Real estate remains a popular investment theme, and there’s no place in the world that does real estate quite like New York’s Fifth Avenue.
The New York Post’s Lois Weiss wrote a column September 30 that highlights the details of a real estate transaction on Fifth Avenue at West 44th Street. Nothing about the deal itself is unusual. Rather it was the author’s observation that ground floor retail leases on Park Avenue in this immediate area are going for $1,200 per square foot.
A 24,000 flagship store would generate almost $29 million in annual rent for its owners, making Fifth Avenue real estate some of the most lucrative in Manhattan.
How can regular Joes get in on this action? By investing in one or more real estate investment trusts owning Park Avenue properties. With Fifth Avenue set to regain the title as world’s most expensive retail space, I’ll provide you with several ways to play the real estate game along Fifth Avenue.
SL Green Realty (SLG)
My first choice when it comes to Fifth Avenue real estate is SL Green Realty (SLG). In partnership with New York property maven Jeff Sutton, SLG acquired a 49-year leasehold interest in November 2013 in the retail portion of 650 Fifth Avenue, which consists of 32,000 square spread over four floors. As part of the deal, SLG and Sutton agreed to buy out Juicy Couture’s lease for $51 million. While no financial details were released, the entire office building is thought to be worth between $500-$700 million.
SLG owns a total of 1.1 million square feet of office and retail space on Fifth Avenue. Commercial real estate being the tricky beast that it is, the company is executing some very interesting deals. In February it paid $146.2 million for the opportunity to develop 45,000 square feet of retail space at 562, 570 and 574 Fifth Avenue. SLG essentially acquired the development rights under 180 feet, leaving the office development to others.
With SLG’s total return up 12.5% year-to-date and its long-term performance easily outdoing both its REIT peers and S&P 500, its Fifth Avenue investments can only enhance its value down the road.
Vornado Realty Trust (VNO)
Second up is Vornado Realty Trust (VNO), which owns or partially owns 2.2 million square feet of retail and office space on Fifth Avenue, but also happens to own 32.6% of Toys “R” Us and the Merchandise Mart in Chicago — a 3.6 million square-foot building once owned by the Kennedy family.
To give you an idea how expensive Fifth Avenue real estate is, VNC paid $278 million (92.5% interest; seller retained 7.5%) in October 2013 for 57,500 square feet of retail and office space at 655 Fifth Avenue. Spread over eight floors with 50 feet of frontage on Fifth Avenue, the retail portion is leased to Salvatore Ferragamo through 2028. Rents on this stretch are said to be more than $3,000 per square foot — two-and-half times what the going rate is just five blocks south.
As Vornado demonstrates, real estate is all about location, especially on Fifth Avenue.
Hudson’s Bay Company (HBAYF)
My third idea is a bit of a wildcard: Hudson’s Bay Company (HBAYF), the Toronto-based holding company that acquired Saks in November 2013 for $2.9 billion. In addition to owning Hudson’s Bay and Lord & Taylor, the acquisition of the high-end department store gives the company entree into luxury retail.
Of course, the jewel of Saks’ business is its 650,000 square-foot store at 611 Fifth Avenue. Estimates of the property’s value vary from $800 million to northward of $1 billion. Generating more than $600 million in annual revenue or approximately 20% of Saks’ annual total, this a big reason why Hudson Bay majority owner Richard Baker had stalked the company since 2006.
Not only did the acquisition give HBAYF prime Fifth Avenue real estate, it also gave the company a platform to introduce a new and exciting luxury name to Canada. Over the next few years, Baker intends to open as many as seven Saks stores north of the border with the first set for 2016. It intends to give Nordstrom’s (JWN) a run for its money, after the company recently opened its first Canadian store in Calgary.
General Growth Properties (GGP)
My penultimate pick is General Growth Properties (GGP), who along with Thor Equities LLC and RXR Realty LLC, announced it June that it had acquired 530 Fifth Ave., a 500,000 square-foot office and retail building for $595 million. RXR will own the office space; GGP and Thor will own the retail.
Currently, Fossil (FOSL) is one of the big-name tenants leasing retail space, with 40,000 square feet yet to be occupied. Rents are expected to top $1,500 per square foot.
Clearly, GGP, the second-largest operator of shopping malls in the U.S., sees an opportunity to capitalize on the strength of Fifth Avenue retail. Look for it to buy into more urban locations in the future.
Lastly, and mostly for whimsy, I’ve chosen Coca-Cola (KO), whose property at 711 Fifth Avenue is set to become Ralph Lauren’s (RL) flagship U.S. store this fall. Ralph and company will pay the world’s largest soft drink maker $400 million over 16 years for the privilege of being located on Fifth Avenue across from the St. Regis Hotel.
Faith Hope Consolo, chairman of Douglas Elliman’s retail group puts it best when she states in the Wall Street Journal:
“They kept it empty for years. It’s hard to believe that retail space that would go for $3,500 to who-knows-what per square foot would be kept vacant.”
Muhtar Kent sat on prime Fifth Avenue real estate apparently because he thought it would make a nice spot for a Coke museum. It’s just another reason Coke’s executive compensation is truly out of whack.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.