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Investors Roll Dice On High Priced Retail Deals

CoStar Shows High Priced Retail Sale Trends and Spotlights High Price Per Square Foot Retail Deals Across the Country
March 12, 2008
There has long been a trend within the retail industry of retailers dividing into two large groups catering to the two extremes of the price spectrum, those providing a high degree of personalized service and expensive goods at a high price point, and those offering value-priced or bulk goods at a steep discount.

Not surprisingly, much of the real estate development, leasing and sales activity has focused on serving one of these two niches. This week, we looked at retail property transactions that attracted some of the highest prices based on sales in CoStar COMPS (of retail buildings 5,000 square feet or larger) that sold for $500 per square foot or higher across the national markets that CoStar tracks. Pictured below is a trend chart showing the results of this research.

The volume of high-priced retail transactions started to pick up in 2003 and the trend continued through the last half of 2005. Since then, the number of high priced retail property transactions occurring has remained relatively constant, at about 225 transactions every six months. The average price per square foot of these deals has wavered between $700 and $800 per square foot since the last half of 2003. The ceiling price for a retail deal broke $3,000 per square foot in the last half of 2003, and since then the highest priced pure retail deals have ranged from $2,150 to $4,375 per square foot.



Although it is difficult to determine how this will compare with deals being negotiated in the first half of 2008, the current level suggests that volume and pricing will be less than the last couple years, but will likely remain in the strong range of volume and pricing recorded in 2003.


The following summarizes some of the highest priced retail property sale transactions (5,000 square feet or larger) that have closed in each region of the U.S. over the last six months. Region designations were determined from the Census Bureau maps.

Two prevailing commonalities can be found among these high-priced deals. In major metropolitan markets, buyers were willing to pay the most for land-locked retail buildings located in some of the most well known luxury shopping districts in the country. An interesting commonality between many of these "high street" deals is investment capital funded by Irish banks.

In non-major markets, buyers were willing to pay the highest price per square foot for small retail buildings tenanted by a single, dependable user on a long-term net lease, such as a restaurant or convenience store tenant.



NEW ENGLAND (ME, NH, VT, MA, CT, RI)



Boston's Newbury Street Hotbed of New England, Taurus Spends $1,058psf on Latest Back Bay Buy (COMPS ID# 1455607)
In early November 2007, Taurus Investment Holdings, represented by Peter Carbone III, closed on two retail condo units totaling 11,494 square feet at the base of 142-144 Newbury Street/265-275 Dartmouth Street in Boston's Back Bay. The historic Copley Condominium building sits at the corner of Dartmouth and the city's famed retail high street -- Newbury Street. The building backs up to the well-known Copley Square and is only a few feet from an MBTA subway stop.

Taurus bought the units from a group of Boston-based private owners, Copley Commercial Trust, for $12.2 million, or approximately $1,058 per square foot.

While Madura, a retailer of fine bedding and home accessories, occupies 10,070 square feet facing Newbury street and wrapping around the corner of the building to Dartmouth, the upscale Salon Red & Spa, which occupied 1,424 square feet facing Dartmouth Street, recently vacated the space, leaving some upside for Taurus.

But this isn't the only building Taurus has snatched up on Newbury Street. Since December 2006, Taurus, backed by $150 million in funds through Dublin, Ireland-based Anglo Irish Bank Corp., has been buying up retail properties on the street.

Including the Copley building, the partnership of Taurus / Anglo has acquired at least 16 retail buildings totaling nearly 150,000 square feet, with addresses ranging from 71 to 301 Newbury Street, for more than $103.5 million, at an average of $694 per square foot. Tenants of these buildings include fine art and antique dealers, upscale salons, high fashion, and more. The partnership is working on a full renovation of the mixed use 234-236 Newbury building into a 15,400-square-foot retail building, which is expected to be complete in early 2009.

The partnership says the purchases were made with the intention of holding them for seven to ten years. In addition, Anglo has backed some recent one-off purchases on Newbury Street by other investors. The deals have given the bank critical mass on the internationally renowned street, leverage to re-tenant and push rents upward. In addition, rumors are circulating that the group is looking to transform Newbury Street to resemble Dublin's hip shopping district.

In any case, there's no doubt that Newbury Street has long been considered an attractive investment area. Since the beginning of 2007, at least 29 transactions have taken place totaling $185.4 million, with retail buildings going for a median price of $750 per square foot.


