Commercial Real Estate & Advisory

Retail Condos Latest Objects of Desire

By Judith Messina | February 19, 2007

Competition intense as quality deals become scarce

In 2005, Vornado Realty Trust bought 17,000 square feet of ground-floor retail space in Madison Avenue’s Westbury Hotel, where Gucci and Cartier have outposts. At more than $6,600 a square foot, it was the priciest retail deal ever in New York. But it may yet be topped in the red-hot market for retail condos.

The landlords and developers of these desirable spaces are often eager to cash out, and buyers—investors or the retailers themselves—are willing to pay the premium.

The intense interest and limited supply are sending prices skyward. Between 2004 and 2006, the total value of retail condo deals nearly tripled, to $752 million, and prices climbed 10%, to an average of nearly $1,300 a square foot, according to Real Capital Analytics, a Manhattan real estate and consulting firm.

“Investors love retail space,” says Bruce Sinder, a principal in Sinvin Realty, which brokers retail condo deals. “They often buy at a nominal return initially, but if they buy smartly in up-and-coming neighborhoods, the value goes up.”
Brokers complain that capacity is insufficient to meet demand. Prices have risen so much that initial returns have fallen to 4% from 6% a couple of years ago, and good properties are getting hard to find.

Tightening market

“It’s gotten more competitive,” says George Perry, director of investments for Wien & Malkin Securities Corp., a Manhattan real estate investment firm that has invested in retail condos. “There’s a tremendous amount of capital chasing too few quality deals.”

Retail condos, long occupying a niche market in New York, are gaining favor in other urban centers. Once shunned because of their high per-square-foot prices, they have become popular in the booming retail economy. Additionally, more lenders are ponying up money at relatively low interest rates. Retail condo sales were up 43% nationally last year.
The wave of condo conversions in New York coincides with the development of dozens of residential and office towers, creating opportunities for landlords and developers to cash in on retail space at ground level and below. Selling space can offer tax advantages, and the deals command higher prices per square foot than the apartments or offices above.
Leonard Taub, a senior managing partner at Kaish & Taub Development Group, for example, figures that ground-floor retail space in Gramercy Park, where he plans to build a residential condo, will sell for about $1,500 a square foot. That’s 29% higher than the average residential condo in the area was going for at the end of 2006, according to Miller Samuel.
In a project at Wythe Street and Broadway in Williamsburg, Brooklyn, Mr. Taub plans to sell 10,000 square feet of ground-floor retail space that he estimates will fetch $550 to $700 a square foot.

Peter Von Der Ahe, a director at investment real estate broker Marcus & Millichap, says he gets two calls a day about ground-floor space in a rehabbed 80-condo building between West 113th and West 114th streets. The price: $500 a square foot.

Investors covet retail condos’ income and property appreciation. They can also reap tax advantages if they buy and sell properties of similar value.

Kushner Cos., which just bought 666 Fifth Ave. from Tishman Speyer for $1.8 billion, has reportedly been besieged with offers for the retail space, which is occupied by Brooks Brothers, the NBA store and Hickey Freeman.

Investors are even buying on spec. Last spring, Madison Capital paid $80 million for a partnership interest in 85,000 square feet of retail space in a luxury condo building going up on Broadway across from the Time Warner Center. In December, electronics giant Best Buy signed a 15-year lease for more than half the space, which is still under construction.

Solid Investment

“It’s almost impossible that a retail condo investment in a prime area will go bad,” says Steven Kohn, president of real estate investment bank Sonnenblick-Goldman, which arranged the Westbury Hotel deal and equity and debt financing for Madison Capital.

Retailers, eager to lock in their costs and benefit from rising property values, are also stepping up to the plate. Restaurateurs are often buyers.

Tequilas Mexican Grill, for example, must vacate its space on West 14th Street because the building is slated to be torn down. Instead of leasing again, Tequilas’ owner recently bought the ground floor and basement of 358 W. 23rd St., a five-story brownstone, for $1.9 million.

“He’ll never have a rent increase, and he has a huge asset,” says Craig Slosberg, a managing director of Newmark Knight Frank Retail who represented the restaurant owner in the deal.