By Theresa Agovino

Italy's economy is one of the slowest in Europe, but you would never know it from retailer demand for stores in the country's most fashionable shopping districts.

In the five years ended in September, prime retail rents -- also known as "high street" rents -- in Rome surged 10% to $1,148 a square foot a year while they grew 7% to $449 a square foot a year in Venice, according to real-estate services firm Cushman & Wakefield.

Milan's high street rental growth has been the strongest in the country, rising 12% over five years to $1,304 a square foot a year, Cushman & Wakefield said.

But during the last five years Italy's economy was anything but hot. In fact, it fell 2.8% in 2012 and 1.7% in 2013, according to Moody's Investors Service. Moody's said Italy's gross domestic product grew 0.8% last year after increasing 0.7% in 2015. It expects GDP to jump 0.8% in 2017 and 1% in 2018.

Why the disconnect between economic growth and high street rents? Retail experts say it is partly because Italians tend to spend more of their disposable income than nationalities, such as Germans, who are bigger savers.

Even more important: a large amount of purchases on high streets are done by foreign tourists and other visitors. With foreign travel booming, retail sales are strong in these popular districts.

"High street retail is disconnected from the overall Italian economy, said Lars Huber, chief executive officer of Hines Europe. "When you have 60, 70, 80% of the purchases done by non-Italians, what it means is that it's largely disconnected in terms of the Italian economy, and therefore, a bit more hedged."

To be sure, storm clouds remain over the Italian economy. Moody's last year lowered the outlook on Italy's debt to negative from stable. Among the reasons cited for the change was the country's failure to vote late last fall for constitutional changes that would have made it easier for the government to make reforms necessary to improve Italy's finances.

But the number of international tourists visiting Italy from 2014 to 2015 grew 4% to 50.7 million, making it the world's fifth most popular destination, according to the United Nations World Tourism Organization. "The economic situation isn't the best ever," said Marcello Zanfi, head of high street and tenant representation at real-estate brokerage CBRE. "Without tourism the retail situation would be weaker."

Milan has been a trade hub since the Middle Ages. In more modern times, the city emerged alongside Paris and New York as one of the world's capitals of fashion as the homes of such brands as Prada and Versace.

Today Milan's famed Via Monte Napoleone features stores from many of Italy's top designer names. It is the sixth most-expensive retail strip in the world, and the third priciest in Europe, fetching rents of $1,239 a foot a year, according to Cushman & Wakefield.

Chain stores also have increasingly been showing up in Milan.

Since 2014, KFC, Domino's Pizza and Victoria's Secret all have opened outlets.

Starbucks Coffee Co. Chief Executive Howard Schultz grabbed headlines last February while visiting Milan to announce the city would house the chain's first store in espresso-soaked Italy. Japanese casual retailer Uniqlo is also reportedly planning an outpost.

"Milan is where the retailers come to create brand awareness," said Mr. Zanfi.

Italy's strong tourism sector also is helping drive up retail rents in other key cities. Thoroughfares in Rome, Florence and Venice also hold spots on the list of most-expensive retail locations in Europe by Cushman & Wakefield, giving Italy the distinction of being the only country with more than city on the list.

Late last year, Nike opened one of its NikeLab stores in Milan. It is one of only six in the world where the athletic company features its newest, most cutting edge products that are curated to blend exceptional design with superior performance.

Davide Dalmiglio, head of capital markets for real-estate services firm JLL in Italy, said Milan has also been helped by a pro-business administration that has made it easier for companies to do business in the city. The city has laid out a master plan so companies know what to expect and there have been significant improvements in infrastructure. One new metro line has been added in recent years and there are planned expansions to others.

"There is just a mentality of improvement and it is helping everything, said Mr. Dalmiglio. He added that a decade ago, there were five major streets coveted by retailers. Now there are around 15, he said.

"There is more demand," said Mr. Dalmiglio.

(END) Dow Jones Newswires

January 31, 2017 14:23 ET (19:23 GMT)

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