Retailers Jump at the Chance to Invest in Fifth Avenue

Originally seen on nytimes.com

On the bustling shopping strip of Fifth Avenue in New York City sits something you might not expect to find: an empty lot.

But it won’t stay empty for long. The development site at 570 Fifth Avenue, between 46th and 47th Streets, is slated to become a 33-story office tower, anchored by an 80,000-square-foot IKEA store at its base, according to the developer, Extell Development.

Ingka Investments, the real estate arm of Ingka Holding, the world’s largest IKEA franchisee, injected “approximately $400 million” into the overall project, said Extell’s founder and chairman, Gary Barnett. In exchange, Ingka scored a one-third stake in the building and ownership of its retail space.

“Having Ingka come in has been very helpful for us,” Mr. Barnett said. “They’ve injected a very substantial amount of equity. They’ve become our partner in the actual overall office deal, as well as purchasing their retail space.”

Ingka’s investment let Extell move forward with its office building, more than a decade after it first started buying up parcels for the development site, Mr. Barnett said. And it let Ingka secure a coveted slice of Fifth Avenue while keeping its popular furniture affordable.

“We can safeguard long-term stability for IKEA, keep overhead costs more predictable and maintain our commitment to providing accessible products,” said Jenna Grader, a portfolio manager at Ingka Investments.

Over the past year, competition for a handful of retail spaces on Fifth Avenue has heated up.

“They’re not making any more Fifth Avenues,” said Gary Phillips, said Gary Phillips, a managing director at Eastdil Secured who represented Extell in Ingka’s deal with his colleague Will Silverman. “It’s one of one.”

Luxury brands have been on a buying spree on the iconic stretch, as Curbed reported this year. Kering (the parent company of Gucci and Balenciaga) and Prada bought retail space from the real estate mogul Jeff Sutton, while LVMH (the parent company of Louis Vuitton) and Rolex intend to rebuild their Fifth Avenue flagships.

But it’s no longer just luxury fashion houses investing there, Mr. Silverman said. Geshary Coffee spent $38 million to buy 560 Fifth Avenue at the end of last year. Uniqlo entered into a contract in August to buy its 90,732-square-foot retail space at 666 Fifth Avenue for $350 million. And more deals may be in the works, with Brookfield Asset Management considering a sale of its building at 685 Fifth Avenue, Bloomberg reported.

“Fifth Avenue is effectively eternal,” said Mr. Silverman, who also brokered the Prada, Kering and Uniqlo deals with Mr. Phillips at Eastdil. “When the opportunity arises to secure a location that you’re sure you’ll want forever, why would you not think about securing it?”

Chasing those opportunities is clearly a part of Uniqlo’s strategy, said Zach Redding, a managing director at Colliers who represented the seller in Geshary’s 560 Fifth Avenue deal. (Uniqlo bought its flagship at 546 Broadway in 2021.)

“They clearly said to themselves, ‘We’re going to buy the stores that we want to be in — in irreplaceable locations,’” Mr. Redding said.

Fifth Avenue retailers tend to pour money into expensive, eye-catching displays. For example, Coach’s Fifth Avenue store sports a huge dinosaur made of leather purses, while Uniqlo built a custom T-shirt design studio at its 666 Fifth Avenue location. Owning, rather than renting, means a retailer won’t lose that investment, said Brett Herschenfeld, an executive vice president at SL Green Realty.

“They try to create these maisons, so to speak, to have a very unique presence,” Mr. Herschenfeld said. “What they’re doing technologically with the space — it’s a massive investment. Why not own it? Because at the end of a 10-, 15- or 20-year lease term, you don’t.”

And retailers have one big, temporary advantage: less competition from traditional investors.

A real estate investor usually rounds up debt and equity to buy a property, with a plan to make that money back by renting out the building to a retailer. But with elevated interest rates and retail rents below their 2015 peak, “those investors are not necessarily lined up out the door,” Mr. Redding said.

Retailers can often borrow money at lower interest rates through their corporate banking relationships or use cash, which means they also tend to pay more, said Dan Kaplan, an executive vice president at CBRE who represented Geshary in its 560 Fifth Avenue purchase.

“They’re willing to pay the numbers that could entice the sellers to sell,” Mr. Kaplan said.

That also seems to be the case for Prada, which bought its location at 724 Fifth Avenue for $425 million. That’s on the high end of the $385 million to $426 million that the building was appraised for, according to Women’s Wear Daily, and it’s more than the $365 million the building was valued at in 2018.

(Prada, which also bought 720 Fifth Avenue, and the seller of both buildings, Sutton, did not respond to requests for comment.)

Those high prices are hard to turn down.

Sutton’s sale of his Fifth Avenue properties amounted to almost $1.8 billion, enough to pay off his loans on the buildings and then some, according to The Real Deal.

With Ingka’s multimillion-dollar investment in hand, Extell plans to start excavating the 570 Fifth Avenue site in under two months, Mr. Barnett said. The one-million-square-foot development will include at least 20,000 square feet of additional retail space when it’s completed around the end of 2027, according to Extell.

But as more retailers lock down their space, the number of prime storefronts on Fifth Avenue will dwindle, said Mr. Phillips at Eastdil. Buying might be their best bet to stay on it.