Behind the deal: Vornado and Crown’s $700M buy of St. Regis retail

When Vornado Realty Trust and Crown Acquisitions, two of New York’s savviest retail investors, announced that they would pay a record price per square foot for a condominium along Fifth Avenue, it sounded like the epitome of the store-space wildcatting driven by deal-hungry buyers quickly becoming part of the industry’s narrative.

But a closer inspection of the $700 million purchase of 24,700 square feet of retail space plus air rights at the St. Regis Hotel and a neighboring townhouse  — a deal set to close in the fourth quarter — reveals far more.

For Vornado, the purchase of the St. Regis retail condo at 2 East 55th Street and the townhouse at 697 Fifth Avenue, is right in line with the company’s strategy of buying high profile properties — and marks the firm’s latest bet on one of New York’s ritziest neighborhoods. Vornado, led by CEO Steven Roth, is one of Upper Fifth Avenue’s largest landlords, and owns not only retail at 608 Fifth, 640 Fifth and 666 Fifth, but also 689 Fifth Avenue — on the same block as the St. Regis.

Insiders also note that the surging annual sales figures for select Fifth Avenue retailers like Apple, Saks Fifth Avenue and Tiffany likely played a part in the decision to go ahead with the mega-purchase. Indeed, even with asking rents along Fifth Avenue skyrocketing, insiders believe those record retail sales numbers will support rising rents. Apple’s extraordinary sales volume for its store at 767 Fifth Avenue, for example, is believed to be about $600 million over the past 12 months, several retail insiders told The Real Deal.

Financial reports from Tiffany tell a similar story. The luxury jeweler’s store at the corner of Fifth Avenue and 57th Street pulls in sales of about $320 million per year from the 45,000 square feet of selling space at 727 Fifth Avenue, or about $7,000 per square foot. And Saks Fifth Avenue, at 611 Fifth Avenue, reportedly rakes in about $600 million per year.  Apple’s 767 Fifth Avenue stores does about the same amount of business — but in only 22,500 square feet. Bergdorf Goodman reported in 2007 that it did $500 million in its store diagonally across from Tiffany, and insiders expect that figure has risen.

The expectation is that the tourism trend line, which has seen the number of visitors to New York City rise from just over 36 million in 2000 to more than 54 million last year, will continue to go up, and that money will continue to pour into store cash registers.

In addition, there are additional options for the new owners of the approximately 11,200-square-foot St. Regis condo and the adjacent five-story, approximately 11,000-square-foot townhouse at 697 Fifth Avenue. One is to increase the height of 697 Fifth Avenue. Since the building is not landmarked, it could benefit from the approximately 26,500 square feet of unused air rights on its parcel, as well as about 18,000 square feet of development rights at 689 Fifth Avenue, to build a skinny tower with nearly 55,000 square feet of space.

Insiders also point out that the complex, close relationship between Crown and seller Richemont — Crown over the past two years has been seller, buyer and landlord to the French luxury conglomerate — may have also played a part in the deal.

Long-time tenant

Richemont is the parent company of Cartier, which has a long history at 651 Fifth Avenue. The jeweler bought the property in 1917 in exchange for a strand of pearls at the time valued at $1 million, the city’s Landmarks Preservation Commission reported. Even as it wanted to remain in the space, Cartier chose not to be a property owner, and in 1950, the company sold the building for more than $3 million to Phoenix Mutual Life Insurance, but remained as a tenant.

Phoenix sold the property as part of a package of buildings in 1968 to the Cohen family’s Arlen Properties. In 1970, Aristotle Onassis, through a family trust, bought a 50 percent interest in the property, thus becoming Cartier’s landlord. In 1996, the sides negotiated a lease renewal, which was set to expire in 2012.

Over the course of that last lease, the annual payments rose to about about $7 million, city records show. And during the approximately 15 years of that lease, the value of Retail Space On Fifth Avenue exploded. The trade group Real Estate Board of New York reported in 2000 that the highest asking rent on the stretch from 50th to 59th street was $1,100 per square foot. But by the spring of 2012, REBNY reported the highest asking rent had nearly tripled to $3,000 per foot. The most recent report from May puts that  figure now at $3,900 per foot.

So Richemont, parent company to Cartier, knew more than two years ago that it was going to face a huge rent increase.

Crown Acquisitions, too, was aware of the squeeze. The retail-focused firm headed by Stanley Chera and his sons including Haim and Isaac, which has an appetite for Fifth Avenue retail, was on the prowl for more investments. Crown was part of a large group including Lloyd Goldman, the Feil Organization and Centurion Realty, that in 2009 snapped up the St. Regis retail and 697 Fifth during the downturn from Starwood Hotels & Resorts Worldwide for a bargain price of $117 million.

As part of that acquisition strategy, in May 2012, news broke that Crown had acquired a 49.9 percent stake in the Onassis package of buildings including the Cartier mansion at 651 Fifth.

So at once, Crown became Cartier’s landlord at 651 Fifth while it was in the midst of renewal negotiations —  and seller to Cartier’s parent company, Richemont, which was negotiating to buy the St. Regis retail.

Both deals were ironed out quickly. Richemont inked a contract to buy the retail for $380.6 million in June 2012, in a transaction that closed in October. The new lease closed at about the same time. Sources say Cartier’s new lease payments are about $20 million per year, but that figure could not be confirmed. Crown, Vornado and Richemont declined to comment.