Trends in U.S. luxury real estate

During a field trip to Beverly Hills last year, the concentration of luxury retail on Rodeo Drive stood out to me… as well as Erewhon’s prices. With luxury on my mind, I recently took a trip to Costa Mesa’s South Coast Plaza, one of the top-performing malls in the U.S., to see which luxury brands are finding opportunities in malls.

As we covered in our latest Luxury report, despite economic uncertainty, luxury brands opened new stores along prime corridors and in select malls, along with acquiring prime real estate in major markets.

Following two years of explosive growth coming out of the pandemic, the luxury retail category continued to see strong interest from consumers, with luxury retail sales reaching over $75 billion in 2023. From 2020 to 2023, luxury retail sales observed an impressive compounded annual growth rate of 8.6%.

Globally, the U.S. and Europe accounted for the largest shares of the global luxury market, with both comprising roughly 28% of overall luxury retail sales according to Bain & Company. However, U.S. market share dropped by 4% in 2023 from 2022 as consumers pulled back on purchases due to inflationary pressures.

Moving forward, growth in the luxury retail category will normalize as the U.S. navigates this period of economic uncertainty, with luxury retail sales expected to see a compounded annual growth rate of 1.9% from 2024 to 2028, surpassing $82 billion by the end of 2028.

Based on our analysis of new store openings activity from the period between July 2023 and July 2024, we found that nearly half of new luxury stores opened in malls, and when looking at street retail - 40.9% of new luxury openings - nearly 68% were in prime corridors, which are nationally recognized shopping districts that are noted for their mix of high-street, national, and international tenants.

A common characteristic among the most desirable prime corridors in the U.S. is the scarcity of prime retail space, which continues to impact the growth of luxury retail stores as luxury brands want to place themselves in the best locations, favoring prime corridors.

However, top-performing malls with ample high-quality space and a strategically optimized tenant-mix continue to attract luxury brands, providing growth opportunities. In California, Costa Mesa’s South Coast Plaza saw a surge of new luxury store openings in our report period, further strengthening its luxury co-tenancy.

Prada Group and Kering made noise recently by purchasing prime real estate along Fifth Avenue in New York City. Kering paid nearly $1 billion for a property comprising 115,000 s.f. of multi-level luxury retail space while Prada Group acquired a pair of adjacent office buildings – one of which houses its Fifth Avenue flagship – for a total of $835 million.

These acquisitions can be seen as long-term investments by luxury brands who expect to be around for a long time in select major markets, while also reaping the benefits of owning properties in prime locations, such as insulation from rising rents.

With prime corridors like Fifth Avenue, Madison Avenue, and Beverly Hills Triangle having low availability rates, purchasing properties in these locations can be strategic as well, as these purchases can restrict new entrants to the market by competitors, helping already established brands maintain standing in those markets.