Property owners are betting that Canal Street, long a mishmash of counterfeit handbag stores and small-electronics purveyors, is on the cusp of a real estate transformation.
Vacant storefronts and construction plywood has popped up on the noisy, bustling seven-block stretch from West Broadway to Centre Street. Much of the build-out is being done speculatively, some by new owners like high-profile investor Vornado Realty Trust, which recently picked up a small property there. But established owners on the street are also rehabbing storefronts and looking to add to their holdings.
In addition, landlords have recently seen an uptick in calls from potential buyers, and some of the city’s top retail owners are eyeing potential acquisitions on the gritty, chaotic thoroughfare. For example, Joe Sitt, the CEO of Thor Equities, an active buyer in prime shopping districts like Fifth Avenue and Broadway, told The Real Deal that he’s looking to make his first Canal Street acquisition.
“It’s another part of New York City that is going through positive gentrification,” Sitt said.
Retail sources say the reason these bigger real estate players are starting to pay attention to Canal is a direct result of what’s happening just to the north in Soho — one of the city’s most active retail zones, where vacancies are tight and rents are booming. Brokers and owners say large, and perhaps national, tenants are beginning to believe that they can capitalize on the spillover from Soho. In fact, as brokers pitch Canal Street to tenants, they say they’re highlighting the proximity to high-end condos and hotels like the Soho Grand and Soho Mews.
“Canal Street is the next frontier,” said Albert Laboz, a principal at United American Land, which controls more buildings than any other landlord on this stretch of Canal. “I see it as an extension of lower Broadway, but edgier.
“I think the retailers are starting to get it.”
Canal Street, however, does have some unique challenges.
Unlike many of the city’s iconic shopping thoroughfares where investors often own clusters of buildings, Canal has more than 40 owners among the 72 parcels from West Broadway to Centre Street. And it’s dotted with a slew of tiny shops, which give it a chaotic look. In fact, United American Land — which owns 10 buildings (and controls an eleventh with a long-term lease) and roughly a fifth of the frontage — is one of only two firms that own more than two buildings on the stretch.
“The fractured element definitely makes it tougher to put things together,” said Jason Pruger, executive managing director at Newmark Grubb Knight Frank Retail, who has several listings on the stretch.
It’s also made it difficult to predict what personality the retail there will take on.
“What is Canal Street? Is it a tourist destination? Is it an extension of Broadway? Is it banks, fashion — is it food? That is what people have to figure out,” he said.
Today’s Canal streetscape harkens back to an earlier time in New York when large stores competed with street vendors, and tiny shops were festooned with merchandise clinging to their walls and hanging from the ceilings. The name of the street itself — which was the site of a thin canal between 1811 and 1819 — recalls its history.
Unlike many of the city’s other highly trafficked shopping districts where there are sizable retail spaces owned by large landlords, small individual frontages are still the name of the game on Canal.
The bulk of the storefronts — nearly 1,100 linear feet of the approximately 2,750 feet of frontage on the north and south side of Canal — is occupied by small shops selling discount-price bags, jewelry and perfume. In fact, many of the 25-foot-wide stores are divided into even narrower 12-foot frontages for their small handbag and jewelry tenants. Another 600 feet is occupied by more stable (but still local) retailers, while just 380 feet of frontage is occupied by national stores and banks, known in the industry as “credit tenants.” Although often dull for retail, they provide economic stability to landlords. Meanwhile, roughly 450 feet is vacant. The balance of space is occupied by the U.S. Post Office and a local nonprofit.
Surprisingly, those discount retailers pay rents on Canal that are as high as rents paid in many parts of Soho, with landlords getting $300 to $400 per square foot, several insiders said. They attribute that to the cash economy that many of the handbag and electronic retailers work in, as well as the premium landlords can charge for accepting higher-risk, month-to-month tenants.
In fact, rents are so high on Canal that some national chains have opted to take space on other nearby (and less expensive) streets. For example, the mega-convenience store 7-11 was eyeing a space on Canal last year, but ended up leasing on Lafayette Street instead for about $150 per square foot, said one broker, who asked to remain anonymous. Others said that situation was not unique.
“I am aware of banks who have evaluated Canal Street corners, but who ultimately decided against it for a variety of reasons, including what they considered to be unrealistic expectations on rent,” said Michael Glanzberg, a principal with Soho-based brokerage Sinvin Real Estate.
Meanwhile, the fried-chicken chain Popeye’s vacated 327 Canal Street to take a location nearby at 96 Walker Street because the rents on Canal were too high, according to one insider.
The national tenants that are currently on the street — McDonalds, Burger King, Starbucks, AT&T, Verizon, Sleepy’s, TD Bank and Bank of America — are concentrated on the portion of Canal from Centre to Broadway. Those stores, not surprisingly, are located in the buildings owned by the major landlords.
In addition to Laboz — who owns about 40 properties in Manhattan and Brooklyn, and developed Soho Mews — other well-known retail owners include the estate of Sol Goldman, the Gindi family (which owns the department store Century 21) and Vornado.
