Luxury Retailers Expand Brick-and-Mortar Presence in US

Good morning,

Luxury retailers expand brick-and-mortar presence in US; slow return to office trends; latest in the WeWork saga; and institutional capital retreats from SFH. Let’s delve into today’s topics.

📈 Market Update

🛍️ Luxury Retailers Expand Brick-and-Mortar Presence in US

Despite the rise of e-commerce, luxury retailers like Chanel, Gucci, and Hermès are aggressively expanding their physical store footprints across the US. They are signing leases for bigger spaces beyond traditional high streets, adding hospitality features, and venturing into new markets to attract customers. Strong sales growth is fueling luxury brands' real estate investments as they aim to provide compelling in-person experiences that cannot be replicated online.

🏢 Slow Return to Office Trends

Despite post-Labor Day attendance bumps, office return rates remain stuck at about half of 2019 levels as weaker enforcement of return-to-office policies, rising COVID cases, urban challenges, and a weakening economy weigh on revitalization efforts. With vacancies near record highs, landlords hoped for faster returns, but most companies still allow remote work and few consequences exist for staying home. Absent incentives or mandates, the office outlook remains challenging.

↪️ AI Impacting Long-Term Office Outlook?:
JPMorgan Chase CEO Jamie Dimon predicts artificial intelligence will dramatically improve quality of life and productivity, enabling a three-day workweek within decades. While acknowledging AI's risks, Dimon foresees the technology helping develop products, engage customers, and enhance operations. He argues AI's benefits outweigh potential for job losses, expecting the technology to reduce working hours rather than employment.

🖥️ WeWork Saga Continues; Company Misses Debt Payments

WeWork skipped $95M in interest payments to pressure lenders into more favorable terms, part of its push to cut costs and improve its balance sheet. With heavy lease obligations hampering its financial outlook, WeWork aims to advance parallel conversations with lenders and landlords to boost liquidity. Though able to make the payments, WeWork is strategically forcing lender negotiations after already restructuring leases across its global portfolio.

🏘️ Institutional Capital Retreats from Single Family Homes

After pouring money into SFH during the pandemic, REITs and corporate landlords have retreated as rising interest rates slash returns. With debt costs up and rent growth slowing, large buyers have gone from acquiring 2.4% of US homes in late 2021 to just 0.4% in Q2 2022. Public housing REIT shares trade at a 20% discount to asset value, signaling expected price declines.

Unsustainable?:
Residential pricing feels unsustainable at current prices and rates; stayed tuned to see how this shakes out! We have a feeling it might get ugly.

✍️ Further Reading

• The State of CRE Debt (GS)

• Market Pulse: The Looming Government Shutdown and Fat Bear Week – Coincidence or Omen? (Trepp)

• Parkway Buys 3 MSF Office Portfolio in Houston (CPE)

• KKR’s $560M Deal Confirms Strength of U.S. Industrial Real Estate (GS)

• Brookfield Raises $12 Billion for Flagship Private Equity Fund (BBG)

• Ex-Soros Partner Surfs Argentine Crisis With Real Estate Empire (BBG)

• Trammell Crow Gets Preliminary Nod to Build 2.2M sf Development in NoHo (RD)

📊 Chart of The Day