners know that we know the local market better than the large brokerage houses in Manhattan who also service the outer boroughs. We have a sense of the market and what owners need to do to upgrade their buildings so they can thrive in this challenging marketplace. And we have a way of attracting the type of tenants that can help an owner profit at the end of the day.
An owner recently asked us to find a tenant for a 20,000 SF vacant floor in an industrial building. Based on my experience, I didn’t think it was in the cards to find one large tenant for his building; he’d be stuck waiting. As the building also lent itself to smaller tenancies, I suggested that the owner could sub-divide the floor into smaller rentable units. Subdividing can transform an industrial building for the future while accommodating the many new small and medium size industrial companies looking for space. Once owners transform a large space into smaller units, they don’t have to build it out again. Having multiple tenants also mitigates an owner’s financial risk when one tenant leaves because the others are still there paying rent.
We continue to see strong demand locally for retail rentals. Demand for retail space has remained positive for seven straight quarters, according to the National Association of Realtors. If you’re looking to open a pop-up clothing boutique for the holidays or launch a take-out salad bar or taco stand in a trendy Brooklyn neighborhood, now is a good time to find retail space. Owners are increasingly flexible and creative even working with pop up stores, especially those run by entrepreneurial owners who aspire to convert them into longer term leases.
The National Retail Federation predicts that more than 72% of U.S. retail sales will still happen in-store in 2024. We see the power of retail when we meet with clients coming to Kalmon Dolgin Affiliates’ HQ office in Brooklyn. They talk about the importance of the in-store experience and the personal attention which are aspects to shopping that one cannot get online. Both are a key to driving clothing, personal care and luxury sales because shoppers are more comfortable when they can touch and try things.
A report by 5WPR notes that more than half of consumers surveyed now prefer to find new products in-store rather than online. So it’s no surprise that we’re seeing strong demand for retail space in the outer boroughs.
Given the increasing inventory in industrial and retail properties, don’t be surprised if tenants believe they have the upper hand and want to be a little bit more aggressive in their negotiations with owners.
Despite the challenges in this economy overall, Goldman Sachs sees a “hope” phase coming up in 2023. “We expect markets to transition into a ‘Hope’ phase of the next bull market at some point in 2023, but from a lower level,” said a team led by Goldman’s chief global strategist Peter Oppenheimer, in a note to clients. “The initial rebound from the trough is likely to be strong, in common with the beginning of most cycles before transitioning into a ‘PostModern Cycle’ with lower returns.”
It’s also an opportunistic moment for commercial real estate brokers because the increasing demand for rentals offers brokers quicker deals versus working long term towards a large sale. The rental marketplace is so hot that KDA is bringing on new brokers and salespeople. Call us for an interview ASAP or email me.
Neil A. Dolgin is co-president of Kalmon Dolgin Affiliates. Founded in 1904, Kalmon Dolgin Affiliates (KDA) has grown into one of the New York metropolitan region’s leading commercial and industrial real estate firms. Kalmon Dolgin Affiliates specialize in all aspects of real estate services for developing, managing, selling, leasing and marketing commercial and industrial property. KDA’s highly-trained professional brokers offer clients a practical, street-wise approach to commercial and industrial real estate brokerage, leasing and sales, supported by the latest in real estate marketing, management and research technology.