We have seen a very choppy market for commercial real estate in recent months. Notwithstanding, there has been a spate of positive news regarding the sector, though in general it is still stagnating yet there are some bright spots within the group and among these is a growth in the technology and retail sectors in prime commercial real estate in large cities.
Take London for example. Bond Street in London, a shopping mecca for those looking to add to their collections of Hermes bags or Louis Vuitton shoes and other designer goods, has seen an astronomical rise in values over the past twelve months. This rise has been put down to the decisions by many companies who own luxury brands or ultra luxury brands to stop leasing their properties and begin acquiring them instead. This idea of bringing your own retail outlets onto your own balance sheet has its advantages as prices of the real estate rise.
In large cities there are a growing number of shoppers that are not feeling the effects of the credit crunch. They are the ones who, generally, are the potential customers of these ultra luxury retail outlets and are, in London’s case, mostly foreigners who come to London as a holiday destination or who may own their second and third homes in the city. Unaffected by the general problems in the economy, they are spurring on record profits at luxury goods providers. This in turn has changed the mindset of the luxury goods sellers and suddenly owning their own stores has become a way for them to increase their returns per square foot, a common way for retailers to judge how profitable their own stores are and benchmark their sales to cost ratios.
We are seeing more and more companies acquire their stores and even the offices above in a move that allows them to invest excess liquidity in their own brands and take advantage of the fewer opportunities available to open new stores. Often, large brands on Oxford Street in London, what is sometimes termed as the most expensive retailing street in the world, are looking to acquire their buildings rather than pay exorbitant rents which lead to squeezed margins and increased pressure on production and other parts of the company. In this way, the retailers themselves can take advantage of the potential increase in their property portfolios and add this to their bottom lines to stimulate growth and diversify their risk, while still keeping the money invested in bricks and mortar.
The growth for this is always driven, in large cities, by a lack of space and too many retailers looking for too few commercial real estate investment or rental opportunities. As we see a surge in the incomes of Asian countries, we are seeing a growth in retail investment opportunities. However, it is not only luxury goods that are doing this. The technology sector, lead by Apple Computer is making headway into retailing with their Apple Stores in prime locations. Once Apple decides to open a store in a city, the value of commercial real estate in the area increases in price and investors realise that there will, generally be increased foot traffic in the area. It’s amazing to see how technology and handbags can translate into real estate price growth.