Downtown store frontage, shunned by retail investors a few decades ago, has come back big in the eyes of REITs and upscale merchants. Both are competing vigorously for street-retail sites, encouraged by the residential flight back to the urban cores. Growing numbers of retail REITs, including Acadia Realty Trust, General Growth Properties and Regency Centers Corp., have joined seasoned urban veterans such as Vornado Realty Trust and Forest City Enterprises in staking out — and bidding up — street-retail spaces. “Street retail used to be sort of a cottage industry with a small group of players, but not anymore,” said Alexander Goldfarb, a managing director and REIT analyst at Sandler O’Neill & Partners. “The secret is certainly out — everyone is evaluating it.”
How popular is street retail now? Urban retail property transactions totaled some $13.1 billion last year, up by 60 percent over 2013, according to Real Capital Analytics. GGP has bought stakes in five street-retail properties — four in New York City and one in Miami — in less than two years. Its latest buy was its biggest: half of the 26-story Crown Building, on New York City’s Fifth Avenue, in a deal completed in April. GGP teamed up with New York City real estate investor Jeff Sutton, who is landlord to many of New York City’s top fashion brands, in this eye-opening $1.8 billion deal. The partners will lease, expand and manage the property’s 100,000-square-foot retail space, presently occupied by the tony likes of Bulgari, Mikimoto and Piaget, and will redevelop much of the 290,000-square-foot office portion into luxury residential condos. GGP will also relet the retail space at “today’s rents, which significantly exceed in-place rents, and convert [some] nonretail space to retail to maximize value,” said CEO Sandeep Mathrani on an earnings call.
Some New York City street space has nearly tripled in value over the past three years. One of the city’s top retail landlords, SL Green Realty Corp., bought the Galeria Melissa–anchored 102 Greene St. building, in New York’s SoHo district, for $32.3 million last year from investor Lloyd Goldman. Goldman had bought it for $11.9 million in August 2012. SL Green also picked up 5,500 square feet of development rights in the process. SL was part of a consortium of four investment groups to pay $1.3 billion in 2013 for 650 Madison Ave., a 27-story tower with 75,000 square feet of retail. The retail portion represented 75 percent of the building’s value, according to the group.
Prime street-retail space in New York City, San Francisco and Chicago -typically trades now at a breathtaking $2,000 to $3,000 per square foot, but once improved, the spaces can trade at between $3,500 and $4,000 per square foot in leases, Goldfarb says. And thus REITs do not balk at paying a bit more than market price. “It’s so limited,” he said, “that the attitude is, ‘What does it matter if I pay a few hundred dollars extra?’”
For comparison’s sake, New York City–based JSRE Acquisitions bought the smallest retail building in San Francisco’s Union Square last August for $4.3 million — $2,400 per square foot. The price of the compact 1,800-square-foot, 1920s-era structure, at 69 Maiden Lane, was nearly a new per-square-foot record for San Francisco street retail, according to Colliers International.
Last year REIT Acadia Realty Trust — another urban-active landlord — plunked down some $144.3 million, roughly $1,870 per square foot, for an 88 percent stake in 840 N. Michigan Ave., a prominent four-story retail building in the heart of Chicago’s Magnificent Mile. The fully leased property is occupied by a newly expanded H&M store that is one year into a 10-year renewal, and by Verizon Destination’s largest U.S. flagship store. “We remain active acquirers of these types of high-barrier-to-entry, irreplaceable assets,” said Acadia CEO Kenneth F. Bernstein, speaking to the financial press. This is “where we believe we’re better positioned to create outsized shareholder value over the next five, 10 and 15 years.”
Ahead of this urban curve, Vornado snagged the prime 655 Fifth Ave. in August 2013, paying $278 million for a 92.5 percent stake. Retail rents were already commanding north of $3,000 per square foot at this 57,500-square-foot property, which is also the U.S. headquarters of luxury retailer Salvatore Ferragamo. In January Vornado spun off of its Urban Edge Properties, which has three malls and 79 open-air centers, into an independently traded private company to focus on street retail and offices in New York City and in Washington, D.C.
There are still select opportunities going forward: REITs own just 4.3 percent of institutional-quality U.S. street retail, according to RBC Capital, which staged its first street-retail conference call in May, predicting that the category will become an even stronger force in publicly traded portfolios. RBC estimates that such properties typically trade at cap rates in the 4 to 5 percent range.
“Some very smart money is buying back into urban,” said Paul Schlesinger, senior vice president of Buxton Co., a Fort Worth, Texas–based analytics firm that assists retailers and restaurants in site selection. “And we are definitely seeing an uptick in [retail] clients who are interested in reconnecting with the urban core.” While urban retailers are paying higher rents, they are enjoying tremendous visibility, Schlesinger says. “As the old saying goes: You’re paying for footfalls and eyeballs,” he said. The typical Duane Reade store in New York City sees some 25,000 people pass daily on foot or by bicycle. “Few malls can claim that sort of traffic,” he said. In New York City 50 percent of the residents do not own a car, and neither do some 30 percent of those in Seattle or San Francisco — trends that only boost street retail, Schlesinger observes. And Millennials, many of whom work downtown tech or startup jobs, as well as empty nesters, are providing street retailers with a strong consumption demographic, he says.
