Commercial Hard Sell
This is the ninth article in a series examining various aspects of real estate on the South Fork.
Ask five insiders what's happening with the South Fork's commercial real estate market these days and four of them will start off by recalling last year's sale of the former Whitman Gallery building on East Hampton's Main Street. For many, that sale seems to typify the current situation.
The gallery's owners, the heirs of the late Grace V. Rose, were one of the few local families who emerged from the boom years of the 1980s still holding the deeds to commercial properties acquired by their parents or grandparents.
And, like others, they waited until the market began to show dependable recovery, sometime around 1993, and then waited a little longer, before putting the word out that they would sell for the right price.
Investors Compete
Talk is they quietly approached three or four players with capital. A small bidding war ensued and David Fink and Carl Levine prevailed, paying $1.24 million. It was 67 times the late Mrs. Rose's original $18,500 investment, made in 1960.
The new owners are part of a highly competitive group of investors, perhaps a half-dozen, who are quietly gaining control of the commercial market. Zoning limitations and inflation are tilting the supply-and-demand curve in favor of Robert Ratteni, Leonard I. Ackerman, Ben Krupinski, Mr. Fink, and one or two others with capital enough to pay UpIsland prices and patience enough to take the long view.
"Most of what is for sale is very quietly for sale. No signs out front. That's how much of the commercial business is done here," said Judy Desiderio of Cook Pony Farm, one of just a few South Fork brokers who specialize in retail, light industrial, and office spaces.
Quiet Sellers
Most of the time she waits in the car while prospective buyers take a first look around, because, she said, sellers do not want customers to recognize her and surmise the place is on the market.
"An owner-operator, especially, doesn't want to disturb things, doesn't want the word to get out, unless his price is met," she said.
Indeed, owners of commercial property who want to sell rarely go public unless they're desperate.
Duke's, later the Aqua Grill, was a highly successful Tex-Mex restaurant for eight years before it was sold to its current owners, for $793,000. After they spent a fistful transforming the rough-and-tumble barn into a Tuscan villa that shimmied right up to the highway, the restaurant struggled for two seasons.
It is now one of just two or three businesses in town with a For Sale sign out front.
No Takers
The asking price is $1.8 million, a bit ambitious even in today's market. The pitch: high visibility, seats 200, plenty of parking, two cottages for staff housing, barely used equipment, truly a turnkey operation.
It shows well, but so far no takers. It seems that just as the presence of a broker could cast a chill on a thriving business, a shortage of customers is sure to throw a property into the deep freeze.
But by all accounts the commercial market is performing well for a chosen few. The major players are, as Ms. Desiderio put it, "repeat customers who are all in the acquisition phase," paying purchase prices and charging rents that are growing comparable to those in year-round communities.
New Players
"A shopping center in the middle of the Island may get a greater short-term rate of return, 18 percent on a cash-on-cash return instead of 10 percent here, but here we have enormous returns over the long haul. As a result, there are these new players in town who view our commercial properties as an untapped resource, if you can wait 20 years or more," said Ms. Desiderio.
Mr. Ratteni specializes in Main Street acquisitions, buying buildings such as the one in East Hampton that rents to the Coach leather store and the Bridgehampton one that includes the Golden Pear.
"I'm willing to forsake a little income now for a good return when the mortgage is paid off," he said. "It's a steady, long-term investment. Considerable outlay, minimal profit potential at first. Breakeven or less for two to five years, but 20 years from now your daughter will be interviewing my son about why he's selling."
Zoning's Role
Zoning that values residential property as least likely to damage the environment has deliberately limited the size of commercial and business districts, thereby pushing up prices and rents.
Town Assessors' records confirm the limited growth. For example, they show 70 motels, hotels, inns, and resort complexes in the town and village in 1994 and 73 this year.
"Through zoning, government has cut off the supply. They couldn't do more to increase the value, so we should be giving them a big thank-you," said Mr. Fink.
The downside is that the demand for tax-funded services is growing in proportion to the population, most notably in the public schools, and the commercial tax base here is not keeping pace.
"There's been no growth in Springs, and very little in Amagansett in the last few years," said Town Assessor Fred Overton.
Wainscott Upzoning
Town Councilwoman Nancy Mc Caffrey recently opposed the upzoning of hundreds of commercially zoned acres in Wainscott, saying more residential development there would mean more children enrolling in the one-room schoolhouse, where she is also District Clerk.
