Luxury retailers haven't pulled back on their U.S. expansions in an uncertain economy, though a lack of available retail space is prompting some to buy real estate to secure store locations and to open shops at select malls.
Those are some of the findings from "Shaping Luxury’s Future: Trends in U.S. Luxury Real Estate," a 38-page report that real estate brokerage JLL released Tuesday. Upscale chains leased over 360,000 square feet between July 2023 to July this year in the United States, according to JLL.
Following explosive growth coming out of the pandemic, the luxury retail segment has remained resilient despite the current macroeconomic headwinds, with U.S. luxury retail sales reaching over $75 billion last year, according to JLL. From 2020 to 2023, luxury retail sales achieved a compounded annual growth rate of 8.6%. But the brokerage expects that growth to normalize, to 1.9% from 2023 to 2028, surpassing $82 billion by the end of 2028, JLL's report said.
There's a big factor driving upscale store operators to become their own landlords, acquiring their flagship stores, and for such retailers to open up at malls: scarcity of space, with the U.S. retail vacancy rate at 4.1%.
There's been a real estate buying spree by a number of luxury retailers, said JLL, citing high-profile examples in Manhattan. Kering — the French parent of brands such as Gucci and Balenciaga — paid nearly $1 billion for a property with 115,000 square feet of multilevel luxury retail space. And Italian Prada Group acquired a pair of adjacent office buildings, with one housing its Fifth Avenue flagship, for a total of $835 million.
"These acquisitions mark a shift in strategy by some luxury conglomerates that have chosen to own property in the most desirable prime corridors, paying an expensive premium in the process," JLL said in its report.
Long-term game
"It's really that these brands know that there's not a foreseeable future for them where they're not going to be on a street," James Cook, senior director of Americas Retail Research at JLL, told CoStar News. "Why not just buy the real estate, which in the short term is a big expense. But in the long term, they know they're going to be there for a lifetime. ... Why not invest in it?"
These retailers-turned-landlords can also gain "insulation from rising rents," according to JLL, as well as reap other benefits.
"With prime corridors like Fifth Avenue, Madison Avenue, and Rodeo Drive having low availability rates, purchasing properties in these locations can be strategic as well, as these purchases can restrict new entrants to the market by competitors, helping already established brands maintain standing in those markets," the report said.
There's no question that New York and Los Angeles continue to be favorite locations for luxury retailers looking to expand or establish their presence in the United States, according to JLL. Both markets accounted for a combined 36.9% of new luxury openings between July 2023 and July this year, according to JLL's report. Madison Avenue on the East Coast and Beverly Hills on the West Coast are popular choices for retailers.
But with the supply of desirable retail locations continuing to be exceeded by demand, in some cases malls are offering luxury retailers more opportunities to enter new markets or expand in exiting ones, according to JLL. For upscale retailers that have already established flagships on urban High Streets, one of their only options left is to lease space in other places, Cook said.
"They may already have stores on all of the primary corridors, which there's only a few in North America," he said. "And so if they want to open any new stores, it's probably going to be at a mall location unless it's a relocation ... maybe a bigger store on the same street."
Malls accounted for nearly half, or 48.5%, of all new luxury store openings from July last year through this July, the report said.
Growth via malls
"Malls that strategically optimize their tenant mix to offer the best-in-class retail remain enticing to luxury brands who are seeking high-quality space, with the best malls including an array of luxury brands in their rosters," according to JLL.
A number of malls have created luxury wings where they cluster upscale stores, like the American Dream megamall in New Jersey with its The Avenue section.
Kering expanded Gucci’s presence in major U.S. markets through malls, according to JLL, by opening new stores in Los Angeles at The Grove and Miami in the Dadeland Mall. And Balenciaga debuted a 10,000-square-foot store at American Dream while Saint Laurent entered Maui via The Shops at Wailea and Denver via Cherry Creek Shopping Center.
"For cities like Costa Mesa [in California] and Atlanta, the wave of new luxury openings reflects how luxury brands continue to find opportunities in malls," the JLL report said. "Popular, top-performing malls like South Coast Plaza and Phipps Plaza continue to attract luxury brands, further strengthening their luxury co-tenancy in the process."
In fact, Costa Mesa ranked No. 3, with 16 luxury store debuts, among U.S. cities with five or more new luxury openings from July last year through this July, according to JLL. New York was No. 1, with 34 store openings, and Beverly Hills was No. 2, with 17.