Fof the at the corner of Fifth Avenue and 57th Street, Tiffany’s facade looks exactly as it did in 1961 when Audrey Hepburn, wearing a long black dress with pearls, nibbled on a croissant outside. Inside, however, things are quite different. After a four-year, $500 million renovation, shoppers are greeted by a more modern experience.
Everything shines: the rocks, the metal and marble display cases, the ceilings. What at first glance looks like arched windows is actually 7 meters high LED screens showing a diamond bird over Central Park. Elevators at the rear take shoppers to ten floors: one for silver, one for gold, one for “masterpieces”. A three-story extension now sits on top of the building, overlooking Fifth Avenue. These levels are by appointment only. “We call it the diamond on the roof,” joked Alexandre Arnault, son of owner Bernard LVMHa French conglomerate that bought Tiffany’s in 2021.
It is the most striking example of a luxury trend: huge investments in retail real estate. LVMH has purchased on Bond Street in London and the Champs-Elysées in Paris. There has been a wave of deals on New York’s Fifth Avenue. In December, Prada purchased its current store, 724 Fifth, and acquired 720 Fifth, the store next door, for a total of $835 million. On Jan. 22, Gucci owner Kering announced it had purchased the retail space at 715-717 Fifth for $963 million. LVMH Rumor has it it’s eyeing 745 Fifth, the space next to Louis Vuitton.
These deals are being completed at breakneck speed and at record prices. From a handshake to completion, some come together in just a few weeks. The Kering and Prada purchases were, unusually, both “signing and closing” agreements – full cash payments were made on the day the contracts were signed. The Kering deal is America’s largest ever retail real estate deal.
Why the rush? Tiffany has owned 727 Fifth for decades, but most brands like to lease. Will Silverman of Eastdil Secured, an investment bank that advised Jeff Sutton, the developer who sold to both Kering and Prada, points to growth in luxury sales and shifts in interest rates to explain the change in approach.
Luxury goods started flying off the shelves during the Covid-19 pandemic, when people were awash in cash and had nowhere to go, and the frenzy hasn’t abated since. Beautiful handbags that were once the privilege of a few are now purchased by many. Last year indeed LVMH‘s sales of fashion and leather goods were 40% higher than in 2021.
Luxury goods are still often sold in person, meaning retailers are spending huge amounts of money to attract people to their stores. And the arrival of the masses means they need more space for luxury private rooms in which they can make sales to their old clientele. “Manhattan may be getting bigger,” Silverman notes, “but it’s not getting wider.” There is a finite amount of truly high-end space.
This alone could be enough to entice retailers to buy rather than rent – and buying becomes the clear choice once interest rates are taken into account. Most property owners finance their buildings with a combination of equity and mortgage debt. In America, mortgage interest rates on commercial buildings are around 6-7%. The cost of equity is even higher. If an investor wants to buy a space and cover their costs, they may have to charge an annual rental fee worth perhaps 8% of the building’s value.
Paying these rates would be foolish for a luxury company. Because they make so much money, they can issue debt at a yield only slightly higher than that of German government bonds. LVMH‘s most recent bonds were oversubscribed by 3.5%. Fancy retail spaces are therefore a luxury that they can easily afford. ■
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