The owner of 420 Fifth Avenue has been waiting the market out before filling retail space there.Some landlords are waiting out the current down market in an unusual way. Instead of doing everything in their power to find tenants and taking lower rents, they’ve decided to sit on unused space.
George Constantin, president and CEO of Heritage Realty Services, which owns office and retail properties around New York, said the company used that strategy for one of the largest retail spaces in Manhattan, at 420 Fifth Avenue.
“What we did is essentially wait to make sure we got the best tenant at the best rent, because once we commit to a 10-year transaction, we don’t want to commit to a very low rent,” he said. “And [in 2008], the rents were quite low.”
Constantin said Heritage is now in discussions with a $12 billion retail company he would not identify to take the 74,000-square-foot space, adjacent to a Lord & Taylor store.
“We’re very happy with the tenant we are in discussions with … and then we also have a fallback tenant,” he said. “And both of these are going to meet substantially higher rents than we could have achieved [earlier].”
While “warehousing” space — also known as “inventorying” — may yield reduced income in the short-term, Constantin noted that it enabled his company to maximize its real estate value in the long-term.
Abie Hidary, the president of Hidrock Realty, which owns a number of buildings in the Fashion District, said he’s sitting on about 20,000 square feet of space right now at 35 West 36th Street while his company upgrades it.
“Once the improvements are all done, which should be [this month], then we will hit the market,” he said.
Meanwhile, at 240 West 35th Street, where space was arguably worth $40 to $45 a square foot in 2007, Hidary said he has another 20,000 square feet of space available after signing leases over the past four months for an average price of $30 a square foot.
Hidary said he’s been approached by potential tenants offering $26 or $27 a square foot for the remaining space, but he’s decided to hold out.
“We’d rather inventory the space,” he said. “We think the space is worth a little bit more — probably a lot more — if we just wait for the market to get better.”
Hidary said he could afford to do so because none of his buildings have debt expiring anytime soon. “If I had a mortgage expiring, and I had to pay back the lender in six months, and then needed to get a new mortgage, I’d need as much income as possible right now — which means I’d need to reduce my pricing to lease it up,” he noted.
While some landlords are declining lowball offers, there are experts who say it could be a losing proposition.
“In today’s market, especially considering the uncertainty of the market going forward, as much as a landlord might not be happy with the state of the market, I think landlords would be averse to warehousing space,” said Victor Menkin, founder and president of Menkin Realty Services.
Yet Menkin said landlords who have been upgrading their space have had good reason to warehouse it (and simultaneously avoid a bad market).
He pointed to 152 East 86th Street, an apartment building with retail space and a 2,750-square-foot sunken plaza that the owner, a partnership including the Charles H. Greenthal Management Corp., held off the market for years while doing a $2 million upgrade. Recently the owners landed a neighborhood-transforming tenant: Danny Meyer’s popular hamburger chain Shake Shack.
“We’ve just been waiting for the right deal,” said Harold Bornstein, a vice president with Greenthal.
Bornstein said, however, he would not typically recommend holding space.
“I’ve never warehoused space in a down market,” he said. “I’d rather lower the rent and get a little shorter lease.”
