Commercial and Retail Condos Growing in Popularity

Minding the Store in a Condo

New York Times
April 11, 2007
By J. ALEX TARQUINIO

Patrick Cooney stops in frequently at the Museum of Modern Art store on the corner of Spring and Crosby Streets in Manhattan. Before Christmas, he loaded up on T-shirts and toys for the family. “MoMA is a part of New York,” he said.

But unlike other loyal customers at the museum’s outpost in SoHo, Mr. Cooney is also the store’s landlord. Five years ago, he bought the 15,000-square-foot retail condominium at 81 Spring Street, covering the ground floor, lower level and a storage area in the basement, and the Modern rents all the space.

Retail condominiums work much like residential condos. Developers carve out retail space on the ground floor of a building and sell it to investors. The developers often lease the space out first, and the more compelling the tenant, the steeper the price they can ask of the buyer.

Over the last few years, the market for these properties has skyrocketed in Manhattan. More than 560,000 square feet of retail condo space sold last year for almost $650 million. That was a sharp increase from the 28,000 square feet that sold in 2003 for around $26 million, according to Real Capital Analytics, a New York real estate company that tracks deals worth at least $5 million.

Over the last two years, Manhattan represented 38 percent of the total square footage of retail condo space sold nationwide, and 65 percent of the dollar value, according to the company’s statistics.

While New York has the largest market for retail condos, they are also popular with investors in other densely built-up American cities like Chicago, San Francisco, Boston and Washington, said Dan Fasulo, the director of market analysis at Real Capital Analytics. “They’re the glamour cities, with global appeal,” he said.

Brokers say that in New York’s intense real estate market, developers are eager to assemble construction sites, even in neighborhoods not previously regarded as prime commercial areas. In the process, they are offering such high prices for smaller buildings that the owners cannot resist selling. And once they do sell, there are powerful tax incentives to plow the money back into real estate.

Mr. Cooney, for example, purchased the SoHo store with money he made selling four adjacent residential brownstones on the Upper East Side of Manhattan that had been divided into rental units.

Mr. Cooney, a restaurateur who immigrated from Ireland in 1968 and owns O’Casey’s at 22 East 41st Street, had purchased all four buildings for a total of $350,000 in the late 1970s. So when he sold them for $12 million in 2001, almost all of the proceeds would have been subject to capital gains taxes.

But he opted to do a 1031 exchange, which is named for a section of the federal tax code that allows real estate investors to avoid paying capital gains taxes if they quickly reinvest in real estate. The law gives them 45 days to identify the properties they would like to buy and 180 days in all from when they sold their original properties to close on the new ones.

Mr. Cooney used most of his windfall to buy two retail condos.

First, as part of his original agreement to sell the brownstones to the developer Sherwood Properties, he gained the right to pay $3.5 million to acquire a retail condo in the Metropolitan, the 30-story residential tower at 181 East 90th Street that was built on the brownstone site. A Chase bank branch has a 20-year lease in his condo.

He also paid $6.3 million to the Horizon Realty and Development Corporation for the store in SoHo, where the Museum of Modern Art already had a 10-year lease.

The museum created this store to maintain a foothold in Manhattan while the museum on 53rd Street was closed for renovation, said Kathy Thornton-Bias, the museum’s general manager of retailing.

But the SoHo store first opened its doors just a few days after the terrorist attacks in September 2001. It was difficult then even to enter the neighborhood in Lower Manhattan, much less do any shopping there.

At the time, Mr. Cooney had only a verbal agreement to buy the retail condo, so he might have backed out. But his interest in the distinctiveness of the location and the tenant — combined with his need to close the deal quickly because of the 1031 rules — persuaded him to proceed.

Eric Anton, an executive director at Eastern Consolidated who sold the Spring Street store to Mr. Cooney, estimates that half of the retail condo sales in his office are to buyers with money that they are eager to apply to 1031 exchanges. He said many of these buyers are gearing up for retirement — like Mr. Cooney, who is 62 now — and without the tax incentives, they might instead roll some of their gains into bonds.

David LaPierre, a senior vice president at CB Richard Ellis, said that retail condos might also have a psychological appeal for some local investors.

“Walking around a neighborhood, you can see new stores opening, and you can go in and out of stores,” he said. “That makes retail feel more tangible than an office market, where you can’t tell the quality of the buildings from the outside.”

Of course, soaring sales prices have taken a slice out of capitalization rates, a ratio of the net income produced by a property relative to its cost. When Mr. Cooney bought the Spring Street store in early 2002, it had a capitalization rate of 7 percent.

Now, however, some retail condos in prime locations like Fifth Avenue are selling with yields as low as 4.5 percent, brokers say. “That is very close to a bond,” Mr. LaPierre said. Buyers who accept yields that low are betting that the values of condominiums will continue to climb, he said.

Mr. Cooney estimates that the SoHo store might sell with a capitalization rate of 5 percent now.

“And I would buy it today for 5 percent,” he said. “You can’t beat the location, or the tenant.”