James Nelson, Principal at Avison Young, joined the Daily Beat for an interview. We discussed the state of the market, cold calling, the retail sector, and other interesting topics.
Daily Beat: Avison Young recently put out a 2021 investment sales report. What's your team seeing in the market?
James Nelson: The fourth quarter was an exceptional one for Manhattan investment sales and accounted for 61% of 2021’s total dollar volume. Multi-family led the way with 46 transactions for a total of $1.47 billion in Q4 alone — a 190% increase from the average across the previous four quarters.
Many private investors were looking to sell. The fear surrounding the 1031 exchange lapsing, in addition to capital gains taxes increasing played a significant part.
Ultimately, 1031 was preserved and capital gains taxes appear to be staying the same; however, these concerns led to a lot of transactions from sellers that wanted to close before the end of the year.
The market as a whole has also improved significantly. Before the Omicron wave, we were even starting to see real momentum in the return to office. Multi-family has led the recovery and many apartment rents are now even above where they were before the pandemic.
Daily Beat: Agreed. And this is even with many of the traditional New York City investors concentrating on deals out-of-state.
James Nelson: I believe that many New York investors who had been looking to buy down in the Southeast quickly found out that some of the growth markets were overheated and the returns were compressed.
In a sense, New York has almost become the contrarian play. The average cap rate of a multi-family deal in the fourth quarter was 4.6%, which only compressed by 24 basis points over Q3 2021. New York is now the value play and I think that's also why many investors came back to the market.
Daily Beat: If a client has equity to place, is there a sector within the market that you see as undervalued?
James Nelson: I love retail. When we look back in a few years, I think we will see that the pendulum has swung too far on the heels of the impact of e-commerce. As a result of the pandemic, some high street retail leases are 25 to 30 cents on the dollar from the peak.
Prior to the pandemic, New York City had about 70 million tourists, which decreased by roughly half last year. International tourists are a lot of the shoppers that fuel Fifth Avenue, Broadway, and Soho.This perceived risk is leading to cap rate expansion as rents are being hit hard. You saw some incredible buying opportunities last year and that market is also starting to already come back. In Q4, there were 16 transactions for about a half a billion dollars, which was a huge increase.
Daily Beat: Retailers are getting great ROI for their advertising money on social media and don’t view high-street retail the same way they did in the past. Stores are now viewed based on how much they are going to generate in profit, not about exposure and advertising. How much growth are you projecting in the rents?
James Nelson: I don't think rents will return to where they were, but there's a lot of room for growth. At the peak of the market, rent on Broadway and Soho reached $1,000 per SF. More recently, there have been deals in the $250 per SF range. I think that within a year or two this could go back up to $400 to $500 per SF, but to your point a lot of these global retailers will be shrinking footprints to focus on experiential retail, knowing that customers will likely make purchases online.
Another noteworthy retail trend is clicks to bricks where you have digitally native brands (e.g. Bonobos) now understanding the need for a physical footprint. The pendulum has swung too far and the asset class has a whole has been unfairly punished and offers attractive returns.
Daily Beat: Do you think cold calling still works?
James Nelson: That's a great question. I think the key is to show ownership that you're providing value and helping them think long term. The brokers who just call to ask if someone is selling might get lucky once or twice, but they ultimately won't succeed in this competitive environment.
Daily Beat: The classic 1031 buyer pitch still doesn’t resonate!
James Nelson: A young broker should really be looking to build a name and add value. That's why the content and thought leadership is important because it helps inform owners.
I recommend that new brokers join teams with good reputations and focus on providing clients with valuable information and leverage those relationships. Calling owners to let them know about changes that are happening up in Albany is a much better approach than simply asking if they are selling.
Daily Beat: I know you mentioned last time we spoke that you got involved with ClubHouse. Usage on the platform has dropped off drastically in the past year. What types of people
James Nelson: I've pulled back from ClubHouse. I think a lot of its success had to with people being remote and looking for conversation. It was an incredible platform and maybe it’ll pick up steam again because it does have that ability to facilitate conversations with people across the world.When we were doing the weekly show, it seemed like 10 to 20% were New York people, but we’d get many new faces. I think the podcast is my primary way of reaching the masses and is tailor fed to the New York audience.
Daily Beat: Do you think your podcast helps close deals?
James Nelson: The podcast started as a passion project. I believe there's a severe lack of information out there for individuals trying to break into the business. Some people go back to school for a Master's degree, but the content I put out offers a different road that gives people an opportunity to learn about the business through stories.
To answer your question, I don't think recording a podcast turns into business the next day, but when you're a resource to people and provide information, you never know what's going to come of it in the future.
Daily Beat: Are there any books that you’re currently reading?
James Nelson: Our team is reading Atomic Habits by James Clears together and it's very powerful. The message to really develop the right habits and make them sustainable. Change doesn't have to be massive and take place overnight, but small incremental improvements add up exponentially.
Daily Beat: Jim Kinsey unfortunately passed away a couple months ago. Can you please speak to his loss?
James Nelson: We're all still feeling the loss of Jim and will continue to do so for many years. He was such an incredible person who brought so much value to his colleagues, friends, and family.
It was certainly a tragic shock. Jim was not only a business partner, but a close friend of over 20 years. We worked together back in the Massey Knakal days.
What really amazed me was the number of lives Jim touched and how many people he helped. Jim was such a mentor to a lot of young people in the business. The best way we can remember him is to embody that and make the time to help others and do some good. He's sorely missed.
*The interview has been edited and condensed for clarity.