By Sarah Trefethen
As New York City continues to grow in population and attract shopping-happy tourists from around the world, investors and retailers alike a clamoring to own a piece of Manhattan’s miles of storefronts.
Capitalization rates on multi-family investments have dropped to the vicinity of 4 percent, according to Timothy Quinlan, of Quinlan Development Group, a retail-focused investment group which owns 85 stores in Manhattan. Retail rents, on the other hand, are yielding cap rates as high as 6 or 6.5 percent.
“Today’s financing dollars at 6 percent can be juiced up pretty nicely,” Quinlan said.
The result is a rush to own retail condos, from Downtown to Fifth Avenue.
“There’s a trend here. There’s a big demand for it, there’s a big market for it,” said Adelaide Polsinelli of Eastern Consolidated. “[Retail condos] have increased in value tremendously because they’ve become more popular.”
Polsinelli has handled over 27 retail deals in the past 24 months, and Eastern Consolidated recently announced that she will be heading the company’s new Retail Sales Group. New developments and zoning changes that allow for the creation of new retail spaces along with new residential neighborhoods will meet some of the demand, but retail focused investors have also been making some high-profile deals for just the lower floors of Manhattan towers.
Developers who in the past have preferred to control the ground floor of their buildings are being persuaded by the current market to sell off the retail condos, said Joseph Aquino, of Prudential Douglas Elliman’s retail group.
“Some of these landlords really do excel in office leasing,” Aquino said. “They see very large dollars being thrown at them, and the dollars really persuade them to give up the ownership interest in the retail portion of the buildings.”
One notable example of this strategy is 666 Fifth Ave., the retail portion of which Vornado purchased in July for $707 million. “666 fifth wasn’t the pioneer, but it was the most high-profile example,” Polsinelli said.
Quinlan’s company has been investing in retail condos since his father founded the company in 1971. They’ve noticed the recent popularity of the strategy “somewhat to our chagrin, because prices have really popped,” he said.
However, it’s not just about popularity. There are real market forces driving the trend, according to experts.
“New York City is under-retailed, particularly with the number of spending dollars that are out there,” Quinlan said.
Tenants might choose to buy their storefront to have more control, while retail condos are attractive to investors because they come with fewer headaches than residential property, Posinelli said. Combined with decent cap rates, this makes them “a good place to park money.” More and more investors are looking at building purchases with an eye to separating out the retail and office or residential portions, Posinelli said.
“In some cases, one plus one equals three,” she said. “Investors are looking at deals to buy with the thought that they will be selling them off in pieces.”
The market seems poised to remain strong for a while. Vornado Realty Trust is redeveloping the retail portion of the Marriott Marquis Times Square hotel in the heart of one of Manhattan’s most popular tourist areas, and will have an option to buy the space. The real estate investment trust will spend as much as $140 million on improvements. Massey Knakal is currently marketing a portfolio of retail properties for Related Companies, made up of a 35,000 s/f retail condo and 60,000 s/f stand-alone building on Third Avenue as well as a 50,000 s/f condo on Second Avenue.
Eastern Consolidated is marketing a retail redevelopment opportunity at 723 Third Avenue currently occupied by Schnitzel and Things and a nail salon with the rooftop leased to AT&T. The property is located in an area near Grand Central Terminal that has been targeted for rezoning by the Bloomberg.
“There’s a lot going on in New York City right now,” Posinelli said. “Because of the increase in tourism — which I think is only beginning — the drive to be here is only getting stronger.”
Recent city zoning changes have also been very retail-friendly, Quinlan said.
“Whole new neighborhoods are being created. Whole new populations are coming in and they need places to shop,” he said.
And all if this is happening at a time when the national economy is still struggling to recover from a recession.
“If the market is this strong with unemployment at this rate and bankers having the hard time they’re having … I see a significant upside when things really do improve,” Quinlan said.