📢Luxury retail is outperforming broader U.S. retail. Brands are expanding in prime corridors and malls, with domestic affluent consumers offsetting weaker tourism and tariff-driven cost pressures. Limited supply of top-tier space is stabilizing rents and spurring record property acquisitions by global brands.
U.S. luxury retail sales: $75B in 2023, +8.6% CAGR since 2020 (JLL).
Projected growth: ~1.9% CAGR → $82B by 2028 (JLL).
New luxury store openings: ~50% in top-tier malls, 41% high-street (68% of those on prime corridors).
Flagship acquisitions: Kering $1B Fifth Ave, Prada $835M NYC buildings (CoStar).
Manhattan luxury asking rents: +1% MoM (CoStar).
National retail construction: down >50% QoQ in Q2 (CoStar).
Loan Performance, Luxury retail loan performance remains strong due to high tenant credit quality. Vacancy risk in prime corridors is minimal (<5%), limiting loan-level cash flow volatility. However, exposure to tariffs and slower tourism recovery could constrain retailers’ operating margins, requiring stress-testing of rent coverage ratios. Secondary malls remain a risk pocket, where elevated vacancies (~10%) and weaker tenants increase probability of maturity defaults.
Demand Dynamics, Domestic affluent spending continues to anchor demand. Tourism-related sales, especially from China and Europe, remain below pre-pandemic levels, weakening performance for flagship stores in New York and Los Angeles. Still, demand concentration in luxury corridors ensures near-full occupancy and supports rising rents. Experiential retail expectations—concierge services, exclusive lounges—are further shaping space requirements.
Asset Strategies, Luxury brands are buying real estate outright to guarantee long-term control, shifting some trophy assets from landlord-driven to tenant-owned. Landlords holding prime space can command long-term lease commitments with moderate escalations (~3% annually). Build-out costs remain high (68% above pre-pandemic), requiring landlords to budget significant TI contributions to land leases. Secondary retail requires repositioning or redevelopment to avoid obsolescence.
Capital Markets, Cap rates for prime urban luxury retail remain compressed (4–5%) as global capital seeks stability, contrasting sharply with secondary retail (>7%). Elevated interest rates (~4.2% 10-year) keep debt costs high, but lenders are selectively active for Class A assets. Liquidity is bifurcated—debt funds and life companies favor high-street retail, while capital for B/C malls is scarce. Equity fundraising is down broadly, though niche strategies (distress-focused funds) are oversubscribed.
Resilient demand: Luxury sales remain above pre-pandemic levels.
Prime scarcity: Competition for trophy sites sustains rent growth.
Macro caution: Tariffs and tourism drag require conservative underwriting.
Bifurcated outcomes: Class A retail thrives; secondary assets weaken.
🛠 Operator’s Lens
Landlords should lock in long-term leases (8–10 years) with luxury tenants now, leveraging peak demand and low vacancies.
Property managers must enhance in-store experiences—white-glove services, event activations—to justify premium rents and sustain traffic.
Retailers should hedge tariff and FX risks while budgeting for elevated build-out costs.
Sponsors should maintain lender relationships and highlight tenant credit strength to secure financing at favorable spreads.
Luxury retail expansion will continue but at a slower pace. Sales growth moderates toward ~2% annually, driven by domestic spending rather than tourism. Near-term risks include persistent tariffs, elevated construction costs, and a strong dollar limiting tourist inflows.
If interest rates stabilize or decline later in 2025, retail asset values should strengthen, providing refinancing opportunities for prime assets. Secondary malls face ongoing headwinds: elevated vacancies, weak leasing, and muted investor interest.
Longer term, expect further bifurcation—prime luxury corridors remain trophy destinations with global capital competition, while weaker retail stock risks functional obsolescence absent redevelopment or repurposing.
Costar, JLL
Chart 1 – U.S. Luxury Retail Sales – History & Forecast (2020–2028)
Chart 2 – Distribution of New U.S. Luxury Store Openings (2023–2024)
