Fifth Avenue Property Deal Driven By Tourists, Law of Supply and Demand


By Keiko Morris

The pending $700 million sale of a 25,000-square-foot retail site on Fifth Avenue this week was driven by ever higher rents, growing tourist traffic and tight property supply on the renowned street, according to one of the buyers and brokers.

The site at East 55th Street is a half-block long and sits smack in the middle of Fifth Avenue's highest-priced stretch--roughly between East 51st and East 57th, depending on who is counting.

"We made this investment based on where the market is today, not where it's going," said Haim Chera, a principal with Crown Acquisitions, which joined forces with Vornado Realty Trust to buy the retail space at the St. Regis Hotel and an adjacent townhouse.

Vornado will own 67% to 80% of the property, with Crown owning the rest. Cie. Financière Richemont, a Swiss concern, paid $380.6 million for the property in 2012, according to city records.

But the conditions back then also were starkly different, noted Mr. Chera.

He estimated rents have doubled to about $4,000 a square foot on a six-block span of Fifth Avenue. The new owners of the East 55th site will be able to charge more in rent because the leases for the Bottega Veneta store and the De Beers shop are close to their expiration dates--2016 and 2019, respectively.

Bottega Veneta's lease accounts for 17,100 square feet of the property.

The average asking rents on upper Fifth Avenue--a broader section generally defined as 49th to 60th--were $2,749 in the second quarter of 2014, up from $2,067 in the second quarter of 2012, according to Cushman & Wakefield Inc. However, brokers say asking rents on upper Fifth Avenue can reach as high as $3,000 to $4,000.

"That rent has gone up precipitously," said Adelaide Polsinelli, senior director at Eastern Consolidated, a real- estate services firm. "There are tenants who will sign a lease today and will pay a premium to have the lease executed so they can move in at the time of vacancy."

Retailers also can justify the rents on upper Fifth Avenue as a marketing expense.

In the last five years, retail properties, especially those in the city, have attracted both foreign and domestic buyers, said Andrew Goldberg, a vice chairman at CBRE Group Inc. "In the past, investment firms bought big malls," he said. "Now they are buying retail properties in the city."

A note of caution, however, came from John Bejjani, an analyst with Green Street Advisors Inc.

"It's fair to question how much further street retail rents can rise when subpar store performance is already not uncommon and being rationalized by retailers as a marketing expense," he said.

The pending Vornado and Crown purchase amounts to more than $28,000 a square foot, but other deals have rivaled it. The Madison Avenue purchase in February by an affiliate of Chanel SA of about 3,950 square feet from the Louis and Anne Abrons Foundation Inc. translates into more than $31,000 a square foot.

Ultimately on Fifth Avenue, supply and demand rules, many in the industry said. Only about 1,200 feet of storefront lines the east side of Fifth Avenue between East 51st and East 57th streets. "The simple answer is that there is only one Fifth Avenue and one New York City, said" Joanne Podell, vice chairman at Cushman & Wakefield. "It can't be duplicated."

Mr. Chera said increasing numbers of tourists were helping fuel more retail sales along the rarefied corridor.

The city's tourism organization estimated that 54.3 million visitors traveled to New York City in 2013, up from 52.7 million in 2012. It projected 55.8 million visitors to the city by the end of 2014.

Write to Keiko Morris at Keiko.Morris@wsj.com

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