Commercial brokers are seeing strong demand for retail condos despite slumping sales of almost every other type of investment property.
Brokers said they consider this type of property a safe harbor for investors, as prices and deals show an increase over last year.
“It’s sort of a flight to quality right now,” said Eric Anton, executive managing director of Eastern Consolidated. “As it’s difficult to get financing and deals done in a downward market right now, people are not comfortable being pioneers, and retail condos are safe real estate and a safe investment, especially with good locations in the city.”
Deals for retail condos — which involve the sale, rather than lease of retail space — are accelerating in 2008. For the year to date, retail condo deals total $712 million, boosted by the sale of retail space at 666 Fifth Avenue. Retail condo deals totaled $109 million in 2007, said Bob White, founder and president of Real Capital Analytics, a New York City real estate research firm. That year saw a dip from 2006’s total of $650 million, attributed to the start of the credit crunch and tightening financing.
This year, White said, foreign investors in particular are keen to buy, thanks to the dollar’s fall.
In July, the Carlyle Group closed on a $525 million stake in the retail condo at 666 Fifth Avenue, which was purchased by the Kushner Companies last year for $1.8 billion. A new Abercrombie & Fitch kids store will occupy half the space, which is being vacated by Brooks Brothers, and pay an estimated $2,500 per square foot — likely the highest rent in the city.
These high-rise office buildings are becoming more popular for retail condo investment in the city, said Faith Hope Consolo, chairman of the retail leasing division for Prudential Douglas Elliman.
“Large office buildings on Fifth Avenue, like 666 Fifth and 717 Fifth, as well as Madison Avenue, are where there are big possibilities,” she said. “Joint venture groups are buying large retail spaces in these office buildings more and more.”
It’s often easier to buy in office buildings, she noted. “It’s much more flexible. You don’t have the rules of a residential co-op building, for example, where the profit is limited.”
Retail space racks up bigger profits than office space on a per-square-foot basis.
“The differential in value between the retail and office components of a building has gotten so large that it makes sense to look at selling the retail separately,” said White, of Real Capital Analytics. “The pieces could get more than the whole.” The Apple Store on Fifth Avenue, which does good business in the base of the GM Building, gave approximately $30 million back to the owners last year, White said.
Selling these desirable spaces helps investors recoup funds in the slow market. The rate of retail condo trades remain brisk, giving investors some hope in the current economy, noted Dan Fasulo, managing director of Real Capital Analytics.
“These transactions continue to occur at a fast pace and don’t show any signs of slowing down,” he said. “They’re not building any more retail on Fifth Avenue, so the buying and selling of property will be sure to continue.”
For developer Henry Justin of HJ Development, which is now finishing a condo conversion at 211 East 51st Street, three commercial condos will help him to earn his usual 10 to 15 percent profit, he said. The asking price for one commercial unit that is under contract is $2.7 million, and the other two are $2.8 million each.
Hines Interests, in a joint offering with Andre Balazs, put a portion of retail space at 40 Mercer, a luxury building designed by starchitect Jean Nouvel, up for sale. The space, leased to three high-end retail tenants, is now called 465 Broadway and will be sold separately.
Studley, the commercial real estate firm, estimated that the 9,400-square-foot retail space would sell for somewhere in the $50 million range. While its Soho address is desirable, the space is also modern and large, a rarity for the commercial buildings there.
Foreign investors are also showing considerable interest in retail condos. If a retail spot is in a world-renowned location, it’s an easy sell back home, Fasulo noted. “The foreign investors are very taken by the retail condo investment niche,” he said. “It’s the trophy nature of the property asset. Everyone can relate to a retail property on Fifth Avenue.”
And with tourist traffic streaming by large avenues, it’s a natural draw for these investors, he said. “Between the huge influx of tourists and business travelers, and the dollar being so low, it’s a natural choice.”
Cap rates since 2005 on retail condo deals in New York have ranged from 3 percent to 8.5 percent, according to Real Capital Analytics. Currently, the rates are at record lows, said Fasulo. That’s due mainly to below-market rental rates, but if investors hold on, the payoff will come down the road. “We’ve seen trades happening at the lowest cap rates in years right now,” he said. “But in a few years, the owner could double the rent, and the cap rate won’t even matter anymore.”
The retail space at 666 Fifth Avenue presents the same situation. The cap rate is extraordinarily low, but with new retail tenants coming in, the investors simply have to show some patience for the payoff. “It’s the same play here,” Fasulo said. “With backing from the likes of Carlyle, they know what they’re doing with their investment. The Brooks Brothers lease currently is renting below market, but Abercrombie & Fitch going in there will have a record-high rent.”