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April 25, 2016

For more than 100 years, Chanel has been known for its handbags, perfume and haute couture.  But recently, the French fashion house has been expanding its sphere of influence into the world of commercial real estate in the United States.

In 2014, the luxury retailer paid more than $31,000 per square foot ($123.8 million) to purchase a residential co-op building on Madison Avenue in New York.  The sale was one of the highest price per foot ever recorded for retail real estate. Then, late last year, Channel set its sights on Los Angeles—paying $152 million ($13,217 per square foot) for the retailer’s flagship store on iconic Rodeo Drive.  It, too, set a record for retail space in California.

Spanish fashion mogul Amancio Ortega—the founder of Zara—also staked a claim in Beverly Hills with his purchase of the Gucci building for a reported $100+ million in 2014.  And Swedish business magnate Stefan Persson, who founded H&M, purchased the Benetton store on New York’s Fifth Avenue in 2015 for $137 million.

Taken individually, these transactions might simply be an indication of luxury retailers building their brands.  But collectively, they show a growing trend of global retailers flexing large capital to lock down prime window space.

Retailers, in general, are very bullish on the market value of high street retail.  Just look at the rents they’re achieving in places like Rodeo Drive and Fifth Avenue—they’ve more than tripled over the past five years,” said Dave Monahan, Managing Director with JLL’s Capital Markets in New York.  “It’s no surprise that luxury giants like Chanel, Hermes and Prada are looking at expiring lease terms, increasing valuations and strong fundamentals and choosing to buy rather than rent.

In fact, foreign penetration into the U.S. retail sector nearly doubled from 5.2 percent to 9.3 percent from 2014 to 2015.  In total, foreign retail investment increased by $2.8 billion in 2015 and accounted for nearly a tenth of all retail transaction volumes.  While foreign buyers run the gamut from high-net-worth individuals to high-end retailers, it’s sovereign wealth funds and pension funds that are making the greatest impact on the U.S. retail market, accounting for 39. 6 percent of all cross-border transactions last year.  In the largest transaction of 2015, Singapore-based GIC invested more than $1.3 billion into mall properties in growing, predominantly West Coast secondary and tertiary markets as part of a partial-interest transaction with Macerich.

“Overall investment into the retail sector dropped by more than 25 percent in the first quarter of 2016 year-over-year.  But we expect that number to stabilize in the months to come as the market finds equilibrium from the volatility in the debt markets. Foreign capital will remain selectively focused on Class A shopping centers or urban product with strong U.S. sponsors,” concluded Monahan.

Dave Monahan
Managing Director, JLL Capital Markets

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