Is NYC’s retail bubble about to pop? July 25, 2016

The Real Deal | July 1st, 2016

By Konrad Putzier

When 685 Fifth Avenue hit the market two years ago, investors practically lined up around the block. The building’s roughly 25,000-square-foot retail space — which sits on the corner of 54th Street — came with 152 feet of frontage in the heart of Manhattan’s most profitable shopping district. Best of all, the property’s only retail tenant, Gucci, was about to leave, allowing any buyer to sign a new tenant in a neighborhood where asking rents were growing at an annual average of 8 percent.

Who wouldn’t want to get in on that? Joseph Sitt’s Thor Equities and the shopping mall giant General Growth Properties, helmed by Sandeep Mathrani,certainly did.

In July 2014, the two firms joined forces and paid $475 million for the 20-story building, which also includes 90,000 square feet of office space. Soon after, the partners began actively marketing the property’s retail.

According to sources familiar with the project, however, reality has not quite lived up to expectations.

In February, the owners landed the luxury fashion designer Coach as a tenantfor a 10-year lease with a rent of about $4,000 per square foot. While that may seem like a major coup, sources say Thor and GGP had to offer deeper concessions than expected: The landlords agreed to pay for the space’s build-out, which can cost up to $1,000 per square foot for a prime retail location.

“On the face value it looks like they got a very high rent, but if you count in concessions it looks different,” said
Faith Hope Consolo, chair of the retail division at Douglas Elliman.And in the end, Coach didn’t take the entire ground-floor space, leaving the building’s owners with about 900 remaining square feet

A representative for Thor declined to comment.

Thor and GGP will still collect about $20 million in annual rent for the retail space, according to one source, and the partners entered contract to sell the building’s office portion to the Turkish real estate and jewelry company the Gülaylar Group for $160 million in March, meaning their initial investment will likely net them a hefty overall profit. But the concessions offered to Coach point to a broader concern in Manhattan’s retail market: Luxury and non-luxury tenants are becoming less willing to pay the kinds of rents owners demand.

These days, hardly a week goes by without a new report about struggling retailers and rising vacancies in Manhattan. Average retail asking rents fell year over year in seven of the borough’s 12 main retail submarkets in the first quarter of 2016, according to Cushman & Wakefield. And several prime shopping districts now have availability rates well over 20 percent, while stretches on Bleecker Street and Broadway have become notorious for their empty storefronts.

These signs of trouble are coinciding with record spending by retail investors and the rise of the retail condo.

Investors have shelled out $25 billion on Manhattan retail properties since the beginning of 2011, according to data from Real Capital Analytics. And in recent years, buyers have been more willing to dig deeper into their wallets and accept higher per-square-foot prices — forcing them to find tenants willing to pay high rents to justify their purchases.

Since 2000, RCA’s database counts 24 Manhattan retail condo sales that were priced at $10,000 per square foot or more. All of them closed after July 2011 and 17 closed in 2014 and 2015.

“I don’t want to say it’s a bubble but it’s been constantly bid up for six years,” Lee & Associates Managing Principal Peter Braus told The Real Deal.

Consolo added that retail condo sales prices have gone into the “stratosphere” in recent years.

“It is clear that there were numbers that were far too aggressive and the market just couldn’t keep up,” she said.

What goes up …

While real estate insiders are reluctant to call it a retail bubble, many acknowledge that a correction is imminent.

Michael Weiser, president of commercial brokerage GFI Realty Services, said the best indicator of whether Manhattan’s retail market is weakening is vacancy.

View full article here.

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