Has the retail-condo market bottomed out?

Investors pulled away from the troubled sector last year, but an influx of condo sales may signal a change of tune

<strong>The Marquand</strong>
The Marquand

UPDATED, 4:22 p.m., March 20: “Retail” was a four-letter word in the industry last year. But a recent spate of retail-condo sales in early 2018 might reflect changing attitudes.

Investors bought or put into contract a total of $276 million worth of retail condo properties in the first eight weeks of 2018, a review of Real Capital Analytics data byThe Real Deal shows. That’s already more than half of 2017’s total of $523 million.

“Sales activity is definitely picking up,” said Jeremy Nazarian, a managing director at the brokerage Venture Capital Properties, who in October brokered the $15 million sale of an 11,500-square-foot retail condo at 124 Hudson Street in Tribeca. “I’d say last summer was really kind of the floor as far as retail goes.”

Indeed, Manhattan’s retail market has seen a slew of notable transactions since the start of the year. In January, Status Capital paid $82 million to purchase a retail condo at the base of the Marquand condo building at 11 East 68th Street from Vornado Realty Trust. The following month, Union Investment signed a contract to buy the condo at 412 West 14th Street from Thor Equities for $88 million.

The renewed interest in pure-play retail properties follows a year in which the sector took a hammering, as investors pulled back from what had been one of the most desired and highly speculative property types. Retail rents were climbing at astronomical rates in the years following the recession. Asking rents doubled in some of Manhattan’s priciest shopping districts from 2010 to 2014, according to CBRE. In the case of Fifth Avenue between 42nd and 49th streets, rents more than tripled.

But then rents started to correct — Manhattan average asking rents dropped more than 18 percent year-over-year at the end of 2017, to $883 per square foot.

Areas such as Soho were hit particularly hard; a survey of the neighborhood by TRD late last year found nearly $1 billion worth of retail co-ops and condos purchased over the previous six years were sitting vacant. But with the retail leasing market starting to find a new equilibrium, investors are getting a better sense of what properties are worth. Insiders say capitalization rates have expanded since the days of the rent run-up, meaning buyers today are not willing to accept as much risk as they once were.

“The day of the 4 cap is dead,” said Matthew Marshall of Marshall Real Estate, who last year sold a retail condo at 325 Lexington Avenue for $7.35 million. “It’s more like 4.75 and 5 cap today.”

Nazarian made a similar point and said that investors are still wary of the kinds of speculative deals that led to overpriced retail properties in the first place.

Sign Up for the undefined Newsletter

“I think the sentiment is still there that vacancy is not as attractive as it was back in 2015,” he said. “But sellers are being more realistic with their projections.”

The Lightstone Group, for example, pulled the plug late last year on marketing a pair of retail condos at the base of its Marriott Moxy Hotel near Times Square (one vacant, one leased to Pret a Manger), which it had been looking to sell, along with a parking garage, for $64 million.

Lightstone president Mitchell Hochberg said offers on the property came in lower than the amount the company was willing to sell for. He said Lightstone could hold it long term and re-list it in a more favorable market. “At this point, we’re more buyers than we are sellers,” Hochberg said.

A group of Italian investors had better luck recently with a Soho building and two adjacent retail condos leased to Louis Vuitton. The owners put the properties on the market for $80 million last year and sold them for $82.5 million in February.

“When we launched, we launched into a wall of negativity about retail,” said CBRE broker Ned Midgley, who marketed the property for the seller. “Was there an adjustment last year? Absolutely. But two years before, there was a huge price adjustment upwards. So, I think [we’re] sort of getting back to stable.” 

Despite the recent influx of retail-condo sales, the market doesn’t appear to be returning to those heady days, such as when Vornado and Crown Acquisitions paid $700 million in 2014 for the retail at the base of the St. Regis Hotel.

Whereas out-of-control prices led to a slow condo-sales market, the high prices investors paid during the recovery may lead to more deals down the line. Buyers who got out over their skis and are holding out for retail rents that they’ll never achieve may be forced to sell, said Brian Steiner, a principal at the alternative lender Maxim Capital Group.

“When you get into the point of the cycle where there’s distress, that generally creates buying opportunities,” he said. 

Correction: A previous version of this story incorrectly identified the sellers of the retail condos leased to Louis Vuitton in Soho. This story was also updated to note that Lightstone was selling the retail condos along with another property.

Recommended For You