In New York City, none of this is restricted to the borough of Manhattan. Retail real estate investment is spilling into Brooklyn too, in such neighborhoods as Park Slope. There, according to Schlesinger, “650 square feet is going to cost you a million dollars in a space few would [have wanted] a decade ago.” Forest City has developed retail in Atlantic Center and Atlantic Terminal, both in Brooklyn, and also at Manhattan’s Harlem Center and at Queens Place, in the borough of Queens; all of these feature major large-format retailers.
Nearly 3,000 miles away, grocery-anchor-oriented Regency Centers has targeted a densely populated downtown neighborhood, Seattle’s Capitol Hill, where it acquired the 220,000-square-foot, mixed-use Broadway Market for $43 -million in December. The downtown facility’s 110,000 square feet of retail includes a Kroger-owned Quality Food Center store, an Urban Outfitters and a Gold’s Gym. The property is just east of Amazon.com’s 3.3 million-square-foot new global headquarters.
In-demand street-front properties give GGP and other retail REITs — which are not developing outlet centers like some competitors — an alternative pathway to growth, according to Nathan Isbee, an analyst at Stifel Nicolaus & Co. GGP views street retail “as an extension of the mall portfolio, given the overlap of tenants,” Isbee wrote in a report.
GGP’s recent urban thrust is a carryover from CEO Mathrani’s past as retail division president of urban-specialist Vornado, according to Goldfarb. Last year, GGP’s New York City purchases included half of 685 Fifth Ave. for $260.7 million and half of 530 Fifth Ave. for $150 million, plus a stake in 785,000 square feet of retail space in Miami’s Design District. Miami is, in fact, quickly becoming a nouveau haven for vibrant street retail. Taubman Centers, in partnership with The Forbes Co., had the rare chance to create a large swath of urban retail space in the city’s new “heart” — the under-construction, Miami Worldcenter mixed-use complex, downtown. Taubman’s 765,000-square-foot Mall at Miami Worldcenter, which is to be anchored by a 195,000-square-foot Macy’s and a 120,000-square-foot Bloomingdale’s, will become a cog in the 15 million-square-foot master-planned development. Taubman calls the downtown location “the new hub of urban Miami,” visited as it is by some 40 million visitors annually. The open-air mall portion is slated for completion in 2018.
At the artsy Design District, in Miami, where developers are converting low-rise warehouses into retail, restaurant and art-gallery spaces, GGP and Ashkenazy Acquisition Corp. paid some $280 million last fall for a 20 percent stake in the district’s ownership group. Thus far, project master developer Dacra, which is owned by investor Craig Robins, and partner L Real Estate, have delivered 15 buildings to 50 brands and are starting on 20 new buildings for an additional 50. “We realized the historic architecture of the neighborhood had a huge potential, and we began by renovating existing buildings and cultivating design tenants,” said Dacra CEO Steven Gretenstein. “And we have become a solid world-luxury retail destination.” The GGP partnership “allows us to enjoy the benefit of their combined expertise, knowledge and experience,” Gretenstein said. “Their involvement is a strong endorsement of the neighborhood’s strength and international appeal.” The district’s business model is attracting significant interest from around the country and globe, he says.
The flip side to all of the street-retail deals, according to Goldfarb, is that investors are scrutinizing acquisitions in the works more carefully, because the prices and the reconfiguration expenses are getting so large. “Suddenly, every [Manhattan] market has street retail,” he said. “But not to say that street retail is going to collapse — if you want media attention, it’s hard to do better than Times Square and Fifth Avenue.” And while it takes an enormous amount of capital to land choice street-retail property in popular high-barrier-to-entry cities, there are risks to trying it in smaller markets. “If you venture to downtown retail spaces in cities where the market isn’t quite there yet, you can get into trouble,” Goldfarb said.
Urban retail has also created a run on specialty executives. “Demand for street-retail personnel has grown, not just so far in 2015 but also over the past several years,” said David Poline, CEO of Atlanta-based Poline Associates, a recruitment agency for the shopping center industry. And this is not just for downtown projects; suburban communities continue to reach out to developers to spur walkable, transit-oriented, urban-style centers, Poline says. The challenge, he said, is “finding leasing talent that both understands these macro-development trends but also possesses the Rolodex of local, regional and national tenant contacts.”
Adding impetus to the spate of urban-retail acquisitions, analysts say, is an abundance of available capital from pension funds, insurance companies and sovereign wealth funds. Observers expect the downtown residential shift and retail investment to continue. For the first time in nearly a century, says Goldfarb, “urban growth is outpacing suburban growth.”
