The Case For Brands Acquiring Retail Real Estate

It may seem counterintuitive for brands to purchase stores rather than lease in a time of decreased store footprints and rising e-commerce transactions. However, there are situations in which it is not only viable but advantageous.

It is a strategy that worked historically with many department stores, but many are now trying to reduce their assets. For example, Macy’s M , one of the country’s largest departments stores and owner of retail real estate, had over 6 million square feet across 315 wholly-owned assets as of their Q2 earnings. That doesn’t include mixed properties where they lease the land and own the building. They closed 45 leased and owned locations in 2020. Hudson’s Bay is another example, owning or controlling over 40 million square feet as of the end of last year. It’s also created a real estate investment business to optimize its assets, which recently included a partnership with WeWork for Saksworks and the sale of the famed Manhattan Lord & Taylor building to Amazon AMZN .

One of the largest is Walmart WMT , which owns and leases over 10 thousand properties worldwide. It’s a historic retailer with a logistical advantage over the past couple of years in using its mass retail footprint to service deliveries. At the same time, it is a landlord with a division called Walmart Realty that includes hundreds of properties available for purchase or lease, acting as a clear added revenue stream for the brand.

Acquiring real estate is an investment for established brands.

Despite the changing demand for physical retail locations, there’s still an advantage in owning property for more prominent established brands. If they’re going to be around in the long-term and have the capital, then investing in real estate makes sense. They will save on rent, gain new revenue streams from leases, and potentially profit on the property over time.

It is likely why IKEA has started to make some big real estate purchases. They recently bought the Topshop location in London on the intersection of Oxford Street and Regent Street for $523 million. It will be a solid long-term London flagship location for them. Reuters previously reported IKEA’s purchase of other city center properties, including King’s Mall in London, 6×6 Mall in SF (it’s first US real estate deal), and a Toronto retail property. These significant investments make sense for a brand that requires large footprints and is looking to secure downtown locations.

A favorable real estate market is an opportunity to secure flagship locations.

Earlier this year, TheRealDeal reported Uniqlo had bought its New York City flagship for $160 million. They’ve occupied the three-floor, 53,000 square feet retail space since 2006 and purchased the building from their former landlord. The area above includes both residential and office and will bring in additional revenue for the brand. The opportunity may have been due to a favorable real estate market during the pandemic, but it was more likely to secure a vital location. It’s not alone in this strategy. In 2020, Chanel CCO  bought its London flagship on Bond Street for £310 million ($400 million), 30% more than the asking price.

Leasing will continue to be popular amongst emerging brands and smaller store footprints.

Purchasing retail stores usually involves the purchase of a much larger building or mall. The capital investment is incredibly high, so it’s not something that will happen for emerging brands. And more prominent brands will likely continue to lease small footprint locations, especially in more rural areas. But there is a clear advantage in acquiring retail property when the capital exists, and the property is a value-add for the brand.