New York City is enjoying a luxury retail real estate boom. The city gained 27% of the 650,000 square feet of new luxury retail spaces added in the U.S. last year, according to a new report from JLL Research. Number two Los Angeles trailed behind, garnering some 18% of new luxury openings.
The Upper East Side, bounded by East 59th Street and East 72nd Street, accounted for 43% of new luxury leases in the city. Notable additions include Hermès, Valentino and Van Cleef & Arpels on Madison Avenue and on Fifth, Louis Vuitton and Burberry. However, it doesn’t account for the new Rolex 28-story headquarters building under construction on Fifth Avenue, which plans to devote the first four floors to retail.
Luxury brands’ headlong rush into the nation’s financial capital New York City as well as the U.S. in general makes good business sense. The luxury market in the Americas recovered from the pandemic more quickly than elsewhere, with it grabbing 32% of the $371 billion personal luxury market in 2022, according to Bain-Altagamma. By contrast, Europe had 27% and China 17%.
Bain-Altagamma’s mid-year global luxury market update, which predicts the luxury market to advance between 5% and 8% overall, highlights luxury brands’ focus on experiential retail as a key to its continued growth.
“Luxury brands look set to sail through 2023, thanks to retail strategies that are focussing on the physical channel once more (albeit in synergy with digital), specific pricing strategies and ever new, increasingly experiential ways of engaging with customers markets,” said Stefania Lazzaroni, general manager of Altagamma, in a statement.
However, it signals a more cautious outlook for the U.S.:
“The scenario for the United States is something of a mixed bag. The middle classes are already feeling the pinch of inflation and the effects of the 2022 stimulus payments are long over. Aspirational brands and products are lagging behind, but top names are on the up. American high-end consumers are traveling once more, and spending outside of the U.S. The growth estimated for the year is 3%.”
Speed Bumps In The U.S.
Slower growth in the U.S. is blamed on a pull-back among so-called aspirational consumers, or the more precise demographically-defined HENRYs (high-earners-not-rich-yet), top quintile households with incomes from $150k but under the top 5% starting at $295k.
Besides being hit by raging inflation that cuts into their spending power, many of these expensively educated HENRYs will feel another sting when their student loan payments start coming due this month.
Economic headwinds are impacting consumers across the board, and one could argue the HENRYs are feeling it more intensely. Lower and middle-income consumers are accustomed to prioritizing “needs over wants” spending.
HENRYs, however, have gotten used to a lifestyle allowing frequent luxury indulgences, even living beyond their means because their high levels of education assure career advancement. So, they take it more personally when forced to cut back and live more like their middle-class parents.
“We’ve been seeing folks across the income spectrum being challenged,” The Conference Board’s chief economist Dana Peterson said in its September economic update. “They’re shifting to buying things they need, like food and energy, and that is really telling,” she continued, explaining they are pulling back on discretionary purchases, with luxury being the most discretionary of all purchases.
Caution Advised
Peterson held to The Conference Board’s earlier prediction that a recession will fall in the first half of next year, which it hopes to be short and shallow.
“The Confidence Index fell for the second month in a row and it was moved by expectations. The expectations gauge fell below 80 to 73.7 points, which is a threshold that signals recession within the next six months,” she said.
Here’s hoping that it won’t be as bad as the 2008-2009 Great Recession, which resulted in a 9% dropped in the personal luxury market over the two years. But already Morgan Stanley
Morgan Stanley lowered organic growth forecasts for most luxury companies for the back-half of the year and Barclays lowered its recommendation on LVMH and the luxury sector to neutral from positive.
The luxury brands that have planted new flags in NYC’s mid and uptown shopping corridors may find more of the city’s highly-paid though not-rich-yet office workers walking by their stores, rather than turning in. So they are going to have to look elsewhere for business.
Moving On Up
Luxury brands have grown overly dependent on the aspirational HENRY customers to fuel growth. “LVMH and the rest excel in selling ‘abundant rarity’ or ‘rarity by the millions’ to put the brand in contact with larger aspirational audiences and to earn profit from the considerable investments accumulated in brand equity,” Professor Jean-Noël Kapferer shared with me.
Now brands will have to turn to enticing the HNWI consumers who aren’t interested in fake rarity, only that which is real. Chanel and Hermès are brands that haven’t caved to the aspirational ‘abundant rarity’ model.
And while both are going strong – Chanel revenues rose 17% year-over-year in comparable sales to $17.2 billion constant currency and Hermès up 25% at constant-currency rates in the first half of 2023 to $7 billion – each reported the weakest growth in the Americas. Chanel was up 9.5% in the Americas versus 29.6% in Europe and Hermès advanced 20% here compared with 27% in Asia and 22% in Europe.
All of which points to a simple fact: HNW customers are not geographically bound. The world’s their oyster when it comes to shopping and the current strong dollar makes traveling abroad to shop a smart money move and it adds an experiential element that no amount of in-store programming can beat.
Not only that, but New York City isn’t as attractive a destination as it once was to the well-heeled. It’s portrayed in the media as a dangerous place overrun with crime and the streets filled with countless drug-addicted homeless and illegal immigrants waiting for shelter.
It isn’t a pleasant picture, and Mayor Adams and Governor Kathy Hochul calling New York a city in crisis doesn’t help, especially with more than 2,000 National Guard deployed there. What HNWI wants to shop in the city when they can hop on their private jet, go somewhere fun, and shop?
Tourist Shortfall
Last year, New York City tourist visits still hadn’t made up for the losses suffered during the pandemic when it was the country’s ground-zero for Covid. Overall, 2022 tourist traffic was down 15%, with domestic tourism down 11% and international off by 30% from 2019. Domestic tourists account for about 80% of its visitors.
While the NYC Tourism + Convention association forecasts 2023 visits will come close to 2019 levels, reaching 63.2 million compared with 66.6 million in 2019, it expects international trade to grow by 20% over 2022 levels, quite a reach considering its -30% shortfall last year.
Even its expectation for domestic tourist traffic to advance by about 10% over 2022 could be optimistic, considering how quickly things are changing on the ground.
On a side note, business travel, which accounted for 16% of travel last year and has been slower to recover from the pandemic, is projected to pick up by over 33% in 2023. That’s all well and good, but with corporations looking down the barrel of an expected recession, travel budgets are an easy place to cut, especially since we’ve all grown comfortable with Zoom meetings.
And the recent announcement that the International Toy Fair is abandoning New York City after more than a century doesn’t bode well for its appeal as a conference destination.
Holding Their Breath
Without question, luxury brands offer New York City residents and guests the best of the best for their in-store shopping experiences. “These brands create lots of magic and awe in their retail environments,” said Thomaï Serdari, associate professor of marketing, Stern School of Business, NYU.
But, the luxury brands may have to wait a bit longer to recoup their investments in New York City real estate. There is only so much that beautifully designed stores, artistically crafted windows and displays, expertly trained staff and enhanced store experiences can do against the economic headwinds battering them from outside their doors.
See also:
