By Sarah Trefethen
The way money is flowing these days, corporate tenants may be asking: why rent if you can buy?
With lenders less enthused by real estate investment than they are by well-heeled corporate borrowers, some experts say, the interest, taxes and maintenance fees that an owner-occupier would pay for office or retail space in Manhattan stack up favorably against commercial rents.
“It’s a cyclical situation,” said Michael Rotchford, Cushman and Wakefield’s head of corporate finance and investment banking. “In certain times in the real estate cycle matched up to the capital cycle it becomes much more affordable for corporations to buy real estate.”
The effect of this alignment of the financial stars may be seen in recent deals, from fashion retailer Zara’s purchase last year of its 38,750 s/f retail condo at 666 Fifth Ave, to the Federal Reserve’s decision to purchase 33 Maiden Lane, (where it has offices,) to Google’s building on Eighth Avenue and the recent announcement that Gary Barnett’s Extell Development Company has struck a 285,000 s/f deal with the department store Nordstrom’s to kickstart the developer’s planned mixed-use project on 57th Street on the West Side.
“It’s not exactly a new thing outside the city. Stores like Walmart and Nordstrom are used to owning,” said Robert Futterman of RKF, who represented Extell in the deal. “If you look at a Target-anchored shopping center, Target probably owns its pad.” International companies are also more likely to want to own their space, according to Futterman. Fashion retailer Etro owns its spaces on Madison Avenue and in Soho, he said.
“They believe their costs are less than if they leased,” Futterman said. “And if they can get their money out of Italy and invest it in Manhattan real estate, that can’t be a bad deal.”
Ownership may be on the increase, Futterman said, though he doubted it would ever amount to more than 10 percent of the Manhattan retail market.
“Many of these companies do not want the liability of ownership,” he said.
Not everyone is convinced that examples like Nordstrom, Google and the Fed are part of a trend rather than isolated cases.
“I always think of it more as control rather than cost of capital in those cases,” said Andrew Scandalios, a senior managing director at the mortgage banking firm HFF.
It’s easier to finance real estate in Manhattan than other places in the country, Scandalios said, and he estimates the universe of companies who would find it cheaper to buy than to lease in this market is actually small. But others say supply is the main factor limiting owner occupancy of commercial condos. “There would be more sales if there were more availability,” said Michael Rudder of Rudder Property Group, a broker who specializes in commercial condos. “There’s a ton of demand from all sorts of companies out there.”
In New York, office condos make up just two percent of office space, Rudder said. According to Rudder Property Group’s mid-year report, availability in the city’s 9.09 million square feet of office condos is 11.8 percent. But 50 percent of that available space is concentrated in just two buildings — 190,000 s/f in Extell’s Gem Tower in midtown, and at 40 Rector Street in the financial district. By the end of the year, Rudder anticipates a marked drop in amount of available space.
All this may add up to dawn of a construction boom.
While the city’s landlords are unlikely to run out to perform condo conversions on assets that in some cases have been in the family for generations, Rotchford and Rudder agree that the time is ripe for developers to turn to commercial condos to get new projects off the ground.
As an example of what’s possible, Rotchford suggests looking along Sixth Avenue between 48th and 54th streets. RCA commissioned 30 Rockefeller Plaza in the 1930s, and a few decades later the Exxon Building went up across the street. Other companies that dabbled in development in the area included McGraw Hill, Sperry Rand, Time Inc, the U.S. Rubber Company and television network ABC.
“If you think about Sixth Avenue from the 1930s to the late 1980s, it wasn’t all a lot of big beautiful buildings. What got those buildings built were the corporations,” he said.
Rotchford predicts the current financial climate is “going to be helpful for development because there are going to be corporations that are willing to commit, because that’s a way for them to get an ownership interest in the building.”
That’s what happened for Extell with the Nordstrom deal, and Coach’s 600,000 s/f purchase in the Hudson Yards development last November. And with big names like Microsoft and Facebook said to be looking to expand their presence in New York, some experts hope those deals are the beginning of a trend.
“If we can get a critical mass of corporations, we can really change the West Side,” Rotchford said.
And while Scandalios still maintains that in most Manhattan submarkets it’s probably still cheaper to lease than to buy, he’s not out to discourage developers from marketing commercial condos.
“In the case of new development like in Hudson Yards and things of that nature, where tenants want to control their environment and it makes it easier if they’re part of the capital structure to finance, I can see that,” he said. “Because it is difficult to finance spec’ office buildings, even in Manhattan.”