As Luxury Brands Acquire Properties, Will High-End Landlords Diminish?
Rent or buy? Luxury retailers are capitalizing on their extra funds to purchase highly sought-after retail spaces across North America and Europe.
Prada recently purchased its Fifth Avenue location for $425 million while LVMH is in talks to purchase Bergdorf Goodman, a men’s store on that avenue.
Gucci and Balenciaga’s parent company, Kering, purchased a property on Fifth Avenue for $963 million to expand its real estate portfolio which already features iconic properties in Paris and Tokyo.
Recent activity on Fifth Avenue has helped maintain its status as the world’s most expensive retail street to lease, with rents estimated to reach $2,000 per square foot in 2023, according to real estate firm Cushman & Wakefield. Furthermore, this activity signals potential changes within luxury retail real estate market.
Retailers’ Role in Reshaping Rental Landscape
While retailers buying their physical stores is nothing new, recent years have seen this trend accelerate rapidly amidst commercial real estate’s difficult tenancy situation.
U.S. retailers have seen an upswing in retail space acquisition, particularly in New York and other high-end areas. Chanel for instance paid $63 million for an entire San Francisco building while LVMH plans on turning its $245 million Beverly Hills purchase into an flagship Louis Vuitton store.
Commercial real estate has been hit hard by slow economic growth and high interest rate environments, but retail has proven resilient. Even as hybrid workplaces remain viable solutions, U.S. retail sales in Manhattan are recovering, even if below pandemic levels, said Keith DeCoster, director of market data and policy at REBNY in a statement.
DeCoster said that with steady tourism activity, commuter foot traffic and office visitations increasing at a steady rate, retailers are taking on larger footprints while landlord concessions become less common.
Luxury goods retailers such as LVMH have seen record profits in spite of sales slowdown, according to Eric Menkes, co-chair of leasing for law firm Adler & Stachenfeld, according to The Wall Street Journal. They now have extra money they need to spend and are asking themselves why it should all go towards rent payments, according to Menkes.
“Luxury retailers in prime locations like Fifth Avenue were paying exorbitant rents; eventually they came to question themselves on why they were helping make their landlord rich,” as one source put it.
What This Means for CRE Investors
While investing in real estate may seem like an obvious use for their extra funds, luxury retailers probably aren’t just considering it in terms of saving rent money.
Property ownership gives owners more say over what can be done with the space while controlling who else rents it. A stroll down Fifth Avenue or Champs-Elysees in Paris reveals nearly all the major luxury fashion brands; their consumers tend to congregate there as well, although they’re less interested in short-term returns like real estate investors might, instead thinking in terms of long-term branding and marketing strategies.
CRE sector challenges have decreased its appeal for new investors to enter this space, leading landlords facing credit crunches due to rising interest rates to consider selling off luxury properties; luxury retailers without much competition could make an offer on them instead.
CRE investors are facing changes to the sector they invest in. While Federal Reserve is expected to reduce rates this year, it could take longer for this change to materialize into better deals for retail real estate – luxury or otherwise – at this time. Retail real estate seems to be at the forefront of commercial real estate’s current downtrend.
