Luxury Retail Still Favors NY, CA but Expands Further Into Sunbelt

Good morning,

Luxury retail still favors NY, CA but expands further into Sunbelt, longer commutes chip away at office demand, and Manhattan rents are at a record high of $4,400 per month. Let’s delve into today’s topics.

📈 Market Update

🤑 Luxury Retail Still Favors NY, CA but Expands Further Into Sunbelt

Luxury retail leasing surged in the US over the past year, with nearly 40% of that occurring in malls, as retailers expand into Sun Belt cities to meet robust demand for upscale goods. While New York and California still dominate for luxury openings, cities like Atlanta, Miami, and Las Vegas are gaining more high-end stores. Luxury sales hit nearly $70B in the U.S. in 2022 and expect to hit $75B this year, and brands are rolling out more locations to capture share. However, low retail vacancy could challenge growth, as could inflation's impact on lower-income luxury consumers. Malls are becoming more popular for luxury stores, with many allocating space for luxury wings. Luxury retailers still see value in brick-and-mortar locations, with most shoppers planning to visit in-store as often or more than last year.

🚗 Longer Commutes Chip Away at Office Demand

An analysis by the US Chamber of Commerce found a relationship between the cost of commuting and the amount of available office space in major U.S. cities - markets with a higher annual opportunity cost of commuting have seen a larger increase in available space since 2019. Several tech hubs like San Francisco and Seattle with lengthy, high-cost commutes have experienced the greatest office availability increases, while Sun Belt cities with shorter, cheaper commutes have held up better. This suggests that resistance to frequent downtown commutes has dampened office demand, especially in cities where commuting takes more time and money, adding commuting costs as a risk factor for office fundamentals.

🏙️ Manhattan Rents at Record High of $4,400 per Month

Renters in Manhattan have hit their “affordability threshold” as median rents remain at a record high of $4.4k per month. Supply is low due to lack of new rental buildings, and many potential buyers are priced out of owning as mortgage rates are 7%+.

✍️ Further Reading

• European Central Bank Raises Key Interest Rate to Record High (WSJ)

• European Market Update: Lack of Amortization; CLO Resets; €145M Senior Debt Financing (Trepp)

• Hotel Stocks Decline, but News of Hersha Deal Softened Impact (CS)

• Mortgage Rates in US Increase for First Time in Three Weeks (BBG)

• Gary Barnett Slashes Price on Central Park Tower Penthouse by $55M (RD)

• When the Homeowners Association Comes for Your Home (BBG)

📊 Chart of The Day