The Real Deal New York

Betting on OTB real estate

Plan to close 72 parlors offers some new opportunities in prime locations
By Sarah Portlock | March 31, 2008 10:56AM

If the city’s Off-Track Betting operation goes ahead with its plan to shut down six dozen storefronts in mid-June, you can bet that the properties that those
gritty, 1970s-era parlors sit on will likely become go-to spots for new commercial and retail ventures.

Brokers said the planned shutdown, which involves locations in all five boroughs, provides a rare real estate opportunity. While not all OTB outposts are in prime locations, some are in retail hotspots or on the edges of up-and-coming neighborhoods. They said OTB landlords, who have been locked into long-term, discounted leases with the government, could get back into market-rate leases, possibly doubling their rents overnight.

Gary Trock, senior vice president of retail services at CB Richard Ellis, said the shutdown will likely pave the way for more upscale retailers.

“I think it will substantially increase the value of the ownership’s property,” Trock told The Real Deal. “I think it will be all good [for] a neighborhood not to have an OTB in that market, [considering] the nature of the clientele.”

Trock ticked off OTB’s trophy locations, saying that rents at the headquarters site at 1501 Broadway could be in the $400 to $500 range. OTB currently pays $29.50 per square foot at that location.

He also cited the OTB location on West 48th Street at Rockefeller Center, though that outpost is already paying near-market rent at $194 per square foot because OTB recently renegotiated a deal with the landlord that involved other concessions.

A little history: In February, after Mayor Michael Bloomberg said the city would have to start subsidizing OTB because it wasn’t getting enough money back from its revenue-sharing formula with the state, the OTB’s board of directors voted to shut down the organization’s 72 operations in the five boroughs.

While there is still a chance that the state could come up with a settlement before the June 15 shutdown, that is starting to look increasingly unlikely, given the chaos surrounding Governor Eliot Spitzer’s resignation last month.

Barring an 11th-hour deal, leases on 15 of the OTB’s 61 branches will expire without renewal at the end of 2008. (Three leases have already expired, including one at 28-15 Steinway Street in Astoria, and one on Hylan Boulevard on Staten Island.) In addition, OTB will terminate leases early at nine other branches, and brokers will work with landlords to get out of the remaining 34 leases.

In addition to those 61 outlets, OTB will lose three teletheaters and eight betting facilities inside restaurants to the shutdown.

Sublets at the 34 longer-lease locations will be brokered closer to June, when new market rates can be locked in, according to a 42-page document outlining the shutdown plan.

A number of the 17 Manhattan OTB locations are situated in the heart of first-tier retail markets: There are three in Midtown, one on the Upper East Side on Second Avenue between 69th and 70th Streets, one on the Upper West Side on West 72nd Street between Broadway and Amsterdam, and one in Chelsea, where Trock predicted there would be no problems finding new tenants.

There are also locations in downtown Brooklyn, Park Slope, Williamsburg and Greenpoint. Those locations are primarily near transportation and in high-density areas.

“The locales … some are good, and some are bad,” said Trock, who has advised several landlords about OTB spaces in the past.

“All of these leases are severely undervalued, and going back to ownership would be a positive thing,” Trock said. “If any ownership is smart, they’re not going to let them off for free. [They are going to] get some sort of penalty from Off-Track Betting.”

Sal Ferrigno, a senior managing director at Robert K. Futterman & Associates, a retail brokerage firm, said he is “absolutely” looking at the soon-to-be-available spaces.

“We already have some sites [in mind], and we’ve pinpointed our clients. The landlords need to get possession and OTB needs to give up the space, and then we can probably start negotiating deals,” Ferrigno said. He declined to name the clients or where he is looking.

But in an interview, Raymond Casey, the president of the city’s OTB, said he remains hopeful that his agency will stay afloat.

“There’s still time,” he said. “We’ll see what the new governor has to say, but he clearly needs some time to understand the issues.”

Although Casey declined to comment about any brokers scouring out his locations, he said it is something OTB is watching closely with its own realtors.
“We’re pretty comfortable that we’ll have a lot of flexibility with our leases,” he said. “This is not the first time OTB has faced some sort of adversity, and we came through it. Many of our landlords have been with us for 30 years.”

Still, Trock singled out the West 48th Street location near Rockefeller Center as “a great, great location” that will do “very well subletting.” He also mentioned the OTB location at Second Avenue and 53rd Street, which is two floors and 15,000 square feet. Trock said it would be “perfect for a restaurant.”

In the outer boroughs, OTB parlors tend to be in residential neighborhoods where Ferrigno said there will be opportunities for smaller companies to move in. Not all of those branches are in prime retail spots, and wooing new tenants might not be easy, especially given the uncertain dynamics of today’s market.

Still, many landlords will likely see a boost in their rent collections. Current rent at the OTB in Downtown Brooklyn is $62 per square foot, compared to the market rate of $75. In Williamsburg it’s $38 compared to the $60 market rate, in Greenpoint it’s $27 compared to $65, and in Park Slope it’s $45 compared to as much as $65, according to Diana Boutross, a broker with Winick Realty Group who has worked extensively in Brooklyn.

“We know that there’s going to be a lot of retail available, and I think the numbers are adjusting,” Boutross said. “A lot of their stores are located fairly well.”

Michael Worthman, a broker with Winick Realty Group who focuses primarily on retail spaces in Lower Manhattan, brokered a deal on Fulton Street near an OTB parlor on John Street. “I don’t know if it’s a sign or a coincidence, but a lot [of OTB parlors] are in areas that are on the rise,” he said.

Because the betting parlors tended to attract a more down-market clientele than most neighboring tenants would prefer, Trock said the departure of OTB will be a net positive for the area. “This just adds to an additional cleanup of another neighborhood,” he noted.

Casey dismissed claims that any OTB closings would raise real estate values and defended the parlors’ clientele. “OTBs are really a microcosm of the neighborhoods they exist in,” he said. “I don’t think it’s going to change the culture of the neighborhood. The net economic effect will be a negative one, not a positive one, as the businesses fall off without OTB patronage.”
That will become clearer if the parlors actually close.

Worthman said with spots in the Financial District and on lower Lafayette Street, landlords will be able to command market rents at $100 to $200 per square foot. According to the closure report, OTB currently pays $108 per square foot for the 5,800-square-foot space it occupies at 110 Lafayette Street just south of Canal. And uptown, rents near the OTB in Harlem along 125th Street between Seventh and Eighth avenues are reaching as much as $150 per square foot. The OTB pays $90 per square foot.

Worthman said Lafayette has been a “great block in
the last few years, especially as you get more south toward Canal.”

“It’s still on the rise, and it’s not there yet; it’s still under the local guys,” he said, adding that the area is “going to be seeing a little of bit of a change in quality of tenants, and maybe that has to do with getting rid of guys like OTB.”

He struck a confident note about finding new retail tenants. “There’s a guy always looking,” Worthman said.

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