MIDDLE ATLANTIC (NY, NJ, PA)



Thor Equities Pays $2,079psf for Soho Retail Building (COMPS ID# 1480145)
On late January 2008, Thor Equities purchased a 5,771-square-foot retail building at 440 Broadway in Manhattan's Midtown South, Soho district for $12 million, or approximately $2,079 per square foot, from 440 Broadway Corp. Last renovated in 1988, the building is doors down from Bloomingdales and other neighbors include J. Crew, CB2, Muji, Tommy Hilfiger, and a soon-to-be TopShop, among others.

Currently, it is home to "Underground-NYC", an outfit that sublets booth space within the building to new and emerging garment designers and artisans. The concept has received attention for offering such designers exposure on one of New York City's busiest retail streets that they otherwise would not have the opportunity to receive.

However, the likelihood of Underground-NYC remaining in the location is low. An undisclosed source told CoStar Advisor that Thor is expected to re-do the façade of the building and convert all of its floors into a complete retail space. Rumors are that Thor is trying to get a designer jeans retailer to lease the space, a tenant type that would be willing to pay $300 to $400 per square foot, the going retail lease rate on Broadway.

Thor is a well-known owner/manager that has identified Midtown South as one of its favorite districts. The company's other properties in the area include 530-536 Broadway, 470 Broadway, 929-933 Broadway and 139 Fifth Ave.

The company has been acquiring urban redevelopment opportunities through young division, "Thor Urban Development", which aims to capitalize on high profile retailers' increasing willingness to "open new stores in urban ethnic markets." The company continues to seek the acquisition of "under performing retail and retail/office buildings in urban ethnic areas to reposition them through renovation, expansion and re-tenanting.


SOUTH ATLANTIC (MD, DE, DC, WV, VA, NV, SC, GA, FL)



New York Investor Spends $1,607psf on South Beach Retail (COMPS ID# 1436921)
Boston isn't the only city where Anglo Irish Bank Corp. is funding property investment on retail high streets. At the end of October, ACHS Management, a New York City-based property management company, backed by a $11.1 million loan from Anglo, acquired a 15,000-square-foot retail building located at 1024 - 1026 Lincoln Road in Miami for $24.1 million. The $1,607 per square foot purchase price represents nearly twice the amount Copelands Investment Partnership paid for the property in 2004.

Built in 1936, DA Group construction put the building through a historical renovation in the '90s. Reportedly, the buyer may expand the existing building by 23,500 square feet.

The building is part of what's known as Lincoln Road Mall, an outdoor shopping, dining and entertainment district in South Beach. Upscale furniture and home retailer, Jonathan Adler, occupies 1024 Lincoln and F.C.U.K. (French Connection United Kingdom), an international casual clothing chain, occupies 1026 Lincoln. Neighboring retailers include Ann Taylor LOFT, Anthropologie, Banana Republic, GAP, Lucky Brand Jeans, and more.


EAST SOUTH CENTRAL (KY, TN, MS, AL)



Shane Investment Brokers Sale of Memphis IHOP for $537psf (COMPS ID# 1485102)

In September 2007, Shane Investment Group of Alpharetta, GA represented Flapjacks Millington Venture LLC of Atlanta, in the sale of a 5,000-square-foot freestanding retail building located at 8484 Wilkinsville Road in Millington, Tennessee - a location that is part of the North Retail submarket of Memphis. The buyers, Fathy Real Estate Partners of San Francisco, CA, purchased the single tenant property, which is net leased to an International House of Pancakes operator, for $2.68 million, or approximately $537 per square foot. The property was a build to suit project for I.H.O.P. and was completed in early 2007.


WEST SOUTH CENTRAL (OK, AR, LA, TX)



CBRE Brokers Sale of Net Leased Convenience Store Asset for $547psf (COMPS ID # 1474003)

At the end of December, CB Richard Ellis' Todd Milang of Des Moines, IA and Sterling Champ of Universal City, CA represented Grand Veloce Forte Corp. in the $2.8 million sale of a 5,118-square-foot convenience store property at 8001-8005 Garnett Road in Broken Arrow, OK, a southeast suburb of Tulsa. Merchants White Line Warehousing bought the net lease investment property for $2.8 million, or approximately $547 per square foot. The brand new building, which sits on a 1.7-acre parcel, was completed in September 2007 and is occupied by a "Kum & Go" convenience store, which executed a 20-year lease, and a Subway sandwich shop. The seller's cap rate was 7.25 percent.


