New Places, High Prices: Luxury Retailers Double Down On Expansions To Fresh Territory
Certain corridors in major American cities are synonymous with luxury retail. Rodeo Drive, Fifth Avenue and the Magnificent Mile made their names serving as hubs for exclusive purveyors of the highest-end goods, but as day-to-day migration patterns have shifted for many Americans, luxury retailers are diversifying their efforts to reach consumers.
That’s not to say they’re abandoning their tried-and-true neighborhoods altogether. Rather, luxury retailers are deploying their significant capital to double down on some traditional corridors while branching out to new ones in cities both major and secondary, and they are cutting down on travel time to retail destinations.
“Consumers want luxury retailers to meet them where they are,” Colliers National Research Manager for Retail Services Nicole Larson said. “I don't think they're as willing anymore to go those farther out distances — 30 minutes to an hour — to go to those locations.”
With inflation, growing recession concerns and general macroeconomic gloom hanging over commercial real estate, the decision of very high-end retailers to open new stores and make forays into new territory might seem counterintuitive. But luxury market watchers say that there are indicators that the confidence of these pricey brands isn’t misplaced.
The U.S. luxury fashion market is the world’s biggest, according to Colliers, with Americans spending $63.3B on luxury goods in 2021. That number is expected to reach $64.9B in 2022, $66.9B in 2023 and $68.3B in 2024, according to Colliers, citing GlobalData.
“Heritage luxury-goods brands are best placed to pass on higher costs through pricing,” compared to their more mass-market counterparts, according to a Bloomberg luxury retail outlook for 2023. “A 10% price hike in some regions was common this year, and will extend to 2023. Inflationary cost pressure hasn't been as severe as it has in the mass market.”
Growth in the luxury market has been “robust,” Bloomberg said, with so-called secondary cities such as Atlanta, Houston and Dallas making a strong showing in the first half of the year.
In New York, shopping corridors on Fifth Avenue are seeing a good deal of vacancy and “a lot of churn,” but anchor stores such as Bergdorf Goodman and Saks Fifth Avenue are staying busy, JLL Vice Chairman Richard Hodos said.
“SoHo and the Meatpacking District are back in a big way,” Hodos said. “By and large, luxury brands are doing a brisk business.”
Overall retail is still grappling with relatively high availability in New York. Average “prime market” availability was 25.7% in the third quarter of 2022, according to JLL. That was well below a 2021 high of 27.9%, but slightly up over the first quarter of this year, when availability was at 25.3%.
But demand is intense for certain nodes of the hot luxury shopping zones. For instance, in central SoHo, a London-based luxury jeweler recently signed a lease for space on Greene Street between Prince and Spring streets, Hodos said. But the jeweler was still in the midst of completing tenant improvements when a big-name luxury brand swooped in and bought the lease.
Demand is spilling into new submarkets in New York, with luxury brands spreading their wings to less-trafficked luxury store locations. Williamsburg, for example, is building momentum, Larson said, although retailers are keeping the stores smaller in these untested markets.
Hermès has opened two new stores in New York City since 2021: a 45K SF store in the tony Plaza District and an 8.5K SF one in Williamsburg.
Hodos said the Williamsburg location is an attempt to court a younger, hipper Hermès customer. Securing the right shoppers means getting a bit closer to them.
With a nod to SoHo, Williamsburg and the Meatpacking District, JLL’s October 2022 Luxury Retail report seemed to agree, noting that industry watchers should “[e]xpect ancillary corridors like these to rise in popularity for luxury leasing in the coming months, as they continue to benefit from nearby residential populations.”
Meeting people where they are is also, in some cases, a move away from central business district-type stores where offices once drove foot traffic. Pre-pandemic, these urban areas might have been the hot spots for luxury goods because of their value to tourists and their high daytime foot traffic.
This might have an effect in markets like New York or Chicago, where some of the high-end shopping hubs overlap with office clusters. But in places like Miami, where there isn’t really a concentrated office or business district, aside from perhaps Brickell, the issues with foot-traffic drop-off haven’t been as pronounced as they might have been in other cities, RelatedISG Commercial Division President Tomas Sulchin said.
But more macro population shifts are having an effect. South Florida and Miami-area luxury shopping hubs like Shops at Bal Harbour, Aventura Mall, Village of Merrick Park in Coral Gables and the Miami Design District are reaping the benefits of the demographic shifts that took place during the pandemic, resulting in population growth and corporate relocations to South Florida.
Retail rents in the broader Miami market posted an average annual gain of 4.9% over the past three years, according to data provided by RelatedISG. Vacancies in the current quarter are more or less in line with the 10-year average and showed very little change in the last four quarters.
In the Miami Design District, where Chanel and Australian label Ksubi have opened stores in the last two years, vacancy is estimated at 6.7%, down 1.4% from November 2021.
Here, luxury brands aren’t looking to break out so much as bunch up, Sulchin said. They want to be in established areas next to other similar-caliber brands.
“In Miami, you have certain streets or small pockets of neighborhoods that have substantially high rents, and then you go a few blocks away, and the rents are drastically lower — just because you have very different [foot] traffic, because people are not used to walking so much in Miami versus more concentrated cities,” Sulchin said.
And luxury brands aren’t just diversifying their locations. One is bringing a new business model to a proven luxury destination, hoping to lure shoppers with the promise of a full experience that lasts longer than a trip to one boutique.
VMH Moët Hennessy Louis Vuitton, the parent company of Louis Vuitton, spent years securing approvals to build a Cheval Blanc hotel, retail and restaurant complex on Rodeo Drive at South Santa Monica Boulevard, at the site of a former Brooks Brothers store.
The Beverly Hills hotel will add a U.S. component to a suite of hotels LVMH’s Cheval Blanc hospitality arm operates in Paris and the French Alps. LVMH bought the Rodeo Drive store in 2018 for $245M, property records show.
The company is also planning a three-story Dior store at 319 North Rodeo Drive, replacing a 16K SF men’s store at the site with a nearly 48K SF building, The Real Deal reported earlier this year. LVMH filed permits for the new project in January. It leases a storefront at 315 North Rodeo Drive for Dior’s women’s store, and has an option to purchase that property, according to TRD. LVMH has been so busy on Rodeo Drive that it has made it harder to find space on the coveted strip.
“They're able to put their own brands into the pieces of real estate that they require, but that's just reducing the inventory for anyone else. Anything that's available for lease — it's simple supply and demand,” CBRE retail and restaurant specialist Ryan Gurman said.