Different situation, new opportunities

Different situation, new opportunities


Retail
20.11.2020 Author/s: Dr. Joseph Frechen, Ralf Koschny
Bankruptcies and further growth in online retail will increasingly create gaps in the rows of shops, even on the high streets.
Bankruptcies and further growth in online retail will increasingly create gaps in the rows of shops, even on the high streets.

The number of shops, especially in city centres, has been declining for years - now more than ever. What was considered a good retail location yesterday may be vacant today. Retailers and investors have to redesign their location policies. We explain how the changed situation is affecting the locations and rents of city centres, city districts, shopping centres, retail parks and local supply.

Stationary non-food retail has already been under pressure for years. Sales growth in retail is predominantly achieved through the dynamic development of online sales. Even before the shutdown, the total number of retail shops was declining. This leads to shop vacancies even in city centre locations. Already in the first weeks of the shutdown, there were almost daily reports of chain stores, especially in fashion retail, going under the protective umbrella procedure. These included Esprit, Galeria Karstadt Kaufhof and Colloseum.

The protective shield procedure is used, among other things, to streamline the shop portfolio and to dispose of less profitable or uneconomical shops as well as to reduce shop rents. As a result, rents are coming under increasing pressure. On the one hand, rent payments were suspended and deferred in April and May, or rents were temporarily reduced; on the other hand, further retail companies could be affected by insolvency in the course of the year. Associations and retail institutes fear that up to 50,000 shops will go out of business and speak of the danger of the inner cities becoming deserted.

Many city centre locations are facing far-reaching changes due to the closure of department stores. There is a lack of successor businesses with similar space requirements and comparable appeal. Therefore, the quality of locations will also change.

Fact 1: The most attractive retail stock in high-street locations is increasingly concentrated in smaller sections with a smaller total area. In total, the share of secondary locations is then increasing, which are less interesting for large parts of the chain retail trade, but which are coming back into focus due to a lowered rent level for specialised retail providers, outlets of online retailers, gastronomy or leisure and service offers. However, high-street locations in A-cities will be less affected by these developments triggered by the closures of department stores than in C- and D-cities.

Fact 2: City district locations with local retailers and goods for daily needs are more robust to declines in footfall than the high-street locations in the big cities. This has been shown by experience with the pandemic. Customer frequencies in the city centres of A-cities in the last week of May in Munich, Berlin and Hamburg were between 50 per cent and 74 per cent compared to the average for 2019, while D- and C-cities had already returned to levels of at least 72 and 61 per cent respectively. This is also because the important visitor group of tourists is still largely missing in the A-cities. Shopping centres in city district locations, with their often differentiated range of everyday goods, have also survived the shutdown and subsequent start-up phase better than regional malls with their mostly large-scale, supra-local catchment areas or malls with high tourist customer shares or cross-border customer traffic. These differences in customer frequency and customer origin will have to be taken into account by retail companies willing to expand in the future.

Fact 3: Specialist store locations and peripheral retail locations have played out their location and property advantages and will continue to profit in the future. During the shutdown and immediately after the reopening, these locations had high customer frequencies. The good accessibility by car, free parking, generous sales areas that made it possible to keep a distance and long opening hours proved to be a format advantage in Corona times. The non-food suppliers in these specialist store locations - including those in the fashion sector - were also able to return to their former sales performance more quickly after the shutdown.

What are the implications for retail rents and locations?

A. City centre locations

  • Highstreet rents in A-locations are tending to come under pressure in all cities, although the best locations within the A-locations are still in demand and this will encourage stagnation. At least prime rents in the A cities are expected to remain stable.
  • In order to identify structural changes, it is useful to look at the achievable rents for larger spaces, for which there are naturally fewer potential tenants. Overall, average rents in the A-locations are falling, as insolvencies are causing locations to be abandoned that cannot be seamlessly re-let. The result: visible vacancies and reduced rents.
  • B-locations are likely to expand further in the city centres, also as a result of a devaluation of peripheral A-locations. These will become lower-frequency locations and thus fulfil the criterion of a B-location. As a result, the prime rent level in the B locations could even rise slightly; however, in relation to the previous spatially defined B location, a decline is to be expected.  
  • This development process is strongly influenced by the weakness in fashion retail - long the leading sector in city centre locations. Weakness therefore currently also leads to a decline in tenant demand and thus to a decline in rental turnover.
  • A positive aspect of the rental development is that other sectors are now able to rent in the city centre, e.g. groceries, drugstores or furniture suppliers. Likewise, gastronomic offers can also expand - the quality of stay in the city centres increases.

B. City district locations

  • Urban district locations are emerging as the winners of the Corona crisis. Under the aspect of contact minimisation, but also of short distances, shopping in one's own district is gaining in importance among smaller, owner-managed businesses. Decentralised, smaller shopping centres with a broad mix of offers were most likely to substitute the city centres and thus profit.
  • The city district locations also benefit from the wide-ranging mix of offers with goods for daily needs and selected aperiodic offers such as bookshops, shoe shops, gift articles, clothing shops and sports shops.

C. Shopping centres

  • Shopping centres are highly ambivalent. Ailing centres are most likely to be affected by consolidation and will fare worse through the crisis or experience increasing difficulties in re-letting and enforcing previous rents on renewal.
  • Regional shopping centres have recovered quickly after reopening. Here we assume stable rents. They are attractive for international chain stores due to their variety of offers and high customer frequency; they complement retail offers with gastronomic and leisure or sports-oriented offers.
  • Neighbourhood centres will remain strong. These small shopping centres, often an integral part of city district locations with a high range of goods for daily needs, benefited from their balanced product mix during the shutdown in spring as well as currently. Accordingly, retail space is also in demand there.

D. Retail parks

  • Retail parks with everyday consumer goods and car parking spaces seem to be the winners. In addition to consistently good turnover, recently even rising, the rent level is still considered moderate. Overall, an increase in rents should even be possible here.
  • However, an increase in rents is limited by the increasing concentration of retail and the growing bargaining power of tenants.

E. Local supply/supermarkets/discounters

  • The segment is currently running virtually out of competition. Significant sales increases in the first three quarters are creating a good mood. At the same time, price competition between discounters and supermarkets is increasing. The increased costs for logistics, personnel and security put the sales growth into perspective.
  • We are currently observing increased rent agreements for new buildings. However, these rent increases are often due to improved construction quality and high (energy) technical standards. A higher rent does not always necessarily go hand in hand with proportionally higher turnover.

 

Note: The text is based in part on our contribution to the Hahn Group's Hahn Retail Real Estate Report 2020/2021.

Contact persons: Ralf Koschny, Speaker of the Executive Board at bulwiengesa, koschny [at] bulwiengesa.de and Dr. Joseph Frechen, Head of Retail Division at bulwiengesa, frechen [at] bulwiengesa.de