New York City CRE (Long the Changing Retail Landscape)

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Is anything available in New York City for less than $5? Some of you are about to find out.

Yesterday, Bloomberg noted the following:

Retail rents are tumbling in Manhattan, especially in the toniest neighborhoods.

In the area around the Plaza Hotel on Fifth Avenue, home to the borough’s priciest retail real estate, rents fell 13.5 percent in the second quarter from the previous three months, the largest decline among the 16 neighborhoods tracked by brokerage CBRE Group Inc. The drop was due in part to a single space that had its price cut from $3,500 a square foot to $2,500, CBRE said in a report Tuesday.

Tenants have the upper hand in New York as landlords contend with a record number of empty storefronts. Across Manhattan, 143 retail slots have sat vacant for the past year, and rents have been reduced on more than half of those spaces, CBRE said. Property owners are increasingly willing to negotiate flexible terms in an effort to get tenants to commit to leases, according to the report.

Apparently a number of commercial real estate brokers didn’t get the memo. Brokers reportedly lashed out last week upon news that General Growth Properties ($GGP) leased out a large space to Five Below, a discount consumer products chain, at 530 Fifth Avenue. Per Commercial Observer:

Some brokers expressed disappointment with the tenant selection.

“It’s not a Fifth Avenue-type tenant. Everyone is pissed,” one broker said of the deal because of the nature of the tenant on a prized part of Fifth Avenue. He added: “There goes the neighborhood.” A more suitable location, the broker said, would have been south of 42nd Street.

“Not sure this was the tenant surrounding landlords with available space were hoping for,” said Jeffrey Roseman, a vice chairman at Newmark Knight Frank Retail, who was not involved in the deal.

Wait. What? Currently, there’s literally a JPMorgan Chase Bank, a Walgreens and a Kaffe 1668 right there there. Who among that lot can rightfully object?

What these brokers don’t appear to grasp is that the brick-and-mortar landscape has dramatically changed. There aren’t very many tenant options for landlords — at least not for 10,800 square foot spaces (which is what this is). And there’s no benefit to any of the other retailers in the vicinity of the space for it to remain vacant. Apropos, as noted in Commercial Observer, one broker appears to get it:

“Five Below is the updated variety store or five-and-dime store of our day—something for everyone,” said Faith Hope Consolo, the chairman of the retail leasing and sales division at Douglas Elliman. “As for the character or image of the street, that is not really affected or important. The key is that a big space was absorbed and this type of tenant will generate traffic.”

Our thoughts exactly. Those adhering to a New York City of yesteryear clearly haven’t noticed the influx of coffee shops, pharmacies and banks on every corner. Who else would take such a large space? Toys R Us?

What? Too soon?

Is New York City F*cked? Part III.

When we first wrote in-depth about New York City a few weeks ago we never imagined that it might turn into a series. But, more red flags keep popping up and - call us crazy - but once strung together, there is clearly reason for concern. Previously we wrote about Mayor de Blasio's seeming inability to understand disruption (vis-a-vis taxi medallion projections and bad budgeting). We then wrote about Comptroller Stringer's handling of New York City pensions and the underperformance thereof. Now we note Oaktree Capital Management's Howard Marks' most recent investor letter... 

As always, the full letter is worth a read. But we want to highlight its closing section. Some choice quotes:

  • "The bottom line is that the incentives for high earners to move in order to avoid SALT, always substantial, have increased. I expect this to have a strong impact on the economies of the high-tax states. What CEO will move his company to New York or California in the future? Won’t future company relocations and formations tend to favor the low-tax and no-tax states?"
  • "I know a Republican congressman from New York who voted in favor of the tax bill. How could he?    Won’t his constituents turn against him and vote him out? He may figure that since he represents a low-income district, his voters won’t be hurt by the loss of SALT deductibility. And that may be true as far as direct effects go.  But the second-order consequences could easily see employers move away, taking their companies and the jobs of the congressman’s constituents with them. High-income people may move to chase lower state income tax rates, but folks with low incomes generally are much less able to do so."

And the kicker:

  • "The other day a friend told me the top 1% of New York taxpayers pay 50% of the state income taxes.  If and when their emigration accelerates, states like New York may get into a negative spiral: a few big earners leave; the state has to raise tax rates to make up for the lost revenues; that increases the differential and causes more big earners to leave; which requires further tax-rate hikes, and so forth. High-tax cities and states may be greatly affected.  New York City residents may feel there are attractions that justify the high rates, but neighboring “bedroom communities” lacking those attractions may be affected even more."

All of these pieces start to add up. 

Is New York City F*cked? Part II.

