Wednesday, October 29, 2014

Exit the Mall: Enter the Design District

A Bet on Miami Signals Luxury Retail’s Urban Shift 

Investors Turn Focus to Outside the Mall Environment

Buckminster Fuller’s “Fly's Eye” dome in Palm Court in Miami’s Design District. LALA PEREIRA/MIAMI DESIGN DISTRICT ASSOCIATES

Oct. 28, 2014 12:52 p.m. ET

MIAMI— General Growth Properties Inc. and Ashkenazy Acquisition Corp. are paying $280 million for a 20% stake in the company that owns much of this city’s Design District, betting on the emerging luxury-retail neighborhood as some 50 brands prepare to open new stores.

The deal with Miami Design District Associates, announced Tuesday, comes at a time when malls are growing slowly and luxury shops on busy urban streets like Fifth Avenue in Manhattan or Michigan Avenue in Chicago—sometimes called “high street” retail—remain bright spots in the retail industry.

Luxury brands such as Valentino, Tiffany and Roberto Cavalli increasingly have been looking for more than one location in many urban markets in the U.S., and “don’t necessarily want to grow in a mall environment,” said Andrew Goldberg, a vice chairman with brokerage CBRE’s retail practice. “They’re most comfortable in a high-street market.”

Open-air luxury-retail projects are popping up in other cities as well. Last month, a developer opened the first phase of the $1 billion Buckhead Atlanta project, with leases signed by Jimmy Choo, Dior and Christian Louboutin near new luxury apartments. This past spring, retailers including Hermès, Cartier and Tom Ford signed leases to open shops at the River Oaks District, a walkable outdoor shopping center expected to open next year about a mile from Houston’s Galleria mall.

General Growth, the nation’s second-largest mall owner, has been especially bullish since the downturn about buying urban storefronts, betting that luxury tenants are poised to grow faster outside of mall settings. Chief Executive Sandeep Mathrani said on an investor call Tuesday he could envision increasing the portion of the company’s assets in urban property to 15% in the next five years, up from 5% today.

The Design District presents “a very rare opportunity where you can buy an entire downtown and curate it the way you would a brand new mall,” he said.

MDDA, which owns about 70% of the Design District north of downtown, is transforming a 10-square-block area into an upscale retail, culinary and cultural destination. The company is a partnership between developer Craig Robins, one of the pioneers in remaking South Beach, and L Real Estate, a private-equity fund in which luxury powerhouse LVMH Moët Hennessy Louis Vuitton SA is a minority investor.

Miami’s luxury-retail market has expanded steadily for decades but has picked up in the past two years, fueled by foreign buyers who have snapped up posh condos downtown and an influx of wealthy tourists from Latin America and elsewhere.

A mural in Miami’s Design District, which has become a magnet for art and cuisine. MIAMI DESIGN DISTRICT ASSOCIATES

“Miami is an international market draw now,” said Faith Hope Consolo, chairman of the retail group of Douglas Elliman Real Estate. “When a retailer is expanding, the second place they go after New York now is Miami.”

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