Saturday, May 25, 2024

This Button Alternative to...

Disclosure: Our...

Did OpenAI steal Scarlett...

Opinions expressed by Entrepreneur contributors are their own....

Help Your Business Excel...

Disclosure: Our...
HomeInvestmentLuxury Brands Are...

Luxury Brands Are Buying Up Properties—Will High-End Landlords Fade Away?

Why rent when you can buy? Luxury retailers are booming and using their extra cash to buy up highly coveted retail spaces across the U.S. and Europe. 

Prada bought the building where its Fifth Avenue store is located for $425 million, while LVMH is said to be in talks to purchase the building where Bergdorf Goodman, a men’s store, is located. 

Meanwhile, Gucci and Balenciaga’s parent company, Kering, bought a property on Fifth Avenue for $963 million, expanding its real estate portfolio, which already includes landmark properties in Paris and Tokyo.

This recent flurry of activity has helped Fifth Avenue maintain its spot as the world’s most expensive retail street to rent, with rents at $2,000 per square foot in 2023, according to real estate firm Cushman & Wakefield. It also marks a potential change in the luxury retail real estate market. 

The Changing Rental Landscape 

While retailers buying their brick-and-mortar shops isn’t new, it’s a trend that’s picked up recently at a time when the commercial real estate space is struggling to maintain its tenancy. 

In the U.S., this trend has largely concentrated in New York, although retailers have also bought spaces in other high-end areas. Chanel, for example, paid $63 million for a building in San Francisco, while LVMH plans to turn the Beverly Hills property it bought for $245 million into a flagship Louis Vuitton store.

Commercial real estate has been under stress from weak growth and a high interest rate environment, but one of the biggest areas for growth has been retail. That’s because even as the hybrid workplace is here to stay, U.S. retail sales in areas like Manhattan are resurging, even if they are below pandemic levels, Keith DeCoster, director of market data and policy at REBNY, said in a statement.

“With slow but steady growth in tourism activity, commuter foot traffic, and office visitations, retailers are absorbing larger footprints, and landlord concessions are becoming less common,” DeCoster added. 

Global interest in luxury goods has helped high-end retailers like LVMH clinch record profits, even as sales growth has started to stall a bit. Luxury retailers have extra money to spend and are wondering why they should spend it on rent, Eric Menkes, co-chair of leasing for law firm Adler & Stachenfeld, told the Wall Street Journal.  

“The rents that the luxury retailers were paying on Fifth and in other prime locations were simply astronomical. There comes a point in time when these retailers looked in the mirror and said, ‘Why am I making my landlord rich?’” he said. 

What This Means for CRE Investors 

While buying real estate might seem like an obvious use of extra cash for luxury retailers, they likely aren’t just thinking about the money they are saving on rent. 

Owning a property means they have more say in what they can do with the space while controlling who else can rent it. Walk down Fifth Avenue in New York or the Champs-Élysées in Paris, and you’ll see nearly all the main luxury fashion brands. Luxury retailers (and the consumers that shop there) tend to congregate in the same areas. They also aren’t looking for the same returns that a real estate investor might be looking for and are instead thinking about long-term branding and marketing strategies.

The headwinds that the CRE sector has been facing have also meant less appeal for new investors to enter the space. For landlords who are facing a credit crunch amid higher interest rates, giving up their stake in a luxury property might make financial sense. In other words, luxury retailers that want to buy their properties don’t have much competition.

For CRE investors, the sector is changing. While the Federal Reserve is still projected to lower rates this year, it could be a while before that translates into better deals. For now at least, retail real estate, luxury or not, is the current winner of the downtrend in commercial real estate.

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Continue reading

This Button Alternative to the Siri Remote for Apple TV is $23.97 for Memorial Day

Disclosure: Our goal is to feature products and services that we think you'll find interesting and useful. If you purchase them, Entrepreneur may get a small share of...

Banks don’t want to inspect your home office, so they’re forcing hundreds of employees to come in five days a week

Work from home regulations for banks are changing, and some of the industry’s biggest players would rather bring employees in five days a week than make the effort to comply—including making regular inspections of workers’ homes. During the pandemic,...

Families of slain Uvalde victims sue Meta, ‘Call of Duty’ maker, and gun manufacturer: ‘This three-headed monster knowingly exposed him to the weapon’

The families of a group of victims from the Uvalde school shooting announced new lawsuits Friday against Instagram parent company Meta Platforms, the maker of the video game “Call of Duty” and the gun company that made the assault rifle...