Multifamily borrowers in New York are looking at the city’s mixed-use market in a new way, feeling out lenders about the prospect of financing opportunities within the sector where there is the potential for a ground-floor retail component.
This emerging trend has gained steam in recent weeks, says Matthew Dzbanek, capital services professional at Ariel Property Advisors, a New York City-based full-service brokerage firm.
“A lot of borrowers are seeing more value in mixed-use assets that they are not seeing in the multifamily space. You get better returns because there is perceived to be more risk and a lot of clients are now comfortable taking that ground floor retail risk,” Dzbanek says.
Ariel Property Partners, founded in 2011 by veteran broker Shimon Shkury, is seeing especially strong demand from potential buyers for small residential buildings with a retail component in areas with strong foot traffic. The firm tracked $1.7 billion of transaction activity for small mixed-use properties in 2021, with a little over $1 billion closed through the middle of this year.
“After everything started reopening, retail in residential areas really started to boom, more so than it ever has in the past. Sponsors who own these buildings in some more of the residential neighborhoods have really seen their retail tenants doing exceptionally well and making more than they were making pre-lockdown,” Dzbanek says.
Sponsors are also looking at adding a retail component to an existing property. “In much of New York you’re going to get more money on the ground floor for a retail building than you will for an equivalent residential unit,” Dzbanek says.
The return of the retail market
Critical to the emergence of mixed-use properties has been an overall rebound in the retail market. Despite fears of an inevitable decline in brick-and-mortar shopping due to the growth of e-commerce and the pandemic, physical store openings rebounded nicely in 2021, and 2022 is shaping up to be a banner year as well, according to a report by Cushman & Wakefield.
A lot of borrowers are seeing more value in mixed-use assets that they are not seeing in the multifamily space
Ariel Property Advisors
“In the first five months of 2022, retailers have opened more than 4,200 stores, exceeding this year’s store closings by 240 percent and putting 2022 on track to be the first year of net-positive store openings since 2016,” the report states.
And retail tenants can still offer landlords comparative advantages over their office or residential co-tenants, according to Dzbanek.
“A lot of times these retail tenants will walk in for longer terms, often signing five- to 10-year leases, as opposed to residential tenants who could turn every year and you have to deal with the re-leasing cost associated with that,” he adds.
A mixed-use property’s retail component can pay dividends for years to come, which is why lenders are listening, says Dzbanek.
“If you are a savvy investor who is very confident in your abilities, you can usually get a deal where the ground-floor unit is getting a higher rent than the equivalent residential, and a tenant which is going to lock in for longer terms,” he says.
Location, location, location
Much of a mixed-use property’s success comes down to where it is.
“We’re seeing retail doing really well in areas of Upper Manhattan, Brooklyn, Queens and the Bronx with heavier residential density,” Dzbanek says. “We’re financing a fully vacant mixed-use building right now in Greenpoint. [The sponsor is] going to be able to put in a high-quality tenant who is going to do very well from day one.”