Supply Reaches Decade High as Outer Borough Construction Intensifies

Vacancy ticks up moderately from cycle lows but asking rents continue upward trend. A diverse base of employment in New York City, featuring multinationals and startups, has sponsored tremendous strength in the retail sector over the past decade. Vacancy has fallen well below 4 percent as tenants scooped up floor plates throughout the five boroughs, with strength especially pronounced in Manhattan and Brooklyn. Years of improvement have triggered a larger development response this year, and completions will reach the highest level since 2010. Most noticeably, construction will rise in the outer boroughs, led by three-quarters of a million square feet on Staten Island. In Manhattan, the largest delivery will be The Shops & Restaurants At Hudson Yards, where a million square feet of retail, restaurant and entertainment space will come online this year. While the L train shutdown in Brooklyn and tenant shifts in Downtown Manhattan lowered net absorption in 2017, strong pre-leasing at new projects should restore absorption to normal levels this year. The resulting environment will trigger another year of solid rent growth.

Outer boroughs garner investor attention and capital as yields tighten in core neighborhoods. The strong appreciation in asset prices throughout the metro has prompted an investor focus on properties with multiple pathways for upside, particularly among private parties and syndicates. While institutions favor the safety and security of Manhattan and Brooklyn properties, smaller buyers have been searching the outer boroughs for higher returns. Broadly, cap rates remain in the low- to mid-4 percent range metrowide, although locations farther from the core can provide an additional 100 basis points of yield. Rezoning has also opened new pathways for excess returns in several submarkets, yet the capital investment required to realize these gains can be restrictive. The L train shutdown in Brooklyn has begun to shift buyer sentiment and widen bid/ask spreads due to the long timetable on the project.