The upzoning to residential use was put on indefinite hold, pending an impact study, after opponents charged it would kneecap the business community's chances for future growth. And, the idea of swapping the rights to commercial-industrial development with properties elsewhere in town is gaining momentum, added Assessor Jeanne Nielsen.
Upzonings anywhere would, some noted, also have the unintended but obvious benefit for the investors of further limiting the supply and increasing the value of what remained.
Investor Confident
Mr. Fink, a Manhattan lawyer who said he rounds out his portfolio with commercial properties in the city and on Main Street in East Hampton, predicted there will be a growing and constant demand for rental space, due to a combination of zoning and economic inflation.
"Every time I feel as though we've hit a ceiling, we punch through to a whole new level," agreed Ms. Desiderio. "The market across the country shows East Hampton is not just the cream. It's the cream of the cream."
But, borrowing a phrase from Alan Greenspan, Mr. Fink cautioned that brokers and players ought not become too optimistic, in a replay of the "irrational exuberance" of the early 1980s.
Whitman Building
"Prices are peaking and, if history is a guide, then we'll see prices coming down again," he said. He now charges rents of about $60 a square foot for street-level retail and $15 a square foot for office space on the second floor.
From his perspective, the Whitman building was a bargain at roughly $280 a square foot.
East Hampton's former Village Hall, he said, had sold not too long before for a price approaching $500 a square foot.
"We bought [the Whitman building] because it was very cheap," he said, adding that "the real land barons are the old families who have owned certain properties for 30 years or more."
Downtown Montauk
As for vacant commercial land, the prevailing opinion is that there isn't enough.
Frank Tuma was named by three other Montauk brokers as the hamlet's expert on the commercial market there, and he said zoning made it tough these days to build anything viable. There are two or three tiny lots for sale downtown near the Montauk Post Office, each about 40 by 100 feet, but "it's been hard to get anyone to look at them."
The same is true at the docks, where Mr. Tuma said he last saw activity about two years ago when he sold one for $150,000 and the other for $85,000. Both are back on the market, still undeveloped, for $125,000 and $150,000 respectively.
Standing Room Only
The developed business districts in Montauk are all rented, as elsewhere in the area. "Four or five years ago there were many, many empties, but now it's standing room only. The season is gradually stretching out, April through Thanksgiving, and this is becoming more and more a year-round community," said Peter Hallock, president of Allen M. Schneider Real Estate.
While there is an obvious demand for commercial-industrial land, to build a carpenter's workshop, for example, "there's no zoning for it in the land that's remaining," said Mr. Tuma. As a result, he said, landscapers and carpenters are forced to operate illegally out of their garages at home.
Most of the vacant commercial land on the South Fork is in Southampton, with a little on the tracks in Wainscott. "But even that is not really available. It's tough to pry it loose from the owners," said Judy Desiderio.
Can't Be Done
Take the case of the Talmage family, who argued passionately against the Wainscott upzoning. They said they bought their 5.8-acre parcel on the tracks as a place to expand their construction company.
Steve Mahoney sold a one-acre parcel near there, with a work building and an office, to Delfino Insulation for about $400,000. The Talmage land is worth far more as commercial-industrial; considerably less, especially given the unattractive location, as a house lot or two.
"Our zoning is laid into place in such a way that commercial opportunities are few and far between," said Mr. Hallock. "The questions we get the most of, every season and even year-round, and always from someone who doesn't understand the Hamptons, is, 'Where can I build a hotel?' and, 'I found this lovely building. Can I turn it into a restaurant?' I have to tell them it can't be done."
Mom And Pop
Mr. Tuma likewise reported from Montauk "a big demand and very little supply," a situation that has pushed that hamlet's retail rental prices to over $20 a square foot.
Mr. Hallock said the Saks Fifth Avenue store in Southampton was maximizing the limited space available there by taking over two adjacent units for an expanded men's department and using its existing store to expand the women's.
It's not news, only more and more true as each season passes, that the prevailing rents are beyond the means of the mom-and-pop stores that used to line South Fork Main Streets. Only specialized boutiques and major outlets can afford the rents now, and the locals are shopping in the Tanger Mall.
"There's no turning that clock back, because when someone buys a building and pays between $800,000 and $1.4 mil, they have to cover that. They can't rent to mom and pop," said Mr. Hallock.