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Luxury tenants finding attractive rent deals and ready to embrace Gen Z

March 26, 2021

Luxury lifestyle brand Adam Lippes has picked a high-profile location for its first store, illustrating luxury retailers are positioning themselves for a post-pandemic recovery. The retailer opened a flagship last month at Brookfield Place in Lower Manhattan, settling in next to tony neighbors like Tory Burch, Louis Vuitton and Bottega Veneta.

“We’re starting to see international retailers, as well as domestic retailers, ranging from high-end luxury to aspirational that are now looking very hard at major U.S. markets,” said JLL international director and America president of retail advisory brokerage services, leasing and capital markets Naveen Jaggi. “They look at this as a once-in-a-10-or-15-year cycle to get great space at attractive rent levels.” The increased interest for prime locations in areas like Manhattan’s Fifth Avenue, Chicago’s Michigan Avenue and San Francisco’s Union Square likely will continue through the rest of 2021, he adds.

Luxury retailers are taking advantage of soft fundamentals that have emerged in some markets. Luxury apparel brands, in particular, have been active in Manhattan, accounting for 38 percent of the apparel leases completed in the market in 2020, according to JLL. Valentino, Chanel and Amiri are among those that signed new leases in the fourth quarter in Manhattan’s SoHo, where many landlords were willing to offer discounted rents and incentives after vacancies jumped to 33 percent last year, according to JLL.

The retailers’ maneuvering is occurring even as the luxe sector is shaking off a tough year of sales. According to Bain & Co.’s 2020 Luxury Goods Worldwide Market Study, the overall global luxury market, encompassing both luxury goods and experiences, shrank by 20 to 22 percent last year to $1.18 trillion, which represents a rollback to 2015 levels. Europe has borne the brunt of the decline due to a sharp drop in international tourism. Consumption on the continent fell by 36 percent, compared with a 27 percent decline in the Americas, according to Bain.

“It’s not as bad as that number suggests,” said Odyssey Retail Advisors principal Rick Strauss. “There are a lot of winners within luxury retail and in aspirational luxury and contemporary, as well.” In addition, both retailers and landlords are gaining confidence due to continued reopening, easing of restrictions and pent-up demand that could add sales momentum in the coming year. “The lack of travel, dining and entertainment for the past year has left a large portion of the population flush with spending power.”

What happened to luxury sales during the pandemic

Despite still-substantial levels of personal wealth held globally, sales were severely hindered last year by store closures, travel restrictions and the fact that people were simply spending more time in their homes. Reduced travel alone created a big drag on luxury spending. According to McKinsey & Co., 20 to 30 percent of revenue in the luxury sector is generated by purchases made outside consumers’ home countries. For example, Chinese consumers took more than 150 million trips abroad in 2018, according to McKinsey, which estimates that purchases they made outside the mainland accounted for more than half of China’s luxury spending that year.

In the 2008-to-2009 recession, luxury retail did not regress as much as other sectors did because consumers at the upper end continued to shop. “The pandemic was different in that it resulted in people not being able to go out to stores and shop, which is where the majority of luxury retail sales take place, at the physical location and not online,” said Jaggi.

Yet the performance of luxury retail also proved to be location dependent. Stores that are less restricted continue to draw traffic and in-store sales. Those cities that typically generate a high volume of tourists are struggling more. The relocation of residents out of urban centers to suburban and rural areas and to second-home destinations also has impacted luxury retailers. “That has really shifted sales in many markets,” said Strauss. In the U.S., for example, southern states have seen stronger sales because those states have been more open for business than New York, California and some other norther states.

Luxury sales at Macerich’s Scottsdale Fashion Square, rendered at top, have remained strong and consistent over the past year, according to Macerich executive vice president of leasing Michael Guerin. “Someone on our team actually used the phrase ‘through the roof’ to describe what we’ve seen in terms of luxury sales.”

In 2018, the shopping center completed a multimillion-dollar renovation of its luxury wing, which is home to nearly 20 luxury fashion, accessories and furnishings retailers like Cartier, Saint Laurent, Escada and Versace. Scottsdale Fashion Square also will add a two-level, 11,000-square-foot flagship store for Dior this year.

“Many of our luxury retailers noted strong sales from our local shoppers, which both speaks to the strength of the Scottsdale market and the breadth of customers our luxury retailers are attracting,” said Guerin.

Chasing younger shoppers

Bain predicts the industry will recover to 2019 sales levels by the end of 2022 or early 2023, and signs of that recovery already are emerging. Luxe retailers have adapted to market challenges by enhancing digital channels and working harder to connect with customers outside their stores. According to Bain, the share of luxury purchases made online nearly doubled during the pandemic from 12 percent in 2019 to 23 percent in 2020.

“For top luxury brands, physical stores remain the crux of their connections to their shoppers, but many have worked to integrate highly personalized experiences to help retain, cultivate and build brand devotees and bring them to their stores,” said Guerin. “Additionally, luxury brands have leveraged personal, long-standing relationships to tailor the shopping experience to meet the needs and comfort levels of their customers.”

Luxury retailers also are recognizing that younger customers drive a bigger portion of sales, and they need to modify strategies accordingly. Bain forecasts Gen Y and Gen Z will account for more than two-thirds of global luxury purchases by 2025. As a result, all brands have been pivoting to embrace younger customers, notes Colliers national director of retail Anjee Solanki. Retailers are emphasizing digital content, social media and social media influencers and are offering luxury at a more affordable entry point. “These retailers are now starting to see that their largest growing segment of buyers are Millennials and Gen Z,” said Solanki, and so they’re asking, “What attributes do those customers connect or align with and how do these luxe brands relate to that?”

Sneakers have been a successful product line for many luxury brands. Luxury retail also has embraced streetwear with a more luxurious version and price point. Even the more mature who consume luxury goods have an appetite for those younger fashion trends, notes Solanki. A pre-pandemic luxe trend was to add products at lower price points, which provides an entry point for younger shoppers and appeals to a wider base. “Brands have figured out that they can’t only offer products at a very high price point and they have to attract people from all groups — high end, mid-tier and low end — so that it becomes more approachable,” she said.

Likewise, landlords are staying relevant to younger customers. Strauss said, “One of the things that we preach to landlords is that it is a very healthy process to continually remerchandise your shopping center, whether it is wholesale changes or individual, space by space, because it is really important to stay relevant.”

By Beth Mattson-Teig

Contributor, Commerce + Communities Today

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