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We previously expressed our concern about the New York City Mayor Bill de Blasio's plan for tackling disruption. The gist was that the Mayor's budget fails to take into account the effect of Uber and Lyft on taxi medallion values. To add insult to injury, this American Council for Capital Formation report makes it sound like the City's pension funds are being managed in a way that would make even Bill Ackman look good. Choice quote: "The performance of the New York City Pension Funds over the past decade has not kept pace with what is needed to stay solvent over the long term. Unfortunately, even conservative estimates project unfunded liabilities to be in excess of $56 billion. It is therefore extremely concerning that managers are spending dwindling resources on investments that are socially or politically motivated, rather than based on performance." The report paints a pretty gnarly picture of how New York City Comptroller Scott Stringer has handled pensions, notwithstanding the funds' recent market-based improvement. Distressed investing fans will particularly love this bit: "For example, the New York City pension funds paid $2.1 million in fees to Perry Capital in fiscal 2016, and had $129 million invested in the firm when it shut down its flagship fund in September 2016 after losing money for three consecutive years. The cumulative return of the city’s pension funds’ investments in Perry Capital inception to date was -14 percent, as of September 2016." Riiiiiiiight. 

As we said before, color us concerned.

Is New York City F*cked?

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Uber, Lyft, and Political Incompetence: Mayor de Blasio Needs to Get it Together

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Maybe New York City Mayor Bill de Blasio ought to subscribe to PETITION. He clearly doesn’t grasp disruption. And other elected officials are calling him out on it.

Just recently, Thomas DiNapoli, State Comptroller, released his “Review of the Financial Plan of the City of New York”. Buried within the document is a subtle rebuke of the de Blasio administration’s failure to acknowledge any semblance of reality. Here are some key highlights:

  • The November (Financial) Plan covers a four-year financial plan from 2018–2021. That plan projects a budget gap of $7.1b, a number dismissed as “relatively small as a share of City fund revenues (averaging 3.5 percent).” The gap has tightened in large part due to pension fund over-performance. PETITION Note: Hmmm. Query how long that will last.
  • NYC’s economy has expanded more than at any time since WWII. But job growth is slowing and may slow more given federal tax policies.
  • The FY 2019 budget gap estimate was increased by $360mm to $4.4b because “tax receipts have fallen short of expectations.” “Despite the strength of the City’s economy, non-property tax collections have underperformed. For example, the City had assumed that business tax collections would increase by 9.1 percent in FY 2018, but collections declined instead by 8.9 percent during the first four months of the fiscal year (after declining for two consecutive years). Although the City lowered its forecast by $240 million in FY 2018, the out-year forecasts were left unchanged.” PETITION Note: read that last line again!
  • The Plan anticipates $8.3b of federal funding in FY 2018, accounting for 10% of the City budget. PETITION Note: Right. We’ll see. There is obviously a real question whether the federal government may be counted on to fund the City at the same levels. And federal taxes and home ownership costs are obviously expected to increase for many City residents. “Changes in federal fiscal policies, however, constitute the greatest risk to the City since the Great Recession.”

And then our favorite bit:

  • The City has 1650 taxi medallions to sell but has postponed sales since 2014 with the express acknowledgement that ride-sharing companies like Lyft and Uber are affecting medallion values. “The average sale price for a taxi medallion peaked at $1 million in calendar year 2014, but it was nearly cut in half by 2016. Weakness in market conditions has continued, with the average sale price declining in 2017 to $350,000 as of November 2017.” And, YET, the November Plan assumes the 1650 medallions will be sold at an average price of $728k.

Wait, what? Just last week, First Jersey Credit Union reportedly auctioned off six NYC taxi medallions for a high bid of $186k. And then on Tuesday January 16, five medallions were sold for a total of $875,000. Two additional medallions sold for $189k and $199k, respectively. To quote the previously linked Crain’s New York piece, “When a taxi medallion sold for $241,000 last March, the seemingly rock-bottom price made major news. It turns out, those were the good old days.” And then there is this, “One industry veteran said the auction prices are low, relatively speaking, because these are cash deals at a time when banks are not lending for medallion purchases.” Right, because the banks know that medallions make for crappy collateral and have zero desire to try and catch those falling knives. These are just the latest in a recent trend of distressed medallion sales — many of which have taken place in the bankruptcy courts. This stuff is public information. We’d think that Mayor de Blasio and his administration would be aware of it. Apparently not.

Here’s the problem: either through ignorance (it’s not like others haven’t noticed) or wishful thinking (that, what, Uber AND Lyft will FAIL?), the administration is budgeting on the basis of medallion sales that may never happen. And, even if they do, they are unlikely to fetch the value projected. Per DiNapoli, this error leaves an estimated $731mm shortfall in the budget. This is an astounding level of cluelessness. Even for a politician.

More importantly, if the de Blasio administration can’t see what is occurring right in front of them, how is it to be counted on to address bigger issues coming soon? Like autonomous cars, for instance? “‘Autonomous vehicles will have a significant and fundamental effect on cities and how they’re laid out’”. Color us concerned. If you live in New York, you should be too.

PETITION is a digital media company focused on disruption from the vantage point of the disrupted. We have a kick-a$$ weekly newsletter. You can subscribe HERE and follow us on Twitter HERE.