Commercial Real Estate & Advisory

As Condos Fill, Retail Space Remains Vacant

By Fred A. Bernstein | June 2, 2011

RIVER LOFTS, a condominium at Laight and West Streets in TriBeCa, has attracted buyers like Gwyneth Paltrow and Chris Martin, who live in a spectacular all-white apartment. At the same time, the building’s exterior has required such extensive repairs that, for much of the four years since it opened, it has looked more like a construction site than a posh residence.

But through all its travails, one thing hasn’t changed about the building: Its vast ground-floor retail space, advertised as having 125 feet of Hudson River frontage, has never been occupied. The commercial broker, SINVIN REAL ESTATE, has been offering potential tenants 18 months’ free rent, but hasn’t leased the space.

A blank storefront on a prominent site may not be easy on the eyes or good for the building’s image. But is it a bad thing for the residents and the condo’s finances in general? The answer is, probably not.

After all, a 99-cent store or a noisy bar could have a negative effect on condominium prices, which is why real estate experts say that the wrong business can be worse for a building than no business at all. Developers are loath to bring in delis, dry cleaners and discount stores; everyone would like a Marc Jacobs boutique or, at the very least, a bank. Many developers have therefore been biding their time, rather than do anything to hurt the value of the residential units over the stores.

Some landlords or developers have the resources to wait out a recession or a downturn. And others have sold the retail spaces as condos to investors, who through carefully structured deals pay relatively low carrying charges.
At River Lofts, as retail space in the building has sat empty, condos upstairs have continued to sell for millions of dollars. The same is true at many other new or recent condo buildings, including high-profile ones like Richard Meier’s 165 Charles Street and Jean Nouvel’s “vision machine” at 100 11th Avenue.

“If the developer has done well upstairs, he can afford to wait as long as he wants downstairs,” said Faith Hope Consolo, who heads the retail leasing and sales division of Prudential Douglas Elliman. “Sometimes we bring them offers,” she said of condo developers, “and we don’t even hear back.”

Ms. Consolo says the retail market, which has been weak for several years, appears to be recovering. There was “as much activity in the first quarter of 2011 as in the second half of 2010,” she said, referring to retail and restaurant leases in Manhattan. But, she said, the effects might not reach the out-of-the-way locations of most of the long-vacant retail spaces — which she described as “orphans.”

Richard Pandiscio, whose company has created the marketing campaigns for a number of expensive condo buildings, said that “from a marketing perspective, a retail tenant that adds an element of convenience or prestige is a positive.” But, he added, “right now, with so many retail spaces empty, I doubt too many residents are bothered by an empty space on their ground floor.”

Mr. Pandiscio himself lives at 100 11th Avenue, the Jean Nouvel building, where early marketing materials showed a glamorous restaurant, on the ground floor. In fact, the space has never been rented.

Another building that has never had a retail tenant — but where condo prices don’t appear to have suffered — is 165 Charles Street, where an apartment sold in February for $7.35 million. In that building, most of the retail frontage is around the corner from the residential entrance, meaning residents don’t have to look at a dusty storefront as they come and go.

But some buildings, like the glass tower at the corner of 110th Street and Malcolm X Boulevard in Harlem, seem seriously diminished by the absence of retail tenants. There, the entire retail frontage facing Central Park is vacant and, with unpainted wallboards behind double-height glass, has a forlorn appearance. (A small deli and a Subway restaurant occupy two much smaller spaces on the east side of the building.) But repeated e-mails and calls to unit owners at the building, known as 111 Central Park North, failed to turn up a single complaint about the vacancies. True, owners are unlikely to speak candidly about buildings in which they have spent as much as $6 million for apartments.

But it is also true that, once they have bought, residents generally have little or no financial stake in whether the retail spaces are ever occupied.

That’s because condo developers tend to retain the retail spaces for themselves, or sell them to investors. Last year, the retail spaces at 40 Mercer Street, a Jean Nouvel-designed building in SoHo, sold for an astounding $41.9 million. At 111 Central Park North, Tom Shapiro, an investor in Manhattan, recently paid $7 million for the retail spaces.

Mr. Shapiro said by e-mail that the businesses he had rented to — the Subway and the deli, as well as a dry cleaner and a medical office that also have street-level access — were doing well, and that other businesses were on their way. He said it was important to find tenants who would enhance the building. “We are big believers in the future of Harlem and acquired the space to hold for the long term,” he wrote.

The situation at River Lofts is similar. According to CHRISTOPHER OWLES, a principal of Sinvin, the retail space in that building is controlled by an investor, not the residents, “so the loss in income isn’t felt by anyone other than the owning party.”

The same is true at One Jackson Square, off 8th Avenue just south of 14th Street. Since the sponsor owns the units, said David Penick, a vice president for development at Hines, one of the developers, the vacancies “have no effect on the finances of the condo.”

As for developers who retain the retail spaces in their buildings, most of them can afford to wait out a slow economy, said Louis V. Greco Jr., a prominent Brooklyn developer. That, Mr. Greco said, is because when the condo deals are structured, “most of the operating costs of the building are attributable to the residential component.” The retail spaces, by contrast, are assigned relatively low carrying charges.

One of Mr. Greco’s projects, the 25-story tower called be@schermerhorn, on Schermerhorn Street in Downtown Brooklyn, has three large retail spaces, just one of which is rented. Mr. Greco said that, because his carrying costs are low and he believes the market “is on an upswing,” he had been sticking close to the asking price of $50 a square foot per year, rather than give the spaces away.

“The vacant retail space has not hurt the residential sales in that we only have one unit of the 246 left to sell,” he said. And while condo owners may not have stores in their building, the first-rate gourmet shop Brooklyn Fare (with its Michelin-starred restaurant) is diagonally across the street.