The Manhattan Theory

Tweet If you are in commercial real estate sales, you have heard this more than once form an out of town real estate rep....."we are going to open 14 stores and we want our flag ship store to be at Veterans and Causeway". And the expectation is that we just make a phone call and owners will fall over themselves to sell us their property.


My response was always "Did you do that in Manhattan? Did you get the corner of 5th and E 59th St.?" Then I proceed with my rant about the island that we call New Orleans. If the island of Manhattan is surrounded by water and the real estate rates are in the stratosphere, then the same metrics would apply to New Orleans. And we ARE surrounded by water, lake to the north, river to the south, gulf to the east and the spillway/swamp to the west. This ain't Texas, you can't just move to the next interstate interchange(there are only 5 eastbound in Metairie, and they are all taken). You could go west on I-10, but you won't reach dry "develop-able" land until Gonzales.

Commercial real estate buyers(and some developers) not familiar with our pricing can not comprehend the values placed on local real estate. And this "value" is represented in many different ways. With some properties it represents a family and the heirs' birthright. It may not be producing a large return, but it may represent decent cash flow if you don't have a mortgage on it.

Or, with most families, the patriarch of the family may have one vision of the future of the property and the heirs another. These are easy to spot. If you see property that has not had a change in use, or updates, repairs, etc. and then one day its gone. Well, guess who inherited the property.

To fully understand the value of good real estate in a densely populated geographical area, such as Manhattan......... or New Orleans, you have to look at the basic fundamentals of commercial real estate investments. First, TIME. These are not flip properties. No one is going to sell for less so that someone can flip it to another buyer. The buyer will find the property and owner without any help. Therefore the cost needs to be analyzed over a longer hold period than the average investment. Look at most of the major properties on the island. Most have been here since the roads were built. Lakeside SC has gone through many changes, but its still there in the same spot, and will most likely be there through our grandchildren's children's life time at a minimum.

Second, current use vs. future value. Of course a snow ball stand on a valuable piece of real estate will not appraise for what the owner is asking, but that's not what they are selling. They are selling the future value of the site. This is the most difficult hurdle for buyers, and me, to understand. We realize that if you put a building on this site, its worth more, but you don't have a building, you have a snowball stand. And this goes back to the "no mortgage" situation....no seller motivation. Plus, do know what the mark up is for snowballs? They can afford to wait.

And waiting is usually the game that is played. If you want to be on St. Charles Ave., well, there is only one St. Charles Ave., so if you want to be there, you pay what is asked. Just like there is only one 5th Ave.

The similarities between Manhattan and New Orleans are not measured in square foot rates, but in demand for limited space.

© Mark Subervielle 8/12/11