The Great Transformation - Which Uses Make Retail Properties More Resilient?
The Great Transformation - Which Uses Make Retail Properties More Resilient?
A department store is empty, the gaps in the shopping centre are piling up. What can be done? There is room for a hotel, a city logistics warehouse, flats for senior citizens or students, or smaller production facilities. A joint webinar with Union Investment highlighted the opportunities and challenges of mixed use.
Whether gastronomy, library, cinema or fitness studio - the combination of retail uses with other uses has been a success factor in the operation and development of retail properties for years. A good mix also makes places more attractive for customers and brings frequency into city centres. The topic of mixed use is by no means new. What is new, however, is the pressure on owners, but also local authorities and cities, to deal with impending vacancies and possible subsequent uses.
Players specialising in various real estate segments were invited to present their mixed-use concepts at the webinar organised by Union Investment - itself the owner of more than 80 retail properties in 15 countries - and bulwiengesa as an independent real estate analyst and consultant. The topic met with enormous interest; more than 1,100 registrations were received and around 750 participants watched the livestream. The event was moderated by Henrike Waldburg, head of the Investment Management Retail department at Union Investment and Ralf-Peter Koschny, board member and retail expert at bulwiengesa.
USA: Logistics after-uses first choice
But first a look at the USA, presented in the keynote by Kseniya Merritt, Head of Retail Investments North America at Union Investment Real Estate. The pressure in the USA is greater than in Germany due to an enormous increase in the volume of e-commerce - every third mall has already closed, and 17 percent will have to close in the next five years. The flow of goods is increasing sharply, and the demand for storage space for online retail is significantly higher than for brick-and-mortar retail. As a result, the topic of logistics re-use is coming into focus, especially in the conversion of malls in the periphery. The pressure to convert inner-city department stores results primarily from the weakness of this sales line. Merritt showed examples of hotels and flats in converted department stores and illustrated how conversions can be implemented in terms of construction and space.
No patent remedy for the right mix
Dr. Joseph Frechen, Head of Retail at bulwiengesa, also emphasises that retail real estate has not only been boiling since the Corona crisis and that a major transformation is imminent. This is primarily due to
- the declining demand for space even before Corona,
- the difficult re-letting of large spaces, as tenants are rejuvenating and there is less demand for large spaces,
- stagnant to declining rents up to and including the high streets,
- the return of consumers to local retailers and restaurants,
- increasing customer orientation of retail, keyword omnichannel, and
- the increasing demand for supply close to home.
Many vacant spaces are currently being created by the decline of department stores. In 1993, for example, there were still 375 Karstadt/Kaufhof department stores; in 2021 there will be 130. In the same period, however, many shopping centres have been built - from 179 centres in 1995 to 489 last year. There is no doubt that the transformation will also affect some shopping centres or parts of them.
It is no secret that online retailing is primarily responsible for the death of shops and the resulting vacancies: today, more than 70 billion euros in retail sales are generated online. This corresponds to an area of 18 million square metres - more than all shopping centres in Germany put together.
There is no patent recipe for the ideal after-use. As is so often the case, the right dose is decisive, and in the respective examination for the suitable use, the circumstances of the macro- and micro-location must be taken into account, the local market structure, the desired positioning or possible conflicts with the neighbourhood. And even within an asset class, a close look must be taken: While a budget hotel may be a good addition to the mix of uses, an upscale hotel may have a positive impact on residential uses, but may not be compatible with a micro-logistics hub.
Discussion round: Concepts for future mixed use
Participants of the discussion round were
- Francisco Bähr, Managing Partner, FOUR PARX | Logistics
- Markus Beugel, Chairman of the Supervisory Board, GBI | Micro Living
- Dr. Peter Ebertz, Managing Director and Head of Hotels, Art Invest | Hotel Developments
- Harald Ortner, Managing Director, HBB | Project Development Retail/Senior Living
- Hendrik Staiger, Executive Board, Beos | Logistics
Former department stores are suitable for logistics uses, but only for micro-hubs. The small delivery warehouses ensure supply on the so-called last mile and can be accessed by vans and cargo bicycles, for example. The central location with good transport links makes these areas attractive. However, free building plots that come onto the market and for which investors virtually outbid each other are hardly feasible for logistics companies from an economic point of view. Better utilisation of existing space is to be strived for. Nevertheless, the willingness of logistics companies to pay more rent in the future must increase. At the same time, there is an urgent need for more acceptance of this type of use, for which the reduction of traffic is elementary. An innovative concept from FOUR PARX is the Smart City Hub, which is in preparation in Hamburg. Goods are to be transported fully automatically in underground pipelines in conurbations and large cities.
The competition for space in the logistics segment is great, especially for residential and office use. Micro-hubs can be a small addition to urban districts. The question of accessibility, i.e. access, loading and unloading possibilities, is important: As long as these hubs, with sizes of a few hundred square metres at most, can be accessed by cargo bikes, they fit well in shopping centres. With larger logistics spaces, questions about load capacity or ceiling height become acute, and the inner-city environment is usually less than enthusiastic. Beos has just developed a mixed-use new building project with flexible space that also includes areas for research and development. Because young, highly qualified people are drawn to the city centre, where everything is close together.
City centres should be meeting places and no longer just for shopping. Bringing housing back into city centres as a function is therefore an opportunity to revitalise empty pedestrian zones at night. Especially people in micro-apartments or students - who have a car less and less often - like to go outside. The city centre is their outdoor living room, so to speak, and gastronomy and entertainment fall on fertile ground. However, project developers have to orient themselves to residential rents and not to prices that can be achieved for retail or offices. If rents of 20 euros/sqm also include circulation areas, unlike office or retail uses, owners have to move. The housing industry cannot serve the rents that have been customary in these locations up to now.
A central location of the facility is also a great advantage for elderly people in retirement properties, also because relatives like to combine their visit with other errands in the city. However, a nursing home is not always the wish of the operator, who sometimes prefers an H&M. Also, some cities do not want care in their city centres - people with walking aids are often not seen as an animating element in pedestrian zones. Investors have had good experiences with leasing to the public sector. With very long lease terms of 20 to 30 years, the income flows reliably.
In principle, hotel developments are well suited as part of mixed-use projects. The different types of use cross-fertilise each other: for example, office users can use the event rooms of hotels, and the hotel in turn can use the fitness centre. However, this requires neighbourhood management and the costs have to be passed on to all users. Currently, however, the hotel industry itself is in shock. Re-uses of retail properties by hotels do not seem realistic in the next three years, as the hotel sector is facing a three- to five-year search phase due to the Corona crisis. Nevertheless, inner-city travel should definitely have a future - after all, unlike retail, the market still boomed in 2019.
Adaptation of building law necessary
The public may sometimes be surprised by this, but all discussants know: Conversion costs at least as much as new construction. One of the advantages, however, is that less demolition is generated and conversion makes sense for reasons of sustainability alone. However, the actors struggle with adversities or surprises that one does not have with new construction.
Another aspect that also came up in many engaged comments from audience members is the issue of building laws. This is different for each type of use and sometimes overwhelms administrations with mixed-use properties. The long processing times for B-plans were complained about, as were general hurdles on the planning law side. There are particular problems in implementing residential uses in B-plans - in contrast, it is less difficult to designate hotels, retail, offices and restaurants next to each other. Classic flats in particular are often only permitted to a limited extent in core areas. Nevertheless, symbioses within buildings should be the future, because only then can real estate be sustainable.
Even if a good start has already been made with the new building area category Urban Area, the discussants - as well as many members of the audience - would like to see the building law adapted and made more flexible in order to facilitate mixed use.
It quickly became clear that an overall conclusion is difficult given the complexity of the topic - there are no patent remedies, the right mix always depends on the individual circumstances. One thing is clear: a dialogue in partnership, also with the administrations, is indispensable. And sustainability will become a central aspect more than ever.
Note: You can view the recording of the webinar from 19.2.2021 via this link (in German language).
Contact person: Sigrid Rautenberg, Head of Corporate Communications at bulwiengesa, rautenberg [at] bulwiengesa.de