Some Luxury Retailers Opting to Buy Rather Than Lease Iconic Buildings

A trend of luxury retailers buying rather than leasing iconic buildings for their flagship stores in top global markets has emerged over the past year. Among the most notable of these:

• Prada’s $425 million acquisition of 724 Fifth Ave. in Manhattan, in which the Italian fashion house had been leasing five floors since 1997.
• Kering’s $963 million acquisition of 715-717 Fifth Ave. in Manhattan with several multi-level retail spaces to accommodate the French fashion group’s high-end brands like Gucci, Brioni and Balenciaga.
• Kering’s $1.4 billion acquisition of an 18th-century building in via Montenapoleone—Milan, Italy’s most exclusive shopping district.
• The potential sale of Manhattan’s 745 Fifth Ave., which currently houses Bergdorf Goodman’s flagship store, to either LVMH or Chanel.

By owning buildings in iconic shopping districts, high-end retailers are banking on creating an experience that attracts more customers. There is a certain mystique to shopping in an iconic building with a stand-alone retail brand: One can find better value for an engagement ring in Manhattan’s Diamond District but it does not carry the same social validation and credibility as an engagement ring from Tiffany’s flagship store on Fifth Avenue.

Building ownership is seen as a way for retailers to enhance their brand recognition. Younger generations, especially Generation Z, desire an authentic brand experience. They have grown up in the digital age, with constant connectivity via social media platforms. This exposure has made them more skeptical of artificial or manufactured content, leading them to seek authenticity and genuine experiences when shopping for goods. Although a digital presence will remain an important marketing tool for retailers, the value of a brick-and-mortar store where products can be experienced firsthand will continue to rise.

Economic considerations also are driving the trend of building ownership by retailers. A CBRE analysis of Placer.ai data indicates that the combined foot traffic in the nation’s top 10 prime retail districts should return to pre-pandemic 2019 monthly averages by Q4 2024. This revival is fueling rent and building value growth along major high streets. In its Q1 earnings call, Acadia Realty Trust forecast steeper rent growth for its high-street buildings than for its more traditional retail properties. As rents in the world’s most famous retail districts continue to rise, owning their buildings gives retailers more insulation from landlord-favorable market conditions.

A more permanent presence for retailers through building ownership provides an opportunity for development of other channels to attract new customers and brand fanatics. There is a general consensus among retail industry professionals that retailers must have both an omnipresent and omnichannel strategy. In other words, they need to be wherever their clients frequent. Luxury retailers are beginning to embrace this by marketing their brand through non-traditional channels such as food & beverage offerings and enhanced client membership programs. With their retail space and brand established along the world’s top shopping streets, more time and effort can be focused on these newer ventures, which have proven to be effective at elevating their brand among their customers.