The Full Nelson

226-40 East 38th Street Commercial Condo–Manhattan's Best Deal in Town

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KJN6_240_east_38th_streetSince January of 2010, the distinction for Manhattan's (south of 96th Street) lowest sales price per square foot was the sale of 14 commercial condominiums at 226-40 East 38th Street. New York University's Langone Medical Center picked up these units late last year for a bargain price of $174/SF. This equated to a total sales price of $49,700,000 for 285,000 rentable square feet. Estimating a conservative land value, the price is less than a third of the replacement cost.

NYU bought the units for their short-term patient care, offices, and research facilities. The center anticipates growth in those areas, along with its department of dermatology and cancer center. The hospital raised a total of $500 million from 17,000 donors in 2008, including a $100 million gift from Kenneth Langone, for whom the center will be named after.

On average, Manhattan commercial condos sold for $850/SF in 2010; however many sold for well below $400/SF offering tremendous value. The average was artificially inflated due to many sales in Chinatown for over $2,000/SF; these sales are attributed to the fact that many of these buildings act more like retail on multiple levels.

We've experienced attractive pricing in this space. Brock Emmetsberger and Robert Burton from my office recently sold floors 5-9 in a 12 story building at 137-39 West 25th Street to a continuing education school for $10,000,000 or $336/SF. It took us several months to find this perfect user. We currently have a 2nd floor in the building for sale for $2,500,000 or $420/SF, although the space would have to be gut renovated.

The challenge is to find a user who is financially stable enough to commit to a space for a long term. Many businesses also prefer the flexibility of a lease to expand or contract in the future. The one exception is not-for-profits which benefit greatly by ownership as they don't have to pay real estate taxes. If they rent, the landlord has to cover their real estate taxes which they essentially end up paying for.

You'd think at these prices, investors would jump on a commercial condo, however there's not a great case to be made. Even if you leased the space for $35/SF, the taxes alone are $10/SF. If the tenant picked up the common charges, the investor would still only net about $20/SF after management and insurance fees. At a 7% cap, that would only translate to a value of $285/SF. This also doesn't account for downtime, TI, and brokerage fees which would further discount the value.

Thus, users seem to be the only game in town and they can be few and far between. These buyers should take advantage of the well below replacement costs offered by commercial condos. Furthermore, the historically low interest rates make it even more appealing. There are small business loans available at below 5% for long fixed rated terms at up to 90% loan to value. When looking at a buyer's carrying costs, these spaces could be well below the cost of leasing. The benefits they receive are permanent stability, a place to call home, and future appreciation

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