Retail condos: Not just for the big guys

Low- and mid-range market sees growing activity as investors buy up store spaces; Eastern Consolidated starts new retail division

Sep.September 01, 2012 07:00 AM

Eastern Consolidated President Daun Paris (left) and Adelaide Polsinelli, head of the firm’s new retail sales division

“People say mom-and-pop stores are dying off,” said Adelaide Polsinelli, an investment sales broker with Eastern Consolidated. “But they aren’t dying off poor.”

A number of mom-and-pop landlords Polsinelli has worked with have recently sold off their Manhattan buildings at a great profit, with the new buyer “condo-ing” the retail — or separating the commercial space from the rest of the building and then selling it.

As the demand for these assets has increased in recent years, megadeals like Vornado’s $707 million retail condo purchase at 666 Fifth Avenue have grabbed headlines.

But the trend is now trickling down to the lower end of the market, brokers said, with demand heating up for small and mid-size retail condos in up-and-coming markets like southern Soho, especially along Canal Street, and the area adjacent to Times Square.

In 2011, Manhattan saw 17 retail condo deals under $10 million, for a total of $92.5 million, according to the research firm Real Capital Analytics. That was up from 10 deals worth $49.6 million in 2010, and four totaling $29.9 million in 2009.

In addition to retailers purchasing their spaces, small-time investors and major real estate players are trading retail condos at the lower and middle end of the market, too.

Vornado, for example, reportedly purchased a 9,200-square-foot retail condo at 72 Mercer Street last month for $31 million. In October, SL Green Realty sold two retail condos at 141 Fifth Avenue for a total of $46 million to an unknown buyer, and Extell Development in March unloaded retail condos at 13-15 West 20th Street and 32 West 18th Street for a total of $6.1 million to a group of foreign buyers, according to Eastern Consolidated, which brokered the deals.

In fact, the rising demand for retail condos has prompted Eastern Consolidated to launch a new, six-broker retail sales division led by Polsinelli, the firm said.

“There was just such demand,” said Daun Paris, cofounder of Eastern Consolidated, which says it’s done some $200 million worth of retail condo deals this year. “We were doing so much consulting” for prospective buyers, it only made sense to form a dedicated division, she added.

To staff the new division, which will also sell retail co-ops, apartment buildings with significant retail components and other retail-driven assets, Eastern hired brokers from Ripco Real Estate, Skyline Properties and other companies, and said it would add another four brokers to the group in the next six months or so.

Brokers say one reason for the increased demand for low- and mid-priced retail condos is rising prices for multi-family properties.

“Investors who [normally] seek to acquire multi-family investments are [now] purchasing retail condos,” said Kevin Salmon, cofounder of Salmon & Marshall, a three-and-a-half-year-old Manhattan firm that specializes in retail condos priced under $10 million.

Andrew Mandell, a partner at Ripco Real Estate, said clients are “asking the question more and more often: Is that person willing to sell their retail?”

Multi-family no more?

As has been reported, demand for retail condos has been on the rise for several years.

So far in 2012, Manhattan has seen 25 retail condo deals worth nearly $965 million for an average price per square foot of $2,733, according to RCA. That’s up from $2,207 last year, when a total of 40 trades took place.

But lower-priced deals have benefited the most from the influx of capital, brokers said. In particular, private investors have shown particular interest in buying retail condos, which they can then lease out to retailers.

In these kinds of deals, private investors are often able to pounce faster than institutional investors and larger funds, said Salmon & Marshall cofounder Matthew Marshall.

“From $2 to $20 million, it’s kind of a different ballgame,” Marshall said.

At the same time, other types of real estate investments are becoming less attractive.

Michael Brown of Ascot Properties NYC, a Manhattan-based real estate investment company, said high prices and easy lending for multi-family buildings have “driven cap rates down so much, it just doesn’t make sense for us.”

Instead, his firm bought four retail condos in the last 18 months, each valued between $3 and $14 million, he said.

Another reason investors are attracted to retail condos is that stores tend to be lower-maintenance tenants than residences.

Once a space is rented to a retailer, “this asset type provides investors with an ease of mind,” Salmon said. “It limits the chance for a tenant to call at 2 a.m. due to lack of heat.”

Plus, the surge of tourism has bolstered retail sales in New York, which means retail rents have risen. Average asking rents for ground-floor space on the Broadway corridor of Soho, for example, have risen more than 17.2 percent over the past six months, according to the CBRE Group’s second-quarter retail report.

That also makes retail tenants more likely to want to buy their spaces.

“As rents continue to rise precipitously, the idea of controlling costs is ever more appealing” to retailers, said Faith Hope Consolo, chairman of retail leasing and sales at Elliman.

An increase in 1031 exchanges — where owners buy property with money from the sale of property they already own, thus deferring the capital gains tax — has also contributed to the rising interest in retail condos, as investors have looked for cash flow in the difficult commercial real estate market, brokers said.

The downsides

But there are downsides to investing in retail condos.

For one thing, interest in the sector is growing, which means prices are going up, especially since retail condos in the city are relatively scarce to begin with.

“It’s a very competitive market with lots of prospective buyers,” said Robin Abrams, executive vice president at Lansco, who noted that approximately half her brokers have done retail condo deals.

Still, many brokers are bullish on the budding retail condo sector.

“It’s as close as you possibly get to a management-free investment,” said Michael Rudder, of Rudder Property Group, which focuses on commercial condos. “They aren’t rent-regulated, and you aren’t getting calls from your tenant about fixing the toilet.”

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