Landlords aim for clean sweep of 'wholesale alley'.

When Kew Management recently leased out a block of space at 40 West 29th Street, a 30,000 s/f building that caters mainly to the wholesale industry, the deal didn't come without a warning to the tenant,

Owner of that property and a number of others in the wholesale district--a swath of territory centered around Broadway from 26th to 30th Street--Kew was wise to various abuses commonly committed by wholesalers in the area.

Of principal concern to Kew was that the space not be divvied up and subleased to a slew of other wholesalers, a common practice encouraged by the high premium subtenants will pay over direct rents for slivers of warehouse space totaling just a few hundred square feet. Selling merchandise directly out of the space, which creates heavy foot traffic in and out of the building and is almost always disruptive to other tenants, was prohibited as well. As James Preston, Kew Management's senior in house agent for its commercial properties, explained it, the space was intended for showrooms, not distribution facilities.

Yet after carefully outlining the restrictions, Kew met with frustrating results when the wholesaler to whom they leased quickly diced up the space and began peddling its wares directly out of the building, the very things Kew had hoped to avoid. The space also was used to trade counterfeit merchandise, a problem endemic to the entire district, where imitation goods can easily be found in many of the shops on the neighborhood's side streets as well as on the tables of street vendors along Broadway.

"We told the tenant exactly what was and wasn't allowed in the space coming, we made it extremely clear that if they conducted prohibited activities we would find out and they would have to leave," Preston said. "But incredibly they went ahead and committed the main violations that we stressed would not be tolerated. This was a person who swore they were legitimate when we signed the deal with them."

Kew Management's experience is indicative of the type of scrutiny and skepticism landlords must pay towards tenants who ostensibly plan to use the space as a showroom for their merchandise. Despite the high rents that some landlords can reap from transactions with wholesalers, some in the wholesale district are nonetheless trying to divest themselves of such tenants to avoid the type of situation Kew went through. Kew, for instance, is now negotiating with a caterer to take the space its troublesome wholesale tenant was forced out of, even though they might have to accept a lower rent at first.

"This person has a restaurant in the area and is definitely a better kind of tenant," Preston said. "But they can pay 10-20% less than what a wholesaler would. We're working with them on a deal though that would bring the rent up over a period of three years."

The seedy wholesale district is something of an anomaly sandwiched between the growing elegance of the Madison Square Park area and the strong class A and B office market of the Penn District. Many landlords however see its drab storefronts and the unseemly crowd it attracts as neighborhood fixtures poised to give way to a long overdue revitalization.

"We're on the fringe of it and the sooner it cleans up the better," said Jim Buslik, a principal at real estate owner and manager, Adams & Co., which has two buildings in the southern vicinity of the wholesale district, 1115 Broadway and 11 East 26th Street.

"And I think that it will. There's a lot of residential development in the area that's going to create a demand for 24 hour retail, which will lead to better retail, that's going to put the pressure on for change."

But with some wholesale tenants able to offer a phenomenal $140 psf, not all landlords may be so eager to see them go.

"Some landlords are resigning these guys," Buslik said. "It's disappointing because they bring down the neighborhood. But then again, these kinds of changes happen slowly. Real estate is evolutionary not revolutionary."

Because Broadway is so narrow in the wholesale district and its bordering buildings are typically just a few floors in height, it conveys a main street type feel ideal to the type of open air selling many of the area's vendors engage in. The area has become so busy, it has been dubbed the SoHo of knockoff goods.

"It's an incredible market for wholesaling," said Sam Stein, a building agent for Justin Management, which owns 1239 Broadway, a building on 30th Street. "I have guys coming to us looking for space all the time, but we don't want bootlegging and all those sloppy uses in the building."

In addition to 40 West 29th Street, Kew Management owns 1123 and 1133 Broadway, 100,000 s/f and 150,000 s/f office buildings respectively.

Preston indicated that he has been busy closing leasing deals in both with a variety of firms including casting and modeling agencies, architecture firms, and law firms--activity that may be indicative of the types of higher quality tenants the neighborhood is starting to attract.

Eager not to offend this influx of new tenants with the disruptive behavior exhibited by some in the wholesale industry, landlords may be even more wary now to rent space out to wholesalers.

"If you have 10-20 people waiting to get in and out of the building to buy fake jeans, it's a sloppy use," Stein said.

"When you have nice architecture and their door is getting banged on by buyers looking for the guy who sells bootleg labels, that's definitely not going to go over well. I know we don't rent to people like that, and I can't imagine other landlords with an eye on changing the tenancy of their building would either."