More New York City Tenants Are Buying Their Buildings. Here’s Why.

It’s not just a post-pandemic streetscape of lower prices

reprints


Maybe the name Prada conjures up images of Meryl Streep as the fictional Miranda Priestly riding herd on Anne Hathaway and Emily Blunt. Not on Jan. 4.

That was the day it became known that the high-end Italian fashion house was intending to buy its second building along Manhattan’s ultra-chic Fifth Avenue shopping corridor, famous for having the highest retail rents in the world. It paid $425 million for 724 Fifth Avenue in late December. At the same time, according to city records, Prada paid $410 million for the building next door, 720 Fifth Avenue. Wharton Properties, the vehicle of retail property mogul Jeff Sutton, sold both.

SEE ALSO: Queens Condo to Pay $119K for Stealing Workers’ Wages

The purchases may have been the start of a trend of luxury tenants embracing the logic of owning their selling space, rather than the traditional leasing of such space. Since those deals, Kering — the French corporate parent of luxury brands such as Yves St. Laurent, Balenciaga and, in this case, Gucci — bought the 115,000-square-foot retail portion of 715-717 Fifth Avenue, paying $963 million. 

Then the Japanese manga and book publisher Kodansha paid $27 million for a six-story townhouse at 25 East 22nd Street in the Flatiron District to act as its office hub. And, just to show the trend isn’t confined to New York, LVMH, the conglomerate that owns the luxury brand Louis Vuitton, announced plans to turn its Rodeo Drive property in Beverly Hills into a massive new Louis Vuitton flagship store.

It’s not only the luxury brands obsessed with owning rather than renting. On Jan. 12, the Nashville-based global delivery service FedEx paid $248 million for Sunset Industrial Park, 18 acres near Brooklyn’s Gowanus Canal, where previous owners Dov Hertz and Bridge Industrial had planned a 1 million-square-foot-plus industrial facility. Hertz and Bridge were the sellers, where FedEx is planning a 246,000-square-foot distribution center, according to Crain’s New York Business.

“It’s not a new phenomenon,” said Doug Middleton, a CBRE (CBRE) vice chairman who oversees investment sales in New York for the commercial property brokerage giant. “A lot of it has been dislocation of the markets. A lot of users want to take control of their destiny, control the whole building and not be subject to a landlord. And I do think it’s something you’re going to see for the next couple of years.”

Longtime top investment sales broker Bob Knakal said he has studied the phenomenon for 39 years, looking at 969 deals below 93rd Street in Manhattan where the property’s user did the buying. He found that users on average pay about 16 percent more when they purchase a site than firms or individuals who specialize in commercial property, comparing bids received from users to the highest bid made by investors.

According to Knakal’s study, the retail industry was actually neck and neck with the education industry in owning over renting, having done 20.5 percent of the deals versus 20.4 percent, respectively. Corporate was next with 16.8 percent, nonprofits at 10.6 percent; religious institutions at 10.2 percent; and every other user (foreign governments, health care, culture, family offices, unions, private clubs and manufacturing) was in single digits.

There are other goodies that accrue to the user when they buy rather than lease the property, Knakal said. One is that tax laws are often easier on an owner, especially if the buyer/user is a nonprofit. Another is that the user/owner doesn’t have to worry about rent hikes or possibly having to relocate at the end of a lease.

“It’s a tremendous benefit,” Knakal said. “You can put a plaque saying that it’s yours on the building. You can put the building on the cover of reports.”

It helps that prices for commercial properties are down across the board, due to a confluence of higher interest rates and the work-from-home trends brought on by the pandemic. That’s a trend that has continued as COVID-19 has faded, which has caused many companies to downsize.

“It’s more of a viable option right now, because of the dislocation in the market,” Middleton said. “With office buildings, you’re not seeing as many players, with the paradigm shift in office. Not as many investors want that property sector right now. It just comes down to: Does the pricing make sense?”

Brokers speak of multiple trigger points where a user might see financial advantages to ownership that don’t exist when leasing space. The primary — though not the only — expense a tenant faces is rent. For an owner, it’s debt service on a mortgage, though mortgages are not an issue for all-cash buyers, which is often the case when a user buys a high-end retail property, Middleton said.

For Kodansha, it came down to multiple advantages the publisher saw in owning the building versus leasing it, said Simon Anderson, the Douglas Elliman broker who represented Kodansha in the deal.

“For business entrepreneurs with fewer than 250 employees, there are really strong financial considerations,” Anderson said. “Prices are lower than they have been, and you will be investing in New York City — Manhattan real estate that will inevitably appreciate.”

In addition, Anderson said that Kodansha took “a great deal of pride” in the fact that it now owns, rather than rents, the building. There are also tax benefits, such as the ability to expense the property’s depreciation, and that the company’s payments are to itself, rather than to a landlord.

An email to Prada was not returned. Neither was one to Kering, parent of Gucci. But Kering did publish a press release announcing the January deal, calling it a “prestigious New York City property, comprising multilevel luxury retail spaces.

“This investment represents a further step in Kering’s selective real estate strategy,” the company said, “aimed at securing key highly desirable locations for its houses,” mentioning other property acquisitions it has made in Paris and Tokyo.

A spokesman for FedEx said the company would not comment on its Brooklyn purchase.

Of course, there are those user purchases that seemingly backfire. The search giant Google (GOOGL) made arguably the biggest and most impactful user purchase ever in 2010 when it acquired 111 Eighth Avenue, the sprawling warehouse building that was built as a headquarters for what was then known as the Port of New York Authority (now the Port Authority of New York and New Jersey), and was used for storage back in the days when Manhattan docks were bustling with shipped goods, a function now found largely in New Jersey. A prior owner, Taconic Capital, then positioned the building as an office megalopolis for tech and creative companies — until Google bought it and began moving all those companies out, and moving itself in.

The $1.8 billion purchase was only the start of Google’s interest in Manhattan’s Chelsea neighborhood. It now has nearly 6 million square feet sprawled across seven Manhattan sites, having just opened up a 12-story office building at 550 Washington Street, aka St. John’s Terminal. It also acquired Chelsea Market, an old factory building across the street from 111 Eighth.

It is unclear if Google will now reverse itself and put some of its Manhattan properties on the market. But Google parent Alphabet spent $1.8 billion on fees in 2023 to get out of some of its offices, and President Ruth Porat, in a January earnings call, said the company’s goal was to “optimize” its real estate, according to Crain’s New York Business.

“Things change,” said Knakal regarding the Google situation. “A company that at one point had one thought can at another time have another thought.”

CORRECTION: This article has been updated to reflect the correct timeline for the sales of 720 and 724 Fifth Avenue, and the correct sales price of 720 Fifth.