Barneys’ Last Stand: Foreign Students, ‘Value’ Rents Make Boston A Safe Bet For Luxury Retail
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Barneys filed for bankruptcy Tuesday, but you wouldn’t know it based on its Boston operation.
The luxury retailer plans to close 15 stores in some of the country's strongest markets, like Chicago, Las Vegas and Seattle, as part of its restructuring. But Barneys in Boston's Copley Place mall is going the other route and beefing up its presence with the luxury chain’s high-end restaurant, Freds, also found in its stores in Beverly Hills, Manhattan and San Francisco.
The expansion comes as Simon Property Group’s Copley Place has debuted a high-end facelift; its stores now have more of a high-street look with floor-to-ceiling displays, and brands like Christian Louboutin and Saint Laurent have been added to the tenant mix around the corner from Barneys.
It might seem curious that Boston’s store remains open while those in Chicago, Seattle and even multiple locations in New York City will close, but Boston’s demographics and fundamentals mean the decision to keep Barneys open here didn't surprise some retail experts.
“Boston is kind of an anomaly with what’s happening compared to the luxury market in the rest of the country,” said retail tenant representative and Bialow Real Estate CEO Corey Bialow.
Massachusetts attracted nearly 70,000 international students to the state’s numerous colleges and universities for the 2017-2018 academic year, according to the Institute of International Education.
That was an 8% increase from the prior year and the most growth of any state in the top 10 — California, New York and Texas were the only states that drew more total foreign students than Massachusetts — despite foreign enrollment at U.S. schools decreasing nationally 6.6% from the previous year.
Many of those students in Boston come from East Asia, which luxury retailers have identified as a key source of growth due to wealthy families with a significant level of disposable income. That, coupled with the numerous high-paying jobs in Greater Boston’s technology and life science industries, has created a region with unmet demand for luxury goods.
Retail sales are expected to increase by 4.5% in Boston this year, according to Marcus & Millichap, one of the highest market growth forecasts in the U.S.
“Boston historically was a provincial New England city,” Bialow said. “That’s changed dramatically as younger people have come into the marketplace.”
That has been reflected in the overhaul of Copley Place and neighboring Prudential Center mall, both of which were renovated in the last five years to include younger high-end brands like Shinola, Moncler and Canada Goose.
Both malls are among the 20 best-performing U.S. malls in terms of sales per SF, according to Newmark Knight Frank Research Director Elizabeth Berthelette.
A single landlord exerting control of a shopping district can play a role in retail success. The Barneys stores in downtown Seattle and on Rush Street in Chicago were in areas with high foot traffic, but also high turnover and where multiple landlords likely had different aspirations, according to Streetsense Director of Retail Michael Smith.
The Barneys at Copley Place may be in a city with a similar economy as Seattle’s, but its surrounding Back Bay neighborhood is one of Boston’s most affluent, and landlord Simon Property Group has spent years making Copley Place a mall with almost-exclusively luxury tenants on the first floor.
“There’s a stability there that they may not see on Rush Street in Chicago,” Smith said. “That’s a perfect recipe for success in retail.”
But Barneys’ specific commitment to Boston may have to do with more than demographics and tenant curation.
Operational costs for retailers in Boston’s toniest areas are significantly less than other U.S. high streets. While it is not unheard of for retailers to pay north of $2,500/SF along parts of Fifth Avenue in New York City and $700/SF along Chicago’s Michigan Avenue, Bialow said peak retail rents in Boston haven't gone much above $300/SF.
“Boston is still a value, as silly as that sounds, when it comes to luxury retail and occupancy costs,” he said.
Boston is also one of the tightest retail markets in the U.S. The Q2 3.2% vacancy rate was nearly 2% below the national average, according to Marcus & Millichap. That is driving a 1.3M SF development pipeline ranging from WS Development’s The Superette, a 125K SF luxury retail component at EchelonSeaport, to Boston Properties’ Hub on Causeway.
But just because you can have breakfast at Tiffany’s and eventually lunch and dinner at Barneys, don’t expect Boston to go the way of New York with multiple pockets of high-end retailers. The New England city’s unwillingness to overbuild, as with other asset classes, remains just as strong in the retail sector.
“It’s carefully curated. We don’t need three Louis Vuittons and three Chanel stores,” Bialow said. “But there are still a lot of luxury brands who are underrepresented here.”