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Retailers Pay Big for Prime Locales

The real estate market may be in a slump but rents for many of the world's most expensive shopping streets are still climbing

Retailers on Manhattan's famed Fifth Avenue pay the highest rents in the world, and it isn't necessarily because they expect to collect the highest profits. Some Fifth Avenue stores are cash cows. Others aren't. That's not the point.

"You want to be where the action is," says Marshal Cohen, chief retail analyst for the NPD Group. "You want to be in a place where you can elevate your brand and make it appear bigger than it is. It has become a new form of marketing. Brands will cut their advertising and marketing budget before they'll cut that store."

The Hottest Addresses

Fifth Avenue, where the average asking rent this year is $1,650 per square foot, tops the list of the U.S. shopping streets with the highest rents compiled for by Boston-based real estate adviser Colliers International. No other U.S. street has asking rents that come close. But having a flagship store on Rodeo Drive in Beverly Hills, Union Square in San Francisco, Michigan Avenue in Chicago, or Las Vegas Boulevard also carries plenty of prestige.

Madison Avenue—which has the heaviest concentration of luxury retail in New York—didn't make the top 10 because only one street was chosen for each city. On a similar list of expensive retail streets compiled by real estate consultancy Cushman & Wakefield, Madison Avenue (asking rent: $1,200 per square foot) was second and East 57th Street (asking rent: $900) was third.

After Fifth Avenue, the next most expensive shopping street in the world is Hong Kong's Causeway Bay, which has an average asking rent of $1,213 per square foot, according to Colliers. The asking rent on Paris's Avenue des Champs Elysées is $922 per square foot, and it's $813 per square foot for a spot among the antique shops, jewelers, and Sotheby's auction house on London's New Bond Street.

The Dollar's Impact

New York and other urban high streets have benefited from the weak dollar, which has attracted throngs of well-heeled foreigners seeking relative bargains at hotels, restaurants, and shops. Most of the streets that had the highest commercial rents are located in major big-city tourist destinations.

An exception is Houston, which can't compete with New York, Miami, Los Angeles, or Las Vegas for tourism. But Houston's Westheimer Road, where you'll find Tiffany (TIF), Chanel, Fendi, Saks Fifth Avenue (SKS), and local clothing boutique Tootsies, has indirectly been helped by high oil prices, which has lifted the disposable income of many of its customers. And wealthy Mexicans and South Americans coming in for treatments at Houston's hospitals often can't resist a trip to the Galleria on Westheimer.

On Fifth Avenue, one in four shoppers is from outside the country, says Cohen, who adds he's seen people e-mailing cell-phone photos of clothes to friends and family for whom they're making purchases.

But the looming U.S. recession is starting to affect Las Vegas. Casino profits are down. And the asking rents have dropped about 33% from a year ago to $140 per square foot, according to Colliers. Still, the luxury shopping areas such as the Forum Shops at Caesars continue to be busy. "Shopping is a major reason people go there," says George Whalin, a retail management consultant in Carlsbad, Calif. "Travel and shopping have always been synonymous. In Vegas, it's travel, gambling, and shopping."

The Suburbs Take a Hit

Suburban store sales—especially in malls—are taking a hit as job losses mount, gas prices hit record highs, and home prices plummet. But destination streets can command record-high rents for reasons that go beyond tourism. High gas prices make driving to the mall less appealing. Big-city streets are vibrant and exciting, and wealthy shoppers still have money to spend, says Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm. "If you have a wealthy customer base, you're much better off," Davidowitz says. The affluent "simply are not in crisis.… There is a pullback across the board. But you're much better off being on an urban luxury street than a suburban department store."

And unlike the suburbs, shopping space is limited in cities and especially on iconic avenues such as Rodeo Drive or the prime stretch of Fifth Avenue, from 51st Street to 59th Street. "It's classic economics," says Ross Moore, senior vice-president of research for Colliers. "There is only one Fifth Avenue and there are only [a handful of] blocks that everybody wants to be on."

Chain Reaction

Many of these streets have changed over the decades with the addition of large chain stores such as Nike (NKE), H&M (HEMS), and Gap (GPS), which pushed out some of the smaller boutique stores with a high-price, low-volume model.

Fifth Avenue stores such as the Apple Store (AAPL), Abercrombie & Fitch (ANF), and Saks Fifth Avenue do hundreds of millions of dollars in sales each year and are among the chains' best performers, says Jeffrey Roseman, executive vice-president of real estate consultancy Newmark Knight Frank Retail in New York. "These are mind-boggling [sales] numbers," Roseman says. "All you have to do is stand outside Abercrombie or Apple and you'd think they're truly giving stuff away."

Withstanding the Downturn

But even high-end streets aren't immune to a downturn. A stock market crash or a strengthening dollar could force retailers to rethink the rents they're paying. "At some point we might see these rents either peak…and in some cases, they might come down," says Gene Spiegelman, executive director of Cushman & Wakefield Retail Services in Manhattan.

But Cohen of NPD Group believes the streets might be able to withstand a downturn because very few economic conditions hurt prime, luxury locations.

Michael Lemanski, manager of Trident Booksellers & Cafe on Boston's tony Newbury Street says retailers pay a premium to be close to stores that can afford similarly high rents. It's not good enough for a retailer to be nearby a street like Newbury; it needs to be smack on it, he says. "This is such a desirable street," Lemanski says of Newbury, where the average asking rent is $185 per square foot. "Because you have a lot of high-end stores, most of the people who come here tend to have a lot of disposable income."

Check out the slide show to see the most expensive shopping streets in the U.S.

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