EAST NORTH CENTRAL (WI, MI, IL, IN, OH)



Spanish Billionaire Spends $1,399psf on Magnificent Mile Luxury Retail Center (COMPS ID# 1471012)

Ponte Gadea Group, the U.S. investment arm of Spanish billionaire Amancio Ortega, in late December 2007, closed on 250,445 square feet of retail space located at 730 and 750 N. Michigan Avenue in Chicago from joint venture partners for $350 million, or approximately $1,399 per square foot.

The joint venture consists of a JP Morgan Chase & Co. fund and Prudential PLC, a London-based financial service company. Ponte Gadea's acquisition price represents an estimated 40% premium over the price the joint venture group paid for the property three years ago.

The 250,445-square-foot shopping center is located between Chicago Avenue and Superior Street in the heart of Chicago’s Magnificent Mile. Notable tenants include Tiffany & Co., Polo Ralph Lauren, Banana Republic, American Girl Place and The Peninsula.

Upside exists in the center's tenant mix as Pottery Barn is vacating its current space and expected to be replaced by Victoria's Secret. In addition, the space of a former Comp USA remains vacant and American Girl is said to be moving from its current space in the center to Water Tower Place at the end of 2008.

The seller reported being approached directly by Ponte Gadea. There were no brokers involved in this direct deal that was never formally "on the market" for sale.

Ponte Gadea has been very active in the U.S. of late, completing high profile transactions in Washington D.C., New York City and San Francisco. In 2007, it acquired the SunTrust Bank office building on New York Ave. in Washington D.C. for $87 million, or approximately $552 per square foot; and 400 Post St. in San Francisco's Union Square, home to Morton's Steakhouse, Borders Books and a Disney Store, for $103 million, or approximately 1,431 per square foot.


WEST NORTH CENTRAL (ND, SD, NE, KS, MN, IA, MO)



1031 Exchange Buyer Pays $536psf for Buffalo Wild Wings Building in Minnesota (COMPS ID# 1405372)
In late September 2007, Peter Knoppert Trust, represented by Brent Hensley of Net Leased Real Properties Inc., acquired a 5,352-square-foot single tenant restaurant building located at 11508 Theater Drive North in Champlin for $2.87 million, or approximately $536 per square foot. Champlin is a northwest suburb of Minneapolis and the 1.55-acre site the building resides on fronts Highway 169, the main Champlin thoroughfare, as an outparcel to Elm Creek Commons, which features a 14-screen cinema and ALDI market. The property was built-to-suit for a Buffalo Wild Wings franchisee, which opened its doors in late 2003 and signed a 15-year absolute net lease. Barry Silver of The Silver Group represented the seller, Sheldon P. Donig Trust, in the transaction, which closed at a price 4.7% higher than the offering price. The transaction was a 1031 exchange for both the buyer and the seller and the seller's cap rate was 6.8 percent.


MOUNTAIN (ID, MT, WY, NV, UT, CO, NM, AZ)



High Stakes Poker Star Pays $762psf for Downtown Las Vegas Retail Building (COMPS ID# 1421960)
322 Fremont Street, a 6,300-square-foot retail building located just off the north end of the Las Vegas strip in Downtown Las Vegas, Nevada, was purchased for $4.8 million, or approximately $762 per square foot, in October 2007 by Eliahu Elezra from a group of sellers including the Premier Trust, Marems Trust and Bradshaw Trust. With tenants including Piccadilly Circus Pizza, a camera outlet and a souvenir/t-shirt shop, the 1961 building is situated at the base of The Fremont Hotel & Casino. Elezra is an Israeli professional poker player currently featured on GSN Network's "High Stakes Poker" TV show. He owns a number of other Las Vegas real estate assets as well.



GGP Closes on $290.8 Million Phase One of a Deal to Ultimately Acquire Las Vegas' The Shoppes at The Palazzo for $600 Million, $1,119 PSF (COMPS ID# 1484849
General Growth Properties (NYSE:GGP) closed on the acquisition of The Shoppes at Palazzo from Las Vegas Sands Corp. for $290.8 million, or approximately $543 per square foot.

The Shoppes, which opened on January 18, 2008, are comprised of 536,000 square feet and make up the retail, entertainment and dining portions of The Palazzo Resort Hotel & Casino. The Shoppes are connected to the existing Venetian and the Sands Expo and Convention Center facilities and The Grand Canal Shoppes. When GGP acquired The Grand Canal Shoppes in 2004, it entered into the agreement to acquire The Shoppes at Palazzo.

The Shoppes' purchase price was computed on a 6% capitalization rate for NOI up to $38 million and 8% on NOI in excess of $38 million. GGP agreed to make additional payments over the next four years to Las Vegas Sands if the project's NOI increases. The REIT estimates it will have spent a total of $600 million, or approximately $1,119 per square foot, to completely own the property at the end of the four years.

