Brooklyn’s Retail Financing Redux: Hipper Shopping En Route

As the economy continues to build steam, a new Brooklyn finds itself craving a new retail culture—and developers and financers are keeping close watch. While New York’s most populous borough has seen a large number of residential buildings take shape in the past year, financing for retail construction projects and acquisitions are just now beginning to catch up.

When asked, the developers behind several of the latest big retail projects told The Mortgage Observer that many of those properties would have a more chic look and feel and a more versatile use than traditional shopping outlets and malls. One common point of comparison has been Jamestown’s Chelsea Market, the high-end urban food court and shopping center with galleries and production studios mixed in.

“For Brooklyn, big box has its place, of course, but I don’t see it as the future,” said Jason Muss, whose family-owned Muss Development transformed government office space at 345 Adams Street in Downtown Brooklyn into one such trendier retail destination. “I question if there are that many places to development big box, especially in North Brooklyn, and how many people in the community would want it.”

Developments like the retail condo at 345 Adams Street show that Brooklyn still has its divides. In some parts of the borough, such as the middle-class neighborhoods below Prospect Park, big box retailers and department stores still have a major presence. Meanwhile, at the Fulton Street Mall—one of Brooklyn’s densest shopping districts stretching 17 blocks, just a stone’s throw from 345 Adams Street—a growing number of national retail chains have started to take root as well. Those chains include Gap, Aeropostale and Raymour & Flanigan, while Century 21, T.J. Maxx and H&M stores are slated to open later this year.

“The retailers are now coming in to support all of the new residential and hotel development and all of the high incomes that come with it, especially in Downtown Brooklyn and Williamsburg,” said Barry Fishbach, an executive vice president at Robert K. Futterman & Associates, a brokerage and consulting firm which specializes in urban retail.

“With nearly 2.6 million people in Brooklyn, it doesn’t make sense for them to have to go to Manhattan to shop,” he continued. “So these new retailers are coming in to service the local population, which keeps growing, as well as all of the tourists visiting these areas because it’s cool to go there.”

Big banks are financing many of those new retail properties in Downtown Brooklyn, said Aaron Birnbaum, executive vice president and co-founder of Meridian Capital Group. Singapore-based United Overseas Bank provided developers Crown Acquisitions and the Gindi family with the $65 million loan to refinance 490 Fulton Street where Raymour & Flanigan recently opened its doors. And Capital One provided loans to United American Land for the redevelopment of a landmark building at 505 Fulton Street where H&M has signed a 15-year lease, he said.

At 345 Adams Street, Muss Development is nearly done readying the once municipal-heavy site for the arrival of several specialty food service chains that will bring it to full occupancy. Tenants Panera Bread and Potbelly Sandwich Shop have already set up there.

Muss Development purchased the 36,000 square-foot space from the city government in 2007 with a multimillion-dollar loan from HSBC. Morgan Stanley refinanced the property with an $18.5 million loan in November 2012.

“We felt that restoring the building properly would help in our leasing efforts, which it did,” said Jason Muss, who oversees construction and marketing for the Forest Hills, New York-based development firm. “When we took over the building, the recession was going full swing, so it was a good thing that we took the time to restore the building and make it look as good as possible.”

Mr. Muss and his father Joshua Muss, early pioneers in the redevelopment of the area, also own the Marriott Hotel at 333 Adams Street, which became the first hotel in Downtown Brooklyn when it opened in 1998, and the Brooklyn Renaissance Plaza office tower at 335 Adams Street, which opened the same year. The developers are looking to open an additional retail space under the hotel in the near future, said Mr. Muss. “We were very laser-focused on the property at 345 Adams because we knew there needed to be an attractive and well-thought-out retail corridor right off the Brooklyn Bridge,” he said.

That pocket of Brooklyn has seen immense changes over the past two decades. There was a period in the 1980s and early 1990s when the now ritzy Montague Street in Brooklyn Heights housed a Burger King and a 99-cent store and the Fulton Street Mall was filled with locally-owned sneaker outlets, gold jewelry sellers and hip-hop record stores.

North Brooklyn’s hipper neighborhoods along the L train are attracting more entrepreneurial developers and retailers than Downtown Brooklyn. Bushwick, which still has its fill of auto shops, vacant apartment buildings and industrial warehouses, is about to become home to a large urban shopping and entertainment outlet, which leasing agents have referred to as a “grittier Chelsea Market.”

In August 2012 North Development Corp. purchased 82 Bogart Street, an 80,000 square-foot building across the street from the Morgan L train stop in Bushwick, for $12.2 million. The developer’s vision for the property is a huge nightlife, retail and artist gallery complex filled with bars, restaurants, shops and studio spaces. Zoning on the property would allow North Development to double the space to 160,000 square feet by adding a second floor if needed.

The purchased building, which fills the entire block, is about 65 percent vacant with a few warehousing tenants occupying the other 35 percent, said Andrew Clemens, leasing director at Massey Knakal Realty Services—hired by North Development to market the up-and-coming retail venue.

“There are a couple of tenants still in the building that know the property is being converted and that they are going to have to relocate once we get those leases in place,” he told The Mortgage Observer. “Those folks are going to have to find new places, but they understand that these properties are essentially much more valuable as retail developments than they are as traditional industrial and warehouse spaces.”

While the developers are not ruling out big corporate national chains as potential tenants for the property, they also see a strong need for “urban, local businesses,” said Mr. Clemens. “One of the things that we think is going to benefit not only this property, but also the neighborhood as a whole, is a nice upscale grocery market,” he said. “We’re in talks with several now and we feel very confident that that will be something that is brought to the table.”

Mr. Clemens added that the developers have seen a steady procession of young creative types moving into neighborhood. “We’re seeing young professionals as well who are looking to get into more affordable housing than nearby Williamsburg and Greenpoint where it’s become very expensive,” he said. “Along with those new residents in the neighborhood we’re seeing a lot of unmet retail needs.”

New York-based Signature Bank provided a $6.7 million loan for the acquisition of 82 Bogart in August 2012, according to public records. Mr. Clemens and a spokesperson for Massey Knakal declined to comment on the financing for 82 Bogart. Signature Bank also declined to speak about that deal.

In nearby Williamsburg, now virtually packed to the brim with newly built condos and hotels, the Midtown Manhattan-based developer Heritage Equity Partners paid $32 million for the undeveloped 160,000-square-foot site at 19 Kent Avenue, one block from the Brooklyn waterfront.

The property, which Heritage Equity plans to transform into a retail and gallery hub with an open square for shoppers and pedestrians, sits among several other commercial developments in the works. Those other properties include the 40,000-square-foot warehouse at 35 Kent Avenue owned by G4 Development Group, which Amazon signed a lease for in late 2012. According to business owners in the neighborhood, Amazon is planning to set up a large photography facility there for customers who want to sell their goods on the e-commerce giant’s website.

Williamsburg has seen “tens of thousands of residential units come online in the last ten years, but very limited commercial development,” said Toby Moskovits, chief executive officer of Heritage Equity. Ms. Moskovits bought the 19 Kent Avenue in late 2012 after a string of successful residential developments in Williamsburg, Clinton Hill and Prospect Heights throughout the economic downturn.

However, much like 82 Bogart, 19 Kent Avenue does not have any specific tenants lined up. The developer’s philosophy is build first, lease later, which differs from the more mainstream developments in Downtown Brooklyn. “We’re not setting this up for big box,” said Ms. Moskovits, who grew up in nearby Flatbush. “In the other buildings we own, we’ve had a lot of success with local entrepreneurs and believe that those are the right tenants for us.”

The financing for 19 Kent Avenue came from private investors and families and Heritage Equity’s own pockets, Ms. Moskovits said. “We have a network of lenders we work with who are not banks, which gives us a little more flexibility,” she told The Mortgage Observer, while giving a tour of the neighborhood’s latest developments. “By 2012, the market started to loosen up, but the banks continued to lend on cash-flowing assets. So the challenge was how do you buy the property and how do you build it, and that required a little more creativity.”

The New York-based private lender Richmond Hill Investment Co. provided Heritage Equity with a $21.8 million loan in December 2012, while Heritage Equity funded the balance of the purchase, according to public records. Developer and construction manager Michael Lichtenstein of the Brooklyn-based Lichtenstein Group acted as a consultant on the deal.

While Heritage Equity and other smaller-scale New York developers have relied on alternative means of financing throughout the downturn—when banks were only willing to lend for commercial properties at high interest rates—that dynamic may soon change.

“Banks are back in the construction lending business, so it’s likely that we will start working with banks again,” said Ms. Moskovits. “But there have been many benefits to us of using more flexible capital to finance our deals and some of that has to do with speed of execution.”

The economic recovery, which has led to more real estate development across the country, has been especially beneficial to retail construction in Brooklyn. As a result of more accessible financing and increasing demand from consumers and tenants, real estate construction has picked back up where it left off in 2008, beginning with new residential developments and followed by new retail developments.

Consumer spending in the U.S., a key driver of retail, rose from $9 trillion in 2009 to $9.6 trillion in 2012 and has further increased to nearly $9.8 trillion in March 2013 at an annualized rate, according to the United States Department of Commerce, while local and national unemployment rates have continued to decline. The jobless rate throughout the five boroughs fell to a 4-year low of 8.4 percent in April 2013, down from 8.9 percent in March 2013, the New York State Department of Labor reported on May 16.

“When you look at Brooklyn, especially, you see a lot of families moving in now with very significant salaries,” said Mr. Fishbach of Robert K. Futterman. Having witnessed the success of the latest wave of residential developments, the banks are now happy to lend for retail construction, he noted.

“Now is a great time to be a borrower and Brooklyn is a great place to be a borrower in,” said George Klett, group director, executive vice president and chairman of Signature Bank’s commercial real estate committee. “With the growing number of lenders and all of the other sources of financing available right now, I’ve never seen anything like it. For commercial development in New York as a whole, it’s a wonderful thing.”

Retail real estate activity in the more middle-class neighborhoods of South Brooklyn has picked up at a slower pace, though one big deal has made headlines in recent months.

In December 2012, the Santa Monica, Calif. mall giant Macerich completed its purchase of Kings Plaza Shopping Center on the border of Marine Park and Mill Basin from Vornado Realty Trust for $751 million. Macerich’s acquisition of the 1.2 million-square-foot mall, which houses Macy’s, Lowe’s, Sears and Best Buy department stores, among other retail outlets, was the largest real estate investment sale of the year and the largest single-trade sale in Brooklyn ever.

Goldman Sachs provided Macerich with a $500 million loan at a fixed interest rate of 3.4 percent for the acquisition in November 2012, according to public records. Macerich, which owns 61 malls in the U.S., including the Queens Center Mall, declined to comment on the details of the acquisition and the company’s renovation plans. Vornado, which reportedly sold Kings Plaza as part of its effort to exit the mall market, also declined to comment.

Other new retail developments are beginning to take shape in Bay Ridge, Coney Island and surrounding neighborhoods. About an hour’s subway ride away from Adams Street, Muss Development is constructing a mixed-use building in Brighton Beach, which Mr. Muss said would include 9,000 square feet of retail space when the project is completed.

“If you’re catering to the right market and there’s an idea behind it, you can get the trendy type of retail to work anywhere in Brooklyn,” he said. “So long as there is foot traffic.”

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