The Goldman estate owns 335 Canal Street, while Vornado quietly bought 334 Canal through a foreclosure auction. After Laboz, the second-largest owner on the stretch is Trans World Equities — a Midtown-based real estate firm that owns five buildings.
Most of the other buildings in the area have long been held by low-profile owners such as the Katz, Lippman and Roth families.
Despite the proximity to Chinatown, however, only 16 of the buildings are owned by landlords with Asian-sounding last names, a review of city record shows.
The Chong family, which is Chinese American, is rehabbing the retail space in the mixed-use 265 Canal Street despite not having a signed tenant.
“You see a shift. The change is coming from the west,” said Philip Chong. His family, which bought the building in 2000, is in negotiations with a tenant for the 13,000-square-foot, ground-floor space, he said.
With 100 feet of frontage on Canal, it’s one of the largest spaces on the stretch and is the largest undergoing a remodeling now. Laboz is also doing construction at 257 Canal.
Change is coming
Historically, owners on Canal have rarely put their properties on the market. But that is starting to change, opening the door for larger owners.
Certainly, the surprise move by Vornado — which normally goes after far bigger buildings — to plunk down $8.2 million to buy the 26-foot-wide, five-story building at 334 Canal at a foreclosure auction in September 2011 caught the attention of many in the industry.
Some investors, such as the former owners of Vornado’s building who overpaid during the boom, may be forced to sell, while others may just want to profit off the eager buyers in today’s market.
For example, 250 Canal, which is jointly owned by ABS Partners and one other investor, is on the market with an asking price of $30 million.
In addition, Michael Marvisi, who owns the neighboring five- and six-story buildings at 326 and 332 Canal (next to Vornado’s 334 Canal), is in contract to sell them for $23.5 million, according to a listing from Town Residential.
Storefronts at 322, 324 and 340 Canal, sharing the block with Vornado’s building (where the retail space is under construction), boast “for rent” signs. In some areas of the city, that would signal a downturn. But here, it appears the landlords are preparing for a cultural shift in the street, emptying old tenants and looking for new ones.
Even as landlords get rid of the souvenir and discount tenants to prepare for national stores, insiders believe the city could play an important role in how quickly Canal Street evolves.
“I think it is slowly starting to change. But I think the city cracking down on the illegal sales [of knockoff products] is going to be the biggest driver,” said Ariel Schuster, executive vice president at retail brokerage RKF (formerly Robert K. Futterman & Associates).
The city ramped up a crackdown on counterfeit goods on Canal Street in 2008 and 2009.
On some stretches, “Almost every store was shuttered,” recalled Robert Fischer, an electronics specialist who’s worked on Canal for decades installing audio equipment in cars.
One landlord, who asked not to be identified in talking about a potential deal, said he’s looking to bring a higher-quality, quick-service restaurant such as Panera Bread to one of his buildings.
In addition, there are a few new buildings, such as the 21-story Sheraton, which opened a few years ago at 370 Canal.
Wendy Silverstein, executive vice president and cohead of acquisitions and capital markets at Vornado, said the firm is continuing to look in the area.
“Canal is a little more cutting edge than Soho, but we like that. We will continue to look for opportunities,” she said.
But she noted that the area will not have a quick makeover.
“That retail,” she noted, “is not going to change overnight.”
While some say the smart money is betting on Canal, there are plenty of naysayers. Many real estate observers note the exhaust fumes from the trucks and automobiles (which rumble across Canal from New Jersey to Brooklyn) and the heavy foot traffic from bargain-hungry shoppers and say “no dice.”
Sinvin’s Glanzberg acknowledged that some retail-focused landlords want to buy on Canal and “are kicking tires at potential acquisitions.”
But he doesn’t view that as a good move yet. He and others believe that the higher-paying customers won’t want to mix with the discounted and knock-off merchants on Canal.
“From the standpoint of someone who represents upper-end and high-end retail, Canal Street really holds no place for those folks,” Glanzberg said. “It is the merchandise. There is a demographic and a shopper on Canal Street that is drastically different from what you find even a block north in Soho.”
One of the city’s top retailers, who spoke on the condition of anonymity, echoed that point, saying luxury tenants don’t want to be near the fake merchandise.
Highlighting the difficulties, an apparel tenant that was a pioneer in the Meatpacking District looked at Vornado’s 334 Canal and turned it down, one retail insider said.
Another insider, who attended the foreclosure sale where Vornado picked up the property, said, “What the hell does Vornado want with a little building there?”
Detractors also note that it’s easier to make changes in a lightly populated neighborhood such as the Meatpacking District, than to attempt to redefine an existing crowded environment.
But despite the naysayers, most think it’s not a matter of “if” Canal will go more upscale, but only “when.” Some say “in the next few years,” while others think it will take a decade.
“Canal is changing,” one longtime handbag seller originally from Senegal, who only identified himself as Ken, told The Real Deal. He sees it happening now, with fewer discount shoppers and more stores shuttered.
Laboz, for his part, said he sees a creeping evolution. He said he doesn’t expect many more banks to take space, but does expect higher-end food tenants and lower-priced apparel to be part of the next wave of change.
Soon, he said, “there will be a tipping point.
“You will have certain tenants going in as pioneers, and they will get it and they will do well,” he said.