An 85,000-square-foot Barneys New York anchors The Shoppes and is complemented by more than 60 boutiques and stores designed to fit alongside the luxury retail tenant base of The Venetian. Twenty stores made their Las Vegas debut at the Palazzo include Chloe, Tory Burch, Christian Louboutin, Diane Von Furstenberg, Van Cleef & Arpels, Anya Hindmarch, Poleci, Lambertson Truex, Phillipe Charriol, Edidi, Piaget and Michael Kors. Ralph Lauren, Jimmy Choo, Piaget, Burberry, Salvatore Ferragamo, Fendi, Bottega Veneta and Montblanc join those.

Restaurant tenants include CarneVino by Mario Batali, CUT by Wolfgang Puck, Table 10 by Emeril Lagasse, and Restaurant Charlie by Charlie Trotter, as well as Dos Caminos, Grand Lux Café, Jade, Mainland, Morels French Steakhouse & Bistro, Prime Blue Grill, SUSHISAMBA, and Woo.


PACIFIC (WA, OR, CA)



Aidan Brooks Breaks San Francisco Record, Spending $2,328psf on Chanel Flagship (COMPS ID# 1479389)

In January 2008, A Brooks Properties closed on the acquisition of the 10,500-square-foot Chanel flagship building in San Francisco's Union Square for $23.5 million, or approximately $2,328 per square foot. According to CoStar COMPS, this deal represents a record-breaking price per square foot for a true retail building sold in the San Francisco market.

Kobe Investment, an Osaka, Japan based investment company, sold the building for $10.5 million more (about $1,000 per square foot more) than it paid for it in 1990. The three-story building (plus rentable basement), built in 1907, has an address of 156 Maiden Lane/156 Geary Street and is located just around the corner from Union Square Park and the famous Sir Francis Drake Hotel.

Allied Irish Bank provided $21.2 million to finance the deal. George Eckard and Kazuko Morgan of Cushman & Wakefield of California negotiated the transaction for both parties.

A Brooks Properties is an investment arm of Limerick, Ireland development tycoon, Aidan Brooks. Brooks has been a very active investor in high profile retail properties in the U.S. in recent years, not only through A Brooks Properties, but also through a stake in Sloan Capital. The two investment vehicles have given Brooks an ownership piece in properties including the Rhinelander Mansion in New York, home to the Polo Ralph Lauren flagship store; 216-220 Post Street in San Francisco, home to Saks Fifth Ave Men; Two Rodeo Drive in Beverly Hills, home to Tiffany's; and 1 Grant Ave in San Francisco, home to Emporio Armani.

Festival Pays $2,222psf for Banana Republic Flagship in Beverly Hills (COMPS ID# 1418531)

In October 2007, the Marcus & Millichap team of Bradley Baskin, Orbell Ovaness and Tony Azzi, negotiated a $30 million retail property transaction on behalf of both the seller and buyer. Festival Retail Fund 1, an investment arm of Los Angeles-based Festival Management Company, purchased a two-story, 13,500-square-foot, Mediterranean-style building, built in 1931, at 357 N. Beverly Drive in Beverly Hills, CA for $2,222 per square foot, from Meyer Pacific. Banana Republic leases the entire building, situated within the elite Golden Triangle shopping district, as its Los Angeles flagship location.

Anglo Irish Bank again stepped in to fund a high profile U.S. retail asset, providing Festival with a more than $25 million loan. The transaction was the sixth purchase for Festival Retail Fund One and the second building the fund snatched up in the Golden Triangle. In January 2007, the company paid $41 million, or approximately $3,029 per square foot, for the 13,533-square-foot building at 345-347 Rodeo Drive that is home to Gucci and Fendi. Festival formed the fund with partner Goldman Sachs to invest up to $800 million in ground-up and existing retail properties in major U.S. cities by the end of 2009.


(Editor's Note: To keep up on happenings and trends in retail real estate, subscribe to CoStar's Retail News Roundup, a weekly column covering retailer expansions and new concepts, store closings, bankruptcies, cutbacks, acquisition, mergers, sales. new shopping centers, personnel changes, and sustainability. Follow this link for access to back issues of the roundup. In addition to appearing every week in the national news and retail news sections of our web site, you may also receive the Retail News Roundup for free via email by requesting to be added to the distribution list by contacting senior editor, Sasha Pardy at spardy@CoStar.com Also, click hereto subscribe to CoStar's dedicated Retail RSS Feed.



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