What's In Store?
September 22, 2010
The State of Things
There’s a lot of chatter lately about whether or not things are getting better. The economic mystics now say the recession is officially over. Statistics aside, there’s nothing like pounding the pavement for a little anecdotal evidence of the actual state of the New York City economy.
Maybe it’s just UN week, but walking around Manhattan, you certainly don’t get the feeling that we are in the midst of the Great Recession…with one exception. There are lots of empty stores. Go anywhere on the Island, and block after block, there are empty stores or stores going out of business. New construction condos are no exception. Developers covet their ground-floor spaces, as the icing on the cake of constructing a new building, with the hope of having quality income-producing tenants long after all of the residential units have been sold. But is a new trend emerging that will impact the leasing of vacant retail units presently held by Manhattan’s developers?
Developers are different from you and I…they have more money. But even developers reach a point where empty stores can no longer be tolerated. Walking around town this week, I noticed two high-end condos, one on the Upper East and another in Mid-Town East, that are now the proud owners of a gaudy discount drugstore on the ground floor. Here’s an equation worth considering: high-end condo, plus down market retail store, often equals a disappointed condo owner. In my view, it's a sign that things are evolving when the movers and shakers decide it’s not going to get any better any time soon, so take what you can get and move on.
What Does This Mean for the Condo Purchaser?
Almost all new construction condos have retail units on the ground floor. Most Offering Plans permit the developer to rent the unit for “any lawful purpose” permitted within the zoning classification where the building is located and as otherwise provided in the certificate of occupancy for the building. The sponsor often reserves the right to slice and dice the units, in order to make them bigger or smaller or allow the tenants or purchasers of the commercial units to divide them up as they see fit. The attorney preparing the Offering Plan almost always drafts the commercial unit language in a way that gives his or her client the broadest ability to lease or sell the commercial units as may be required under existing market conditions.
Has the Space Been Rented?
When someone buys a new construction condo, particularly if that purchase was sometime in the past twenty-four months, the ground floor spaces are usually empty. The purchaser’s attorney, as a component of due diligence, will inquire about the status of the retail space, and is often told, it has not been determined as yet. When the condo purchaser goes ahead with the transaction, he or she is hoping for a TD Bank, a Starbucks or a Banana Republic to be located downstairs. But the purchaser has absolutely no control over what may eventually go into the retail space. That lack of control is now manifesting itself in the form of twenty-four hour health clubs, hair salons, discount drugstores, and dare I say it, “dollar stores”, as is pointed out on the front page of the New York Times. In short, developers can no longer wait for up market tenants who just aren’t out there.
Residential Reality: The Bloom is Off the Rose
At the end of the day, high-end architecture and avant garde design notwithstanding, commerce will always prevail. Once retail capitulation kicks in (and it appears that it’s started), it is likely that empty spaces will start filling up with less desirable tenants, at least from the condo owner’s perspective. As the fog lifts from the housing crisis, the financial loss incurred by deeply discounted condo prices has to be accounted for economically somewhere. That somewhere appears to be on the ground floor.