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Sterling Flips High-End Rodeo Drive Property in $110M Sale to LVMH

Sterling Organization, a private equity firm based in Palm Beach, Fla., doubled its money on the sale of a 7,634-square-foot parcel at 456 N. Rodeo Drive  in Beverly Hills. Sterling netted a cool $110 million for the property—which includes a 6,200-square-foot vacant single-story building and a 1,500-square-foot parking lot between Santa Monica Boulevard and Brighton Way—in the heart of the so-called “Golden Triangle,” one of the country’s most sought-after locations for luxury retail, according to an official release from Sterling. Last week’s sale came a mere day after Sterling closed its purchase of the property from The Karl B. Schurz Trust (Schurz Trust) for $55 million.

The purchaser of the property, a subsidiary of Paris-based, multinational conglomerate LVMH originally considered  leasing space at the property, but the company alternatively expressed an immediate interest in acquiring it. LVMH, which counts Louis Vuitton and Loewe among its portfolio of upscale brands, owns two other stores in the area at 319-323 North Rodeo Drive and 420 North Rodeo Drive, according to The Wall Street Journal, which broke the news of the sale.

LVMH declined to comment on the purchase.

Sterling’s acquisition of the property resulted from a highly structured off-market transaction, when it signed a 30-year ground lease with rights to purchase on Oct. 26, 2017.

Last week’s sale transferred the 456 N. Rodeo Drive  property to the luxury goods behemoth for approximately $17,750 per square foot.

Retail agent Robert Cohen, a vice chairman at RKF in Los Angeles, commenting on the deal, said the move for LVMH was a “very smart move” and part of an overall trend of European retailers investing in brick-and-mortar real estate in top U.S. shopping districts.

“This is a trend we’ve seen more and more of, which is personified on Rodeo Drive for several reasons, the least of which is that it’s only three-blocks long, an easy market and low-density. These retailers don’t have to worry about offices, residential or hotels, which is more difficult,” he said.

“Rents have gone up historically. It’s held its value. Europeans are very smart because they have not only the ability but they understand buying is better long-term than leasing. You control your own destiny.” (This is a trend that WSJ recently noted in Manhattan.)

Cohen pointed out that while $17,000-plus a square foot is high considering the comparables, over time, it works out to make good business sense. Average asking rents per per square foot on Rodeo Drive ranges from $600 to $1,000, Cohen said, so, say, over 20 years, the price paid averages $850 per foot. “You’re at the middle of the market, but now you own the property. Not only are you not paying rent, but you have an asset that is increasing in value,” he said.

Indeed. Rents on this stretch of Rodeo Drive, home to luxury retailers including Hermes, Chanel, Celine, Tiffany & Co. and Givenchy, rank among the highest in the nation. Retail rents on Rodeo Drive were $875 per square foot in 2017, according to statistics from Cushman & Wakefield’s 2017 year-end Los Angeles retail report, making the locale the second-highest in the nation. (Upper Fifth Avenue—49th Street to 60th Streets—in New York City still dominates, the C&W data indicate, closing 2017 at $2,982 per square foot.)

Negotiations for 456 N. Rodeo Drive began in July 2017 between Jonathan Mendis, Sterling’s senior vice president of investments for the Western United States, Brian Kosoy, Sterling’s president and CEO, and the trustee for Schurz Trust. The months of negotiations culminated in the October 2017 ground lease execution and purchase of the fee interest.

“When a circumstance presents itself to acquire a Rodeo Drive property, you aggressively pursue it, regardless of the complications involved in getting a deal done,” Kosoy said in prepare remarks. “This was a win-win-win for all three parties involved with each securing what they desired. The deal round-tripped a lot faster than we projected, and we are extremely pleased with the exceptional financial results we were able to provide to our investor partners.”

Kosoy told Commercial Observer his firm flipped the property because it felt it was in the best interest of its investor partners.

“Part of the opportunity in the commercial real estate sector pertaining to retail is that the passive observer, analysts, as well as much of the media, seem to repeatedly throw the baby out with the bathwater,” Kosoy said. “There are many areas that are immune to the woes of retailers today and Rodeo Drive is one of them. Great retail real estate is not under assault as many believe.”

He foresees Rodeo Drive real estate going in only one direction value wise: higher. “Continued limited and static supply and high demand assures such,” Kosoy said.

Cohen concurred, calling Sterling’s flip, “a brilliant play.”

“It’s an amazing story,” he added. “From a real estate perspective, they tied this up to a ground lease with an option to purchase, obviously purchased, it and to turn this around in a day and sell it, to basically double your money— that shows how voracious an appetite some of these people— these retailers have for real estate.”

Source: commercial

Is High Street Retail (Finally) on the Upswing?

It’s been a bumpy few years for high street retail, and at the risk of taking us off high alert too early, it looks like we’re finally entering a period of stabilized rents, increased deal activity, and a détente between e-commerce and bricks-and-mortar sites.

At the height of the market in 2015, everyone lost sight of the fact that retail stores needed to perform and that sales had to support rents. On prime Madison Avenue, for example, rents jumped seemingly overnight from $1,100 to $1,500 per square foot to an all-time high of $1,800 to $2,200 per square foot.

Putting aside the jolt e-commerce delivered to the rest of retail, this was never sustainable. Landlords increased rents to unrealistic levels and tenants grabbed spaces at any cost. There were painful repercussions for both, ultimately prompting stores to exit the market. Landlords who continued to demand top dollar found themselves saddled with vacant spaces.

Today retail rents have declined by 30 to 50 percent from the peak and leveled off, delivering a much-needed correction. Now those prime Madison Avenue rents have returned to their previous $1,100- to $1,500-per-square-foot level.

Not surprising, the rent adjustment is bringing about a renewed demand for retail spaces.

Tenants initially tiptoed back into the market with pop-ups—short-term scenarios to occupy a space, move some product, build a brand and make a statement. Brands like Amazon and Google did experiential pop-ups, while other brands did exciting collaborations like Supreme X Louis Vuitton. And then there were multiple pop-ups that provided great brand exposure for everything from Casper Bedding to Yankee Candle to Unilever’s multiple pop-ups for St. Ives skincare, Magnum Ice Cream Bars and Pure Leaf Tea. On top of that, it is now becoming the norm for many fashion apparel and shoe brands to do pop-ups in retail spaces for fashion week—i.e., Bogner and Sophia Webster. Lastly, some brands take pop-up space to conduct sample sales to clear out merchandise. Christian Siriano occupied a space on Madison Avenue for a week, and featured fabulous merchandise at much-reduced prices.

Now we’ve gone from very short-term pop-ups to seeing tenants sign one- to three-year leases with options for long-term extensions, a scenario that is limiting risk for both landlords and tenants. If sales are strong and the stores perform well, the tenants plan to stay long term.

Brands are reengaging, perhaps taking fewer stores or spaces with a smaller footprint, but making a real commitment, spending money, and opening retail locations with substantial product.

Retailers that aren’t yet ready to commit to five- or 10- or 15-year leases are nervous about the changing retail climate and future of the industry. Their anxiety is heightened by the constant drumbeat that e-commerce will continue to take market share away from bricks-and-mortar stores.

But I believe that retailers should relax because retail is all about driving sales and there is now less concern whether those sales originate online or in a store. If customers visit a store and it helps them make a decision to go home and buy merchandise online, then that store is serving a purpose.

A classic example is a luxury online brand we represented that wanted to test the New York City market. The tenant opened in a pop-up space in Soho, which was so successful we found the store a permanent space in Soho where sales have been phenomenal.

This retailer understood after opening the pop-up how important it was to have a physical presence. The managers learned that there were expensive products customers weren’t comfortable buying online. Instead, customers wanted to go to the store and see and touch these high-ticket items before making such a significant purchase.

For bricks-and-mortar shops, the lesson is that the internet isn’t something they should fear but embrace and integrate into their brand identity. For e-commerce sites, the lesson is that to increase sales, online retailers should open a physical store, which today is more doable than ever in this climate of reasonable rents.

Robin Abrams is a principal and vice chairman of retail at Eastern Consolidated.

Source: commercial