Luxury Brands on a Real Estate Shopping Spree

While most CRE investors await a market bottom to deploy capital, luxury brands have collectively spent over $9 billion since the start of 2023, eagerly snapping up properties along the world’s most glamorous shopping corridors.

High stakes: The scramble for real estate by luxury behemoths like Kering, owner of Gucci and Saint Laurent, is driven by a blend of strategy and survival. With a recent $1.4 billion acquisition in Milan’s upscale Via Montenapoleone, Kering isn’t just buying a building; it’s securing a legacy and outflanking competitors. This fear of displacement by rivals is fueling an aggressive campaign to own rather than rent their flagship stores.

Making deals: This week, Kering shelled out €1.3 billion (around $1.4 billion with the current exchange rate) to acquire a property on Milan’s prestigious Via Montenapoleone from Blackstone. The street is renowned as one of the priciest retail locations in Europe, yet Blackstone’s investors got a great deal. The PE giant bought this building as part of a 14-property portfolio for €1.1 billion in late 2021. The price Kering paid is equal to a roughly 2.5% cap rate—an astronomical price considering where interest rates are at the moment.

Heating up: This is Kering’s second major deal of the year, following a $1B Fifth Avenue addition to its portfolio in January. It aligns with a luxury sector trend in which brands have dropped over $9 billion on prime real estate since 2023. With Chanel and LVMH scouting in New York, the race for upscale properties heats up. And if a brand wants a corner on Fifth Avenue, they’ve got to come to Jeff Sutton. From the camera business to a real estate mogul, Sutton has become retail real estate king on New York’s prestigious Fifth Avenue.

Luxury ownership: The strategy behind these purchases extends beyond mere possession. Luxury brands, leveraging their deep pockets, can afford to refurbish and transform these spaces into experiences that transcend traditional shopping. Flagship stores are becoming immersive destinations, complete with mini-museums and VIP floors, reshaping traditional retail locations.

➥ THE TAKEAWAY

Big picture: While the surge in real estate deals reflects a fiercely competitive luxury market, it also raises questions about capital allocation. For Kering, property deals are set to consume about 10% of its expected 2024 sales, a hefty investment that stresses the high stakes of securing prime retail locations. Yet, with most of its stores still under lease, the company may explore co-investments to continue this ambitious expansion, possibly alongside partners like Blackstone, signaling a continued bullish outlook on luxury retail real estate.

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CRED iQ’s latest analysis reveals a rise in the distress rate across all property types to a record 7.61% in March, up by 26 basis points from 7.35%, despite a net reduction of 18 basis points in three of the previous four months, marking a reversal in the recent trend of modest decreases.

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