We have spoken before about how hotel brands don't typically own their real estate. But the same is also true of many other businesses. And one common reason for this is that it ties up a lot capital that could be otherwise deployed in the core business. If, for example, you're in the business of producing exclusive handbags, it usually makes sense to spend your excess cash on making better handbags. And if you find that you're actually making more money on real estate, then it could be a sign that you're in the wrong business.

There are, however, instances where owning your own real estate may make the most sense. Maybe you have an irreplaceable location that you want to secure for the long term. And so there's real strategic value. Or maybe you keep having annoying legal fights with your landlord and you just want to get back to focusing on luxury handbags. There are other motivating factors to consider here, but these two seem to be behind Prada's recent acquisition of 724 Fifth Avenue in New York.

Prada has had a flagship 5-storey retail store at this location since 1997 (and most recently was paying US$22 million in rent). In December, they announced that they had acquired the entire 12-storey building for US$425 million. (That works out to be about $5,395 psf on the gross building area!) And then shortly after, they announced that they had acquired next door -- a hard corner -- for another US$410 million (total US$835 million).

All of this makes the deal one of the largest in New York last year. But was it a good deal? I would need some more information to answer from a quantitative real estate perspective. But if I'm Prada, I know that I need to be on Fifth Avenue for the foreseeable future. And now I get access to a hard corner and I no longer have to deal with my landlord. These are clearly strategic things. Last year was also a pretty good time to be buying retail/office buildings with all cash, which is what Prada did.

The New York Post has some interesting articles, here and here, on the growing retail vacancy problem in NYC. (Thank you Michael for the link in the comments this week.)

The vacancy rate on Amsterdam Avenue in the Upper West Side is said to be around 27% and it is said to be around 20% on a stretch of Broadway in Soho. It has become such a problem that Mayor Bill de Blasio wants to implement some sort of retail vacancy tax:

“I am very interested in fighting for a vacancy fee or a vacancy tax that would penalize landlords who leave their storefronts vacant for long periods of time in neighborhoods because they are looking for some top-dollar rent but they blight neighborhoods by doing it,” he said on WNYC. “That is something we could get done through Albany.”

But this is based on the assumption that greedy landlords are simply holding out for exorbitant rents. It doesn’t consider the fact that, maybe, there is simply too much retail space:

Only a few grasp the true scope of the problem. Vornado Realty Trust titan Steven Roth said we can only cure the national plague through “the closing and evaporation” of up to 30 percent of the weakest space — which would take five years.

All of this, of course, has me thinking about the future of ground floor main street retail. What are your thoughts?

We have spoken before about how hotel brands don't typically own their real estate. But the same is also true of many other businesses. And one common reason for this is that it ties up a lot capital that could be otherwise deployed in the core business. If, for example, you're in the business of producing exclusive handbags, it usually makes sense to spend your excess cash on making better handbags. And if you find that you're actually making more money on real estate, then it could be a sign that you're in the wrong business.

There are, however, instances where owning your own real estate may make the most sense. Maybe you have an irreplaceable location that you want to secure for the long term. And so there's real strategic value. Or maybe you keep having annoying legal fights with your landlord and you just want to get back to focusing on luxury handbags. There are other motivating factors to consider here, but these two seem to be behind Prada's recent acquisition of 724 Fifth Avenue in New York.

Prada has had a flagship 5-storey retail store at this location since 1997 (and most recently was paying US$22 million in rent). In December, they announced that they had acquired the entire 12-storey building for US$425 million. (That works out to be about $5,395 psf on the gross building area!) And then shortly after, they announced that they had acquired next door -- a hard corner -- for another US$410 million (total US$835 million).

All of this makes the deal one of the largest in New York last year. But was it a good deal? I would need some more information to answer from a quantitative real estate perspective. But if I'm Prada, I know that I need to be on Fifth Avenue for the foreseeable future. And now I get access to a hard corner and I no longer have to deal with my landlord. These are clearly strategic things. Last year was also a pretty good time to be buying retail/office buildings with all cash, which is what Prada did.

The New York Post has some interesting articles, here and here, on the growing retail vacancy problem in NYC. (Thank you Michael for the link in the comments this week.)

The vacancy rate on Amsterdam Avenue in the Upper West Side is said to be around 27% and it is said to be around 20% on a stretch of Broadway in Soho. It has become such a problem that Mayor Bill de Blasio wants to implement some sort of retail vacancy tax:

“I am very interested in fighting for a vacancy fee or a vacancy tax that would penalize landlords who leave their storefronts vacant for long periods of time in neighborhoods because they are looking for some top-dollar rent but they blight neighborhoods by doing it,” he said on WNYC. “That is something we could get done through Albany.”

But this is based on the assumption that greedy landlords are simply holding out for exorbitant rents. It doesn’t consider the fact that, maybe, there is simply too much retail space:

Only a few grasp the true scope of the problem. Vornado Realty Trust titan Steven Roth said we can only cure the national plague through “the closing and evaporation” of up to 30 percent of the weakest space — which would take five years.

All of this, of course, has me thinking about the future of ground floor main street retail. What are your thoughts?