What Vornado’s 655 Fifth Ave. Buy Means for Manhattan’s CRE

By Gail Kalinoski, Contributing Editor

Vornado Realty Trust has grabbed another prime Fifth Avenue location just as the retail rents there are passing $3,000 per square foot, paying $278 million for a majority stake in 655 Fifth Ave., a retail and office property with 50 feet of frontage on Manhattan’s Fifth Avenue.

Vornado, a Paramus, N.J.-based REIT, said it expects to close on the acquisition in the fourth quarter. The REIT is buying a 92.5 percent stake in the property from a joint venture including Madison Capital, which is retaining 7.5 percent ownership. The 57,500-square-foot property is located at the northeast corner of Fifth and 52^nd Street and houses the flagship store and U.S. headquarters of luxury retailer Salvatore Ferragamo. Madison Capital and the joint venture, including Meadow Partners and CPP Investment Board, bought the property along with 100 Broadway in January 2011 for more than $200 million, according to a Meadow Partners release.

Ferragamo, which owns the adjacent property, has a lease at 655 Fifth Ave. until 2028. In April 2012, the retailer, which sells high-end luxury leather goods and clothing, re-opened its retail space after a renovation. The store, now 20,000 square feet, is Ferragamo’s largest boutique in the world.

“Historically, Vornado has done well in its acquisitions in New York,” Jeff Green, president & CEO of Jeff Green Partners, a Phoenix-based retail consulting firm, told Commercial Property Executive.

This acquisition comes eight months after Vornado acquired the retail condominium at 666 Fifth Ave., paying $707 million for 114,000 square feet in the 39-story, 1.5 million-square-foot office high rise that is home to Hollister, Swatch and Uniqlo.

That price was staggering even by Manhattan retail standards and was just one indication that Fifth Avenue retail was on fire. CBRE’s Retail Group reported asking rent for Fifth Avenue retail locations between 49^th and 59^th streets was more than $3,000 in the second quarter – the first time any Manhattan retail stretch had surpassed the $3,000 mark.

“The escalating rents on the Fifth Avenue corridor show that international brands are still eager to benefit from the heavy-foot traffic and global prestige of having their name on Fifth Avenue,”  Richard Hodos, executive vice president, CBRE Retail Group, said in a release about the CBRE Group Inc.’s Manhattan Retail Marketwatch report for the second quarter.

Hodos said high-end retailers like Ralph Lauren and Valentino agreed to lease prime Fifth Avenue space in the second quarter, which helped push the asking rents ever higher. Ralph Lauren is leasing 38,000 square feet at 711 Fifth Ave. and Valentino is taking 20,000 square feet at 693 Fifth Ave. The CBRE report also noted that Cartier is leasing 5,600 square feet at 767 Fifth Ave. while its mansion at 653 Fifth Ave. is being renovated.

Green said high-end retail corridors like Fifth and Madison avenues in Manhattan, North Michigan Avenue in Chicago and Robertson Boulevard in Los Angeles are all seeing spikes in rents, partly because of lack of availability but also because they are the “hot street locations.”

“But the increase seems to be faster and steeper in New York City,” he said. “Fifth Avenue is going to see the highest increase in average rents and then Madison Avenue will probably be next.”

Green said Fifth Avenue and Madison Avenue in Manhattan are both homes to many flagship stores for luxury retailers.

“They see it as a branding opportunity, one because it’s the place to be seen, and number two, the combination of domestic and international travelers,” Green said.

For Vornado, which has been making efforts to reposition its retail portfolio, the acquisition of 655 Fifth Ave., “given their history, is a good play for them,” Green added.

A blog written by the Zacks Equity Research team at Zacks.com also viewed the 655 Fifth Ave. acquisition favorably, particularly in light of the recent dispositions.

“Vornado is currently focused on improving its core business by making opportunistic buyouts and strategic divestitures,” the blog noted Thursday, citing the second-quarter sale of The Plant, a power shopping strip in San Jose, Calif., for $203 million.

When it announced The Plant sale in April, Vornado also said it had sold a retail property in Philadelphia that was part of the Gallery at Market East for $60 million. A Vornado news release at the time noted that both sales resulted in net proceeds of approximately $156 million, after repaying the mortgage for the San Jose property and closing costs. Vornado said it would have a net gain of $69 million in the second quarter from those sales.

Zacks.com also pointed to Vornado’s sale of its 26.2 percent stake in LNR Property L.L.C. to Starwood Property Trust Inc. and Starwood Capital Group for $1.05 billion which gave Vornado $241 million in net proceeds.

“We expect the strategic sales to add to Vornado’s financial flexibility and aid in profitable investment opportunities. The portfolio repositioning activity would position it well for growth,” according to the analyst blog at Zacks.com.

Vornado is one of the largest owners and managers of commercial real estate in the U.S. with a portfolio of more than 100 million square feet, mainly in the New York and Washington, D.C., areas. It also has retail properties, including more than 100 strip shopping centers, malls and single-tenant assets, in the Northeast, California and Puerto Rico. In Manhattan, Vornado has about 50 street retail properties with approximately 2.2 million square feet of space. On Fifth Avenue alone, the REIT owns at least six properties including 640 Fifth Ave., 608 Fifth Ave. and 510 Fifth Ave., the U.S. flagship of Canadian retailer Joe Fresh.