New York's New Hot Property: Retail Condos

The Wall Street Journal reports, Upward Trend in Retail Rents Attracts Array of Investors:

Madison Marquette's Ryan Colbert, left, and Arvind Bajaj at the Edge in fast-growing Williamsburg. Madison Marquette bought retail space in the luxury condominium development, which sits on Brooklyn's waterfront. Philip Montgomery for The Wall Street Journal

Savanna bought the ground-floor retail space in a SoHo condominium in 2012, eyeing increasing rents in the shopping corridor.

The private-equity firm had planned to hold on to the property for at least five years but sold the space just one year later—and for more than 40% over what it had paid.

"We made two times the equity investment in a year," said Chris Schlank, co-managing partner of Savanna. "We were happy to sell it."

Investors of every stripe have been chasing retail condominiums in New York, fueling sales prices in the city's tourist districts and in neighborhoods where new residential developments are taking shape. The upward trend in retail rents has attracted real estate funds, institutional investors, wealthy individuals and established family firms. Along with retail rents, the prices of these properties keep going up, brokers said.

The number of retail-property sales—most of them retail condos—more than tripled from 2010 to 2013, according to Jones Lang LaSalle Inc. The value of the sales grew in that period from $610 million to $2.9 billion. Retail sales this year are on a pace to surpass 2012's $3.6 billion, said Stephen Shapiro, senior vice president at Jones Lang LaSalle.

"The retail market in New York in general has been buoyed by the offshore dollars of tourists coming and spending money here," Mr. Shapiro said. "There has been unprecedented growth in retail rents driven by shopping and tourism at a point we haven't seen before."

Retail condos are having their moment for a variety of reasons. The expense and labor of maintaining them are lower than the upkeep and tenant- improvement expenses required of residential and office properties, brokers said. For many investors, the price of a retail condo is simply more manageable than the cost of an entire building.

"It's a user-friendly way to get invested in real estate," said Adelaide Polsinelli, senior director at Eastern Consolidated. "Buying a retail condo is like buying a small apartment. You don't have to go through all of the enormous extent of due diligence required of other real-estate investments. It's bite size."

And for small and midsize developers, the sale of the ground-floor retail space could provide cash to help pay down construction debt and finance the residential project upstairs, said Andrew J. Cohen, chief executive of Cohen Real Estate.

Developers are also simply maximizing their profits by selling the retail space on the ground floors in addition to the residential condominiums.

"The price of land in New York only really allows for condominiums lately," said Robert Futterman, chief executive of RKF, a real-estate firm specializing in retail. "Therefore you have seen more condo development than apartment rental development."

Retail condos are popular investments along streets such as Fifth and Madison avenues, where average asking rents at the end of 2013 exceeded $2,500 a square foot on Fifth and $1,300 a square foot on Madison, and in areas such as SoHo, the Meat Packing District and lower Manhattan, which are attracting a rising share of tourist dollars.

Imperium Capital, a real estate and development firm, bought Savanna's SoHo property at 465 Broadway with two other investors for $80.5 million last year. Retail rents on some sections of Broadway, especially between Prince and Spring streets, bring in close to $1,000 a square foot, said Samuel Schneider, co-managing partner of Imperium.

"The rents are not there yet for where our property is, but we think that rents at that number could definitely be achieved in five years," Schneider said.

In the last few years, major retailers such as the Inditex Group of Spain, owner of clothing chain Zara, have entered the market. In 2011, it paid $400 million to purchase a retail condo at 666 Fifth Ave. and buy out the remaining years of the NBA store lease.

"Retailers are saying we could own instead of renting out stores, and we have an asset on the books," said Ms. Polsinelli. "If the business doesn't do well, we have something to trade."

While many investors are focused on the usual high-end retail districts, others are eyeing spots where residential condo development is booming and transportation hubs churn a lot of foot traffic.

Last month, Cushman & Wakefield Inc. represented Macklowe Properties in the $20 million sale of a 5,200-square-foot retail condo at 150 E. 72nd St., the ground floor of a luxury condo development. In January, Cushman & Wakefield represented Keystone Equities LLC and Apollo Global Management in the sale of a 16,000-square-foot retail condo at 202 Canal St. Crane Partners Asset Management LLC paid for $36 million for the condo, Cushman said.

In Brooklyn, the residential explosion in Williamsburg has drawn investors such as Madison Marquette. In January, the firm bought 65,000 square feet of retail space for $45.5 million at the base of the Edge, a luxury condominium development on the waterfront. A ferry, the nearby train station and residents in the building are sure to generate foot traffic and drive sales, said Ryan Colbert, director of Madison Marquette.

The firm focuses on up-and-coming neighborhoods in the outer boroughs, he said.

"The demographic shift of boomers and generation Y to urban cores is going to play out well for the long term," Mr. Colbert said. "You will see a more affluent consumer base in cities who can spend the money needed to support urban retail condos.”




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