The Full Nelson

666 Fifth Avenue Retail Condo – Will NYC Retail Sell for $34,500 Per Square Foot?

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CO45_666_5th_AvenueJaws dropped when the retail condo at 666 Fifth Avenue recently sold for a record setting price of $8,300/SF. By all accounts the $324m sale to the Spanish retailer Inditex SA (ITX) gave the market reason to celebrate. However, by our company's estimates, I believe we could soon see prime retail space trade at as much as four times this figure.

According to Bloomberg, Inditex will make the 39,000-square-foot storefront of Fifth Avenue between West 52nd and 53rd streets into a flagship store for its Zara clothing chain. The site was the former home of the NBA store.

Bloomberg went on to report that the 41-story tower that houses the store, completed in 1957 and originally known as the Tishman Building, has been the site of two other price records since 2007. Kushner Cos. paid $1.8 billion for the building that year, then a record for a single U.S. property. Last year, Japanese clothier Uniqlo leased retail space at the building for 15 years for an aggregate rent of $300 million, the most expensive rent ever for a New York store.

Real Capital Analytics called this transaction the highest sale price per square foot in the US, surpassing Longchamp's 2008 purchase of 713 Madison Avenue off East 63rd Street for $8,000/SF. However, I believe the retail unit in that sale was valued at considerably higher than 666 Fifth Avenue, given that the 6,000-square-foot building contained residential apartments above, which would've been valued at significantly less.

In our opinion, Manhattan retail rents and sale values drastically overcorrected after the market shifted in late 2008. Our retail leasing division feels that in some corridors, rents dropped by as much as 30%.

Sales values followed quickly. As a result, we've seen a huge bounce back in prices. According to Massey Knakal's Property Sales Report, the average price per square foot for retail in 1Q11 was $2,235, up a staggering 92% from 2010. Granted, the 666 Fifth Avenue sale helped these figures, but there were a dozen other retail trades in this quarter which would've evened the averages out.

Meanwhile, the average Manhattan retail cap rate in 2010 was 6.87%, up slightly from 2009's 6.66%. In 2011, we have already seen caps dip for core retail into the 4.5% to 5.5% cap range. If you apply these caps to some of the premium rents being achieved today, it's easy to see that a sale price of around $35,000/SF may be possible.

Bob Knakal was quick to point this out, especially on Fifth Avenue where retail rents are reaching $2,300/SF. If you apply a generous 10% expense ratio (on the Bleecker Retail Portfolio which we sold, the expense ratio was less than 6%), the net operating income would be $2,070/SF. Even at a 6% cap, that would translate to $34,500/SF. At this price point, it's easy to say that investors and lenders would be wary, but the same could've been said years ago about today's pricing.

According to REBNY, 2006 retail asking rents on Fifth Avenue, between 49th and 59th Streets, averaged $844/SF or only 36% of today's $2,300/SF. If these rents could've tripled in this five year period, I don't see why sale prices wouldn't follow.

Evidence of this upside can be seen elsewhere in the world. The Wall Street Journal reported late last year that the iconic Ralph Lauren building in central Tokyo sold for $350 million or almost $15,000/SF. The flagship store in Omotesando—one of the poshest addresses in Japan, located on Tokyo's version of the Champs Elysees in Paris—is a stand alone, white, neoclassical mansion that measures 2,200 square meters.

Clearly, retail is an asset class which has enormous upside potential.

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