By Craig Karmin
SEPTEMBER 28, 2011

In picking a site for its flagship store, Japanese clothing company Uniqlo could have pushed for lucrative concessions from virtually any of the hard-up retail landlords littering Manhattan. Instead, the company opted last year for a premier slot on Fifth Avenue in a $300 million lease that was one of the most expensive ever at the time.

The move wasn’t a one-off. During the summer, Italian fashion retailer Dolce & Gabbana also paid around $300 million to lease space nearby. Earlier this month, SL Green Realty Corp. led a group that agreed to acquire the Fifth Avenue building that is home to Prada at 57th Street and a Giorgio Armani location nearby on Madison Avenue as part of a $400 million acquisition.

Even as concerns mount about a double-dip recession, global retail companies still will pay top-dollar to be on the nation’s most sought-after streets, such as Fifth Avenue.

Landlords say the reasons go beyond actual sales and point to the need for global retail companies to have locations that can serve as billboards for their products.

The Elite of Retail Real Estate

“The rent we pay is quite a large amount,” says Shin Odake, chief operating officer of Uniqlo USA, of the store opening in two weeks. “But given that we think we have the best location on Fifth Avenue, and many people walking by will be from across the United States and other countries, we think the rent is actually quite reasonable.”

Elsewhere in the U.S., other so-called high streets—including Boston’s Newbury Street, M Street in Washington, Beverly Hills’ Rodeo Drive and Chicago’s Michigan Avenue—also are relative oases of prosperity. Rents in these hot spots have been holding up even as the national trend for retail is steadily weakening, and the retail vacancy rate of 11% is its steepest in 20 years, according to data company Reis.

High-street rents, however, look strong even when compared with other popular shopping districts in the same city. The 10 prime blocks on Manhattan’s Fifth Avenue, for instance, have seen average asking rents soar 50% to $2,100 a square foot since 2008 to around peak levels, according to broker CB Richard Ellis. Rents less than two miles south in the city’s bustling Flatiron district have hardly budged over that same period.

“We’re getting record rents on Fifth Avenue,” Michael Fascitelli, president and chief executive officer of Vornado Realty Trust, said at a real-estate conference this month. “You’d think you’re in the middle of the most boom year ever. You go to Third Avenue, and you can’t lease the space.” Vornado owns two flagship retail sites on Fifth Avenue.

The strong demand for high-street real estate partly reflects the relative strength of high-end retailers. Bain & Co. reports that luxury-good consumption last year world-wide reached a record at €172 billion ($233 billion) in sales.

But high streets aren’t the exclusive domain of luxury-goods makers. In March, Spain’s Inditex Group paid $324 million for about one-third of the retail space at 666 Fifth Avenue. Zara, its cheap-and-chic clothing retailer, will occupy about 39,000 square feet there. It will share the building with Uniqlo and Hollister, another lower-priced retailer.

In Boston, real-estate investor Jamestown agreed this month to acquire 23 buildings, including 46 retail stores, on Newbury Street in a transaction valued at $182.5 million. Tenants include clothing retailers Marc Jacobs and Ben Sherman. Jamestown also is in discussions to acquire an additional five buildings on that street, according to people familiar the matter. Some investors say this heralds a broad shift in the way America shops. “The suburban retail-mall model is broken,” says Michael Phillips," a managing director at Jamestown. “Because you have to fill so much space, you get mediocrity next to great stores. Many leading retailers have shifted their focus to urban environments.”

Whether these trophy properties can continue to increase rents under a deteriorating global economy remains to be seen. The broader commercial-real-estate market has hit a rough patch after a two-year run of steady growth and the high street properties may prove to be the last shoe to drop, especially if Europe’s economic woes translate to a stronger dollar and fewer tourist shopping sprees in American cities.

And while landlords demand premium rents to justify their acquisition costs, some tenants have balked at paying such premium prices. When the NBA store’s Fifth Avenue lease came up for renewal last year, the landlord asked for an increase of five times the old rent. Despite what the NBA said was record-breaking sales at the location, the basketball league decided to walk. “It did not make economic sense,” says Sal LaRocca, executive vice president, global merchandising.

But other tenants are ready to step in. Vornado is redeveloping Georgetown Park on M Street and is close to signing leases with Target as well as Bloomingdale’s, according to CB Richard Ellis. Also, the value of high-end retail property is holding firm because retailers themselves are buying it. Besides Inditex, LVMH Moet Hennessy Louis Vuitton and Burberry also acquired Manhattan locations for their stores.

“It’s a growing trend in the U.K. and is showing signs of coming here,” says Nina Kampler, head of CB Richard Ellis’s urban retail group in the Americas.