Potential profit margins favor investment
Potential profit margins favor investment
Despite predictable investment returns and a marketplace devoid of rollercoaster swings in valuations, commercial real estate in Rochester has always flown a little under the national radar.
“It’s been a bit of secret for a while,” said Chris Giunta, salesperson at Cushman & Wakefield/Pyramid Brokerage Co.
The secret isn’t so secret anymore, however.
Crexi, a commercial real estate marketplace and data-center-powered AI technology, ranked Rochester No. 4 on the list of “7 Surprising CRE Markets with Strong Forecasts.” Also on the list: Kingsport, Tenn.; Fort Wayne, Ind.; Oshkosh, Wis.; Portland, Maine; New Haven, Conn.; and Grand Rapids, Mich.
Potential profit margin for investors was the determining factor for the cities that made the list. Rochester scored highly due to low vacancy rates across all asset classes, robust transaction volumes and the number of properties available at an affordable price.
“There’s been some really strong fundamentals here and we’ve seen a lot of activity, especially with people coming into the market,” Giunta said. “It’s been a stable market and you kind of know what you’re going to get here. There are attractive yields and a lot of New York City and downstate capital is chasing those yields.”
Now, however, there appears to be more national interest. Real estate investment trusts (RETIs) and private investors from across the country are entering the market.
“In a lot of smaller markets like Rochester, there’s mostly local interest and in-state interest,” said Shanti Ryle, content marketing manager at Crexi. “But 64 percent of investors digging into Rochester market data through Crexi are from outside of New York, a significant increase.
“People are looking at increasingly diverse, under-the-radar markets. They have more data to make decisions. More serious institutions are paying attention to smaller locales like Rochester.”
The proof can be found in the sales numbers. Through mid-August, total transaction volume in the market ($549.3 million) had already bested the total for 2021 by $79.9 million, according to Crexi data.
Multifamily is up dramatically, with $350 million in transactions compared to $169 million in 2021. That figure is skewed by one deal – the $161.5 million paid for APEX student housing by Harrison Street Real Estate Capital, LLC of Chicago, very likely the largest single commercial real estate transaction in the history of the market.
Still, multifamily has been hot as investors see opportunity to raise rents because prices on the residential real estate market continue to price out, or push the sidelines, would-be home buyers.
“Single-family home prices were appreciating at 3 percent for years,” said Mike Smith, CEO and founder of The Cabot Group, a CRE advisory and services firm. “In the last two years, they’ve gone up 17 percent. When the values get that high, people who had the American dream of home ownership have to rent an apartment.”
And basic supply and demand says owners of those apartments can charge more for rent. That’s perhaps one reason Rushmore Management of Lakewood, N.J., spent nearly $109 million on 16 multifamily properties in the Rochester metro area between December and July. The purchases included $49 million for the 311-unit Clearview Farms Apartments & Townhouses in Wheatland and $21 million for the 199-unit Little Creek Apartments in Gates.
Industrial/warehouse also remains a very strong sector. The vacancy rate as of the second quarter was just 4.5 percent, according to the Q2 Marketbeat by Cushman & Wakefield/Pyramid Brokerage. In reality, the number is probably even lower, Giunta said, due to older space that is functionally obsolete due to low ceilings and/or wooden floors.
Because lease rates have been moderate, new property owners see opportunity to bump the price per square foot.
“If the previous owner was leasing at $5 a square foot and you raise it up to $6, $6.25, $6.70, that’s a 20 to 25 percent increase,” Giunta said.
Transactions involving single-tenant net-lease deals have been commonplace. National real estate investment firms – with a focus on national, well-established clients — buy the properties, knowing the long-time tenant is locked in for a decade or more.
Cove Capital Investments of Torrence, Calif., bought the FedEx Ship Center on Manitou Road in March for $18.792 million. FedEx has a lease through 2028, with two five-year options. Cove Capital’s portfolio is heavy on FedEx, Walgreens and Amazon facilities.
Realty Income Corp. of San Diego bought the Tractor Supply Co. building on Latta Road in Greece for $5.794 million in January. The lease runs through 2035. Realty Income owns nearly 11,000 properties across the country, with a quarter of the portfolio comprised of convenience, dollar and drug stores.
“It’s almost like investing in bonds,” Giunta said. “There’s very little management, the tenant is paying for everything, and you’re buying the credit of the tenant.”
“I think it’s been a secret for a while, but the commercial market here has been very good,” Giunta said. “We’re extremely optimistic about the next six, 12, 18 months.”
While Crexi data shows total transactions involving the retail properties are down year-over-year, Janell Vanegas, principal at Venture Brokerage Group, said there’s no reason to worry about the sector.
“We have so many holes with so many retailers across the country that want to be here,” Vanegas said. “I don’t think bricks-and-mortar will ever be completely replaced because people value that shopping experience.”
Venture Brokerage Group works with preferred developers, the firms hired by national retailers to find them real estate. Vanegas said national tenants are on the way. Bob’s Furniture has a store planned in Henrietta. A upscale eye glass studio is looking at the Whole Foods plaza in Brighton.
“There is definitely more national interest in the market,” Vanegas said.
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