10/19/2011

Demand Soars for Retail Condos in Manhattan

Institutional investors are clamoring for retail condominiums in Manhattan.

For pension funds, insurance companies and foreign buyers, such condos provide a relatively high capitalization rate and low price hurdle for a Manhattan retail property, as well as limited management responsibilities.

“There are more institutional investors focused on retail condos now than at any point in the past,” said Studley managing director Will Silverman.

More than a half-dozen offerings have hit the market this year. Investors that have either kicked the tires or completed purchases include Invesco, German syndicator GLL Real Estate, Ohio State Teachers, Prudential Real Estate Investors, RREEF, TIAA-CREF, German fund shop Union Investment Real Estate and Vornado Realty.

The latest offering is a 100,000-square-foot block of space at Manhattan House, a residential-condominium building that stretches from East 65th Street to East 66th Street, between Second and Third Avenues. The offered space, which is fully leased, encompasses 30,000 sf of stores, 18,000 sf of medical offices and a 230-space garage.

The tenants include such high-end retailers as ALDO, Club Monaco, Lululemon Athletica and Madame Paulette. A florist and a nail shop at East 65th Street and Second Avenue could be combined when their leases roll over in two years. The condo, which has no other short-term lease expirations, is expected to attract bids of about $100 million. At that price, the capitalization rate would be about 5.5%.

Referring to the offering’s attraction for institutional investors, one market pro said: “It’s credit and yield and term.”

The owner, a partnership between Madison Capital of New York and J.P. Morgan, has given the listing to Eastdil Secured.

Several other retail condos are about to close. SL Green, a New York REIT, is under contract to sell a 10,000-sf block at 141 Fifth Avenue to an unidentified investor. When that offering hit the market this summer, it was expected to command bids of about $5,000/sf, or $50 million. Eastdil also has that listing.

Meanwhile, local developer Bromley Cos. has lined up an unidentified institutional buyer for 14,500 sf on the ground floor of The Bromley, a 300-unit residential condo at the northeast corner of Broadway and West 83rd Street. The space, which is fully leased to two tenants, was expected to attract bids of about $45 million, or $3,100/sf, when marketing kicked off over the summer.

Studley, which is brokering that deal, also handled last month’s sale of a 66,000-sf retail and garage condo at the 101-unit Laurel residential-condo building at 400 East 67th Street. Prudential Real Estate acquired the space from New York builder Alexico Group for $61.6 million.

In January, Ohio State Teachers bought a 14,500-sf retail condo at 15 Union Square West from Brack Capital Real Estate of Amsterdam for $57.9 million, or $3,990/sf. CBRE handled that trade.

Brokers said foreign demand for Manhattan retail condos has risen as the tenant base has shifted from local shops to global high-end retailers, such as Uniqlo, Hermes and Cartier. Institutional investors in Europe and other countries are comforted by the track records of such stores.

“That kind of globalization and homogenization means the tenants on Fifth Avenue are a lot like the tenants on Regent Street [in London’s West End], which are a lot like the tenants on Causeway Bay” in Hong Kong, one broker said.

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