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Luxury Retailers Double Down on US Real Estate

Luxury retailers like Chanel and Gucci are aggressively expanding their US real estate footprint, emphasizing in-person shopping due to robust post-pandemic sales and wealthy consumers' preference for physical stores.

Uptick in retail leases: Over the past year, luxury retailers have leased 650,000 square feet of new space in the U.S., a considerable increase from the 250,000 square feet leased in the previous year. This expansion has been motivated by a swift rebound in retail real estate following pandemic lows and a surge in in-store shopping. Despite challenges like high inflation and rising interest rates, the sector has witnessed a projected retail sales increase to $75.68B this year.

Embracing the brick: While many national retail brands, including Barnes & Noble and Macy’s, have reduced their physical footprints, opting to partially showcase their collections in-store and sell extensively online, luxury brands have adhered to a distinct path. Affluent customers, often reluctant to purchase high-value items without an in-person experience, have underscored the importance of maintaining and expanding physical retail spaces in the luxury segment.

Zoom in: To continue drawing customers and maintain growth, luxury retailers are enhancing in-store experiences by integrating hospitality features like cafes and bars and hosting elaborate events. They are expanding not only in size – with new spaces averaging 5,000 square feet or larger – but also in the range of collections displayed, which now span various categories, including cosmetics and children’s clothing.

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Lap of luxury: Historically, luxury retailers concentrated in renowned high-street locations like Rodeo Drive and Michigan Avenue. However, there's a new shift: luxury brands are venturing into booming cities and regions such as Austin, Nashville, and Florida. These regions have seen population surges, indicating potential luxury clientele. Furthermore, these luxury brands have maintained resilience against declining tourists and office workers in certain cities during the pandemic, highlighting their ability to cater to a niche, affluent market segment.

US Midwest Tops Nation For Apartment Rent Growth

For the first time, the US Midwest is leading the nation in apartment rent growth. But rather than being driven by price hikes, Midwestern rent growth is primarily attributed to rent reductions in other parts of the country.

Heart of it all: Effective asking rents in the Heartland rose 3.1% in the year ending August 2023 with YoY net inventory growth of 1.4%. While impressive, the strong performance is less about big price increases in the Midwest and more about rent cuts and new supply volumes in the rest of the nation. While Midwest rent growth is slightly below the region's decade average, it still surpasses the trends seen in the other areas experiencing annual rent decreases.

Next in line: The East Coast follows the Midwest in apartment performance, with a 2.5% growth in effective asking rents and a 1.2% YoY net inventory growth. While East Coast rent growth is somewhat slower than in the Midwest, it's still noteworthy, primarily due to a spike in completed apartments.

Regional challenges: Many other regions nationwide face challenges as new apartment deliveries negatively impact pricing power. In the Carolinas, Mountains/Desert, Florida, Southeast, Texas, and the West Coast, YoY effective asking rent changes are negative. New property deliveries are putting pressure on rental prices in regions outside the Midwest and East Coast.

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Flexible future: While the Midwest and East Coast stand out as leaders in US apartment growth, their success has more to do with what's happening in other parts of the country. Both the Midwest and East Coast are benefiting from slower YoY inventory growth. Meanwhile, other regions grapple with steep rent cuts and higher net inventory growth. As the industry adapts to market shifts, owners and investors must stay agile to capitalize on opportunities.

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🎧 Listen: On this episode of The Real Deal’s Deconstruct, Arkhouse, a PE firm specializing in privatizing public REITs, talks about why they think the public markets undervalue real estate.

KKR's $560M Deal Underscores Strength of U.S. Industrial Real Estate

Global investment firm KKR has made a significant investment in the U.S. industrial real estate sector, acquiring over 5 million square feet of industrial warehouse and distribution properties, and completing a $560M deal that highlights the strength of the industrial market segment.

Deal details: The sale encompasses more than 50 industrial buildings, primarily from KKR's Real Estate Partners Americas II fund, scattered across fast-growing infill markets in cities like Atlanta, Chicago, and Dallas-Fort Worth. This deal was executed through five separate transactions, closing its final sale on September 29th.

Between the lines: Industrial real estate makes up KKR’s largest exposure across its U.S. opportunistic and core-plus real estate funds. According to Roger Morales, KKR's Head of Real Estate Acquisitions in the Americas, the recent transactions underscore the appealing market demand for quality properties in areas with limited supply.

Industrial outlook: Anticipating a pronounced dip in new industrial supply for 2024 and 2025, and with only 204.3 million square feet of industrial space initiated in 2023 (a stark decline from preceding years), industry experts are projecting a short-term slowdown in delivery. However, juxtaposed against these challenges is a positive long-term outlook buoyed by consistent demand drivers such as e-commerce and sustained growth in logistics.

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Market resilience: Industry experts view KKR's transaction as a positive sign, indicating potential increased liquidity in commercial real estate. Given the anticipated deceleration in construction starts influenced by the Federal Reserve's rate adjustments, should demand stabilize to median levels, the horizon looks promising for the industrial real estate sector.

Apartment demand is finally starting to normalize. Q3 net leasing activity closely aligns with the long-term seasonal average but still falls short of meeting the supply. With new apartment completions reaching the highest levels since the 1980s, this serves as a valuable reminder that the current challenges in multifamily are unrelated to the underlying demand factors. Instead, they stem from a 50-year peak in apartment construction, higher cost pressures, and a sudden surge in interest rates, which has disrupted financing.

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