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Markets & Geopolitics

High streets and the new retail landscape

Even before the Covid-19 pandemic, the high street was in distress: structural and social shifts have combined to drive increasing volumes of sales online. Will the pandemic compound existing challenges, or could it provide the sector with an unlikely lifeline?

29 April 2020

Swine flu and SARS were warning shots, but the shocking global escalation of the Covid-19 crisis caught many sectors unprepared. Retail, already widely perceived to be struggling for survival, has suffered a particularly heavy initial impact.

John Mackris, Senior Managing Director of Valuation and Advisory at Newmark Knight Frank notes that the groceries and essential goods subsectors are managing. So too are those retailers with well-developed delivery strategies. Department stores, however, are low on cash and exploring credit lines in order to keep heads above water. The loss of these stores in malls will likely cause a snowball effect, as smaller occupiers look to cite co-tenancy clauses for rent relief. This, in short, is set to be a punishing time for mall owners. Even prior to the pandemic, it was said that up to 25% of America’s regional malls were in danger of failure over the next few years.

Martin Eberhardt, Chairman of the RICS Board in Germany, suggests that German retail is facing similar problems, although shops of under 800 sq m are beginning to reopen. Supply chains will be a problem for many, and thus far consumers have shown a marked reluctance to return. Eberhardt does not fear for prime locations but is concerned for smaller towns and retailers. High streets and malls, he explains, are like ecosystems: shops, food and beverage outlets, and cinemas are co-reliant.

This is set to be a punishing time for mall owners. Even prior to the Covid-19 outbreak, it was said that up to 25% of America’s regional malls were in danger of failure over the next few years.

Like Eberhardt, Marie Hickey, Director of Commercial Research at Savills UK, is not concerned for prime locations, which, she says, will always retain their appeal. For secondary and tertiary locations, the future is less clear. The high street has become the preferred – often only – option for shoppers during the protracted lockdown. The opportunity exists for these locations to reassert themselves as local hubs, in the aftermath of the crisis. They have supported communities through challenging times and may expect to be rewarded with a degree of continued loyalty as lockdown conditions ease. This outcome, though, is far from a foregone conclusion. Hickey identifies two schools of thought on this: that which says Covid-19 will permanently change consumer habits; and that which says our urge to return to a sort of pre-Covid-19 normalcy will prevail. However, it will take a vaccine or other radical solution to enable the latter. This currently seems a long way off.

She cites Nike and Sephora as among the brands that have already introduced community-based stores. The question remains as to which, if any, locations can capitalise on the resurgent sense of localism. Much will depend on landlord aspirations for rent, covenant strength, and coordinated approaches to the management of local centres. In the UK, such approaches are often fractured. Business Improvement District schemes could help to address this – especially if they facilitate the creation of a local destination, with a diversity of attractive elements.

In the US, Mackris senses a strong desire to support favourite shops and restaurants. Brokers may talk about how Covid-19 stands to change the built environment, but he believes that people will revert to old habits as soon as they can. Localism may enjoy a short-term renaissance but, given time, previous habits will return.

High-streets and the new retail landscape

For the past two years, RICS Global Commercial Property Monitor has shown an unabated decline in confidence among occupiers and investors in the retail property market. While this worry is felt most keenly in the UK and USA, the signs of contagion across Europe and Asia are now clear and undeniable. Away from the prestigious shopping avenues of London, Paris and New York, e-commerce is exerting a heavy toll on the high-street. Can it survive and, if so, how?

He paints a picture of how the post-Covid-19 retail landscape might look which includes upgraded refrigeration capacities in food stores and greater use of kerbside pick-up schemes. He also predicts that restaurants will invest in delivery capabilities and improving the online experience for their customers. These changes, says Mackris, will be more operational than physical in nature.

According to Hickey, in a post-Covid-19 UK, retailers will likely favour more flexible lease terms which include pandemic-related clauses. We may also see an increase in turnover-related business rates. On a positive side, there will have to be greater cooperation between landlord and tenant to make locations work, with data measurement and management increasingly crucial.
For Eberhardt, the solutions are, in a sense, already here. The retail sector has been forced into significant changes over recent years; fresh ideas and investment are needed for tomorrow’s town centres. This was the case prior to the Covid-19 outbreak.

It is expected that there will be a staggered re-opening of shops and services. America is likely to see great variation between lower-density areas and major cities, with smaller areas able to open sooner. Nevertheless, the National Restaurant Association in the US estimates that up to 25% of restaurants face closure, with small businesses especially hard hit. These closures will have a knock-on effect for retail.

Retail became a very attractive proposition for investors in the aftermath of the global financial crisis and helped to stabilise property investment portfolios, says Eberhardt, but this trend has reversed over the intervening 10 years. Sustainable rental income will be a problem for some time and is likely to have a deterrent effect on investors. It is probable that the logistics and industrial sectors will be preferred for investment.

Retail became a very attractive proposition for investors in the aftermath of the global financial crisis and helped to stabilise property investment portfolios. This trend has reversed over the intervening 10 years.

There is also an issue around consumer finances post-Covid-19. Widespread job losses and disrupted household finances jeopardise the much hoped-for retail bounce back. While discount and luxury markets have proven in the past to be resilient, the middle market is likely to be squeezed – this, again, is an exacerbation of existing trends.

For Eberhardt, the solutions are inspiration, service, information and communication: people still prefer to see and touch their purchases. Those retailers able to combine data and brand knowledge, and embrace the growing trend for experiential retail destination, stand the best chance of weathering the current storm.