As reported in a recent article in New York City real estate journal Bisnow, and in other recent articles in a number of publications, retail condominium units in New York City remain a desirable asset class among all players, including developers, investors and retailers.
Trading in NYC retail condominium units – typically condominium units located on the ground floor of residential or office condominium buildings – took off over the last decade. Until then, owners and developers tended to hold onto their retail units, but started to sell off these remaining assets to pay down debt during the last downturn. Now, many developers construct the retail units with an eye toward sale or presale.
According to Jones Lang LaSalle, from 2010 to 2013, the dollar volume of sales of retail properties (mostly condominium units) in New York City quadrupled. Last year, sales of retail condos in Soho were reported to be 30 to 40 percent higher than a few years prior.
NYC retail property now commands a higher price per square foot than office or apartment assets. Whereas previously the valuation of the retail portions of an office building took a back seat, now the retail portions can lead the building’s valuation.
Interest by Retailers
National and international retailers are purchasing retail condo units to lock in flagship locations for marketing and cachet. Notable in this category is Zara, which in 2011 purchased (via its parent company) the former NBA store at 666 Fifth Avenue in midtown Manhattan for $324 million, and followed four years later with the $284 million purchase of the 13,600 square-foot site formerly leased by Old Navy at 503 Broadway in Soho for a neighborhood record price of over $19,000 a square foot.
The high rents that draw investors likewise spur interest by end users. Even smaller retailers with available capital seek to purchase retail units as protection against the risk of being displaced from an established and valuable location if a landlord elects to raise rents.
In addition, ownership allows monetization of the asset and offers more long-term accounting benefits. Although there is some indication that prices may be topping off, retail condos have resulted in a significant appreciation in value, sometimes in excess of the business itself, and can be a significant asset. As a result, end users reportedly are “willing to pay 10% to 15% more” than investors.
Advantages for Investors
For institutional and high net-worth investors looking for rental income from NYC real estate, retail condominium units provide a number of advantages including the following:
- The retail foot traffic that results from NYC’s sixth year of record-breaking tourism (topping 58 million visitors in 2015) continues to buoy retail rents, which have been outpacing both residential and office rents. Retail rents continue to climb in retail corridors in areas of residential development and/or renewed vitality, though rents in some well-established areas, such as Madison Avenue’s Gold Coast, remain high but are down by up to 6 percent. However, even in such areas, as supply increases and rents level off, the volume of leasing deals is on the upswing, with more retailers returning to the market.
- The ongoing obligations of the owner of a retail condominium are minimal, compared to those of an owner of office or retail property. Leasing a retail condominium to a commercial tenant is somewhat akin to a net lease in a dense urban center – regulation is minimal, there is only one tenant to deal with, landlords need not invest funds upfront for tenant improvements, and maintenance and services are primarily provided by the tenant itself.
- Investors seeking the particular attraction of owning real estate in New York City can spend less than the price of a building but gain the advantages of low maintenance and stable yet higher yields – plus the psychological appeal of owning real estate they can walk in and out of.