Retail Matters - September 2020 - 3 Ways Retail Real Estate is Changing

Shopper habits, work and life shifts, global pandemics - these are all impacting how retailers operate. What does this mean for retail real estate though?

Here are 3 major ways that retail real estate is changing from right now, to the short-term, to the future.

  1. Right now: New opportunities for physical retail

A lot of changes currently taking place have been driven by the ongoing Coronavirus pandemic. This includes the closure of some stores.

It's not all doom and gloom though. While some retailers are falling into administration or closing parts of their portfolios, others are seeing opportunity.

Fashion retailer Next has snapped up a number of former Debenhams beauty halls for a new venture into beauty retail. Although Next already sells beauty items online, these physical spaces represent a new concept for the brand. By taking on spaces that were already used for selling beauty, Next is able to fill a gap that has opened up.

Next won't be alone in seeing the opportunity to move into favourable new locations or product categories vacated by other retailers. Meanwhile, physical retail remains a key part of many brand strategies. Nike has already announced plans to open 150-200 smaller, digitally powered physical stores across the world in the next few years.

While Nike is looking at smaller spaces, Starbucks is focusing on a mix of formats that focus around convenience. This means small stores for mobile order and collection, but also a prioritisation of drive-thru locations. This is likely to be a trend adopted by other brands as well which may see out-of-town real estate becoming a hot ticket.

The other major development in retail real estate right now focuses on looking at physical stores not as stores but as space.

JLL reported that the US would need another 1 billion sq ft of warehouse space by 2025 in order to accommodate for the rise in ecommerce.

One way for retailers with a brick-and-mortar presence to accommodate the increase in online shopping without huge outlay on warehousing is with a hub-and-spoke model that sees some ecommerce orders shipped from stores. It's an approach Argos has been successfully using in the UK for many years.

As well as a multi-use approach to physical stores, there is also a trend towards dark stores which are fulfilment spaces only. In the US Walmart's Sam's Club has closed some stores to reopen them as pure ecommerce fulfilment centres.

This trend doesn't only apply to large stores or those that are a little more out of the way. Warehousing start-up Ohi offers micro warehouses for ecommerce across the US including in busy Manhattan. By locating their warehouses close to where customers live, retailers can offer faster shipping options to online shoppers. It also acts as a viable new retail real estate alternative to traditional physical stores.

  1. Short-term: Turnover based rents

One of the big changes in retail real estate going forward is about how the rent for those spaces is calculated.

The recent forced closure of retail estates across the UK and the rest of the world meant rent became a key sticking point. Retailers felt the sting of having to pay rent on stores that weren't able to trade with many struggling to make the agreed payments. According to Re-Leased, UK retailers only paid 13.8% of their combined £2.5 billion rental bill for the March-June quarter this year.

As a result, turnover-based rents where the rent the retailer pays is wholly or partly determined by the sales turnover of the rented space are getting a lot of attention. Fashion company New Look has just announced a new CVA proposal that sees over 400 of its UK stores move to a turnover rent model.

While there is a certain degree of benefit in such an approach, it's important that retailers understand exactly what counts as a store sale under a turnover rental agreement. For example, if a retailer has an in-store set-up that allows a customer to order an out-of-stock product online for delivery to their home that will likely count as an in-store sale. Retailers should also consider capping the turnover rent payable as if sales increase dramatically, they could end up paying more under the turnover rent arrangement than a fixed rent.

Likewise, some landlords may include click & collect purchases within store sales calculations as the store is a key element in the completion of the sale. The question here is whether this should only apply to products reserved online but paid for within the physical store, or items that are paid for online for collection. Both parties could view this in a different way so it's important that retailers are clear on the inclusions and exclusions within their own specific lease agreements.

Depending on the terms of the lease it may be that retailers who have a high percentage of sales taking place online but being collected in store could find themselves facing a larger rental bill than just paying a base rent.

A blended rental agreement which includes a lower base rent and some turnover-based rent may be a preferred option for landlords. Regardless, it's apparent that leasing will see some of the biggest changes in the short-term with models varying from retailer to retailer based on their specific business.

  1. Long-term: A real estate reimagining

It's hard to look at the future and make firm predictions right now. COVID-19 is certainly going to be a fixture for some time but how long remains to be seen as the world juggles fears of a second wave and furious work on developing a vaccine.

The general view though is that there will be an after Coronavirus. But its impact may be felt for a lot longer.

It's widely acknowledged that COVID-19 has accelerated trends that were already in play rather than necessarily creating them. This includes a rise in online shopping and a shift towards more flexible working, including working from home. These trends aren't just going to go away when Coronavirus does.

Only 16% of UK consumers said they would return to their old buying habits in a recent survey by Wunderman Thompson. Meanwhile a report by Alvarez & Marsal and Retail Economics found 17.2 million Brits said they would permanently shift their shopping habits towards ecommerce.

As a result, real estate may have to change significantly in order to reflect a world where people aren't necessarily going out to the shops or to work every day.

For example, one knock-on effect is likely to be fewer private cars on the road due to a drop in commuters. This means that road networks may be redesigned in city centres to add more provision for cyclists and pedestrians. We've already seen temporary measures along these lines in London, including the closure of roads in Seven Dials, to encourage visits.

An increase in pedestrianised areas could open up new real estate rental opportunities such as pop-up units along the streets or open-air markets. In Australia, we've seen proposals considered that would allow retailers to open up in car parks and public green areas, as well as restaurants to use paths for tables.

On the other hand, a rise in online shopping may mean more delivery vehicles on the road which will also need to be accommodated for. One interesting approach is already being explored by DHL in the US using a mobile pop-up store for shipping and collecting orders. In theory this means retailers could put a click-and-collect and/or returns station anywhere they like and move it as often as needed.

Other potential outcomes are the redevelopment of high street retail real estate for other purposes. This includes incorporating more social and entertainment elements alongside stores.  The government are supporting the reinvention of the high street by introducing a new use class covering retail, food, leisure and office uses and  providing greater flexibility to move between a wide range of commercial uses within that class without the need for planning permission.

It may even mean non-retail. The Social Market Foundation has suggested that UK high streets could become more residential to counteract the changes in shopper behaviours. In a new report, the Foundation notes that developing just 5% of commercial property could create 800,000 new homes.

It's apparent that retail real estate is experiencing one of its biggest shifts ever. As a result, retailers and landlords need to work together now more than ever. A united approach is the best way to build a stable foundation for the future that works